Crowdfunding – Let’s build it together!

Have an idea, but no funds to realize it? Not a problem, crowdfunding comes to the rescue! The idea is simple – a virtual society provides funding to a project initiator, and such initiator in exchange (depending on the type of crowdfunding in question) offers appropriate benefits to backers (tickets, meetings, gadgets) or grants shares in his/her venture.

There are currently more than 600 sites the world over that allow you to present your project, specify the funding goal and possible bonuses for backers as well as prices of such bonuses in case the funding is successful. According to estimates by Deloitte – in 2013, thanks to the mechanism of crowdfunding, Internet users provided as much as 3 billion US dollars for funding projects. What’s more, the scale of the phenomenon today is even bigger.

Considering the most absurd ventures – such as the “Potato salad” by Zack Danger who, basically as a joke, decided to obtain 10 dollars to prepare this dish, but received a few hundred times more (!) – or more conventional ones (e.g. a guide or a book) and even “groundbreaking” ideas (the Pebble smartwatch) – it may seem that the future belongs to the crowdfunding movement.

Although crowdfunding campaigns have immense economic potential, the speed of their development, in light of lack of appropriate legal regulations, may cause justified concern. Unfortunately, even in the case of the most noble projects, where (someone else’s) money is involved, there are bound to be problems.

Let’s take a look, by way of example, at the notorious case of Erik Chevalier who, according to the decision of the US Federal Trade Commission, committed “crowdfunding fraud” (FTC’s order: Case 3:15-cv-01029-AC). Everything seemed quite normal in the beginning. Erik Chevalier and his team, The Forking Path, Co., posted on Kickstarter – the most popular crowdfunding platform – a board game project named “The Doom That Came to Atlantic City“, and set their goal to 35,000 USD. The interest of backers exceeded all expectations of creators, and 120,000 USD was obtained from a total of 1,246 backers. But in 2013 Erik Chevalier out of the blue informed that the project was canceled indicating that due to a lack of experience in publishing board games he committed “all mistakes possible”. The problems were numerous: his ego, no legal or technical knowledge, and, in particular, no experience. In the following messages, Chevalier argued that he spent a lot of time talking with investors, asking banks for loans and seeking alternative sources of financing, but no one showed any interest. The creator promised to refund money to all backers – but failed to do so. According to the determinations by the FTC, Chevalier spent most of the obtained funds on personal purposes (rent, moving to Oregon, obtaining a license to another program etc.) that in no way was related to producing the game. The FTC stated that using funds obtained thanks to the crowdfunding platform for unrelated purposes constituted a violation of Section 5a of the FTC Act – i.e. unfair or deceptive practices – and therefore the FTC imposed on Chevalier a penalty of 111,793 USD that was suspended due to his inability to pay, but “will become due immediately if he is found to have misrepresented his financial condition”.

Crowdfunding has more and more proponents also in Poland. We can’t complain about a shortage of ideas – but the lack of legal regulations is most certainly a serious problem. Currently, the crowdfunding movement operates based on civil law and already familiar institutions, such as the donation agreement, loan agreement, sale, acquisition of shares or public promise. At first glance, it may seem that crowdfunding is some kind of public fund raising and that provisions relating thereto could be applicable. But the differences are too vast. Public fund raising involves collecting resources (in cash, in kind) in public places for a predetermined, lawful purpose that falls within the boundaries of public tasks and does not involve offering anything to the donors in exchange (satisfaction notwithstanding). Crowdfunding, on the other hand, takes place in its entirety in the virtual space, entails some kind of consideration (except for donation-based crowdfunding). For this reason, the provisions regarding public fund raising are not as a matter of fact applicable to crowdfunding.

Creators of crowdfunding platforms and project creators, in the scope of performed activities, are of course obliged to comply with applicable provisions, internal regulations and contractual obligations. Project creator’s activity may be qualified as commercial activity (according to the Freedom of Commercial Activity Act). Obtaining the status of entrepreneur, in turn, entails the obligation to respect consumer regulations. One could wonder whether the project creator is obliged to realize the project in the event sufficient funds are collected. Although it might seem that this is a natural consequence, this assumption is not absolutely correct. Everything hinges upon the crowdfunding platform’s regulations and project description – it may be specified the project creator is only obliged to provide prizes to backers. In such cases, however, consumer provisions come to our aid, and such actions may be considered as unfair market practices (e.g. as misleading actions) or as infringing the collective interests of consumers. The situation will be similar in the case of aforementioned fraud, spending funds originating in crowdfunding for inappropriate purposes or for non-performance of mutual obligations.

However, those regulations do not solve all our problems. It would be interesting, for example, to examine whether a consumer backing a given venture ceases to be a backer if he/she in exchange receives a share in the company in – thus becoming an investor, and not a consumer…

Irrespective of the above, it is worth mentioning that some actions on the part of project creators could be qualified as fraud and entail penal liability. According to Art. 286 § 1 of the Penal Code:

Whoever, with the purpose of gaining a material benefit, causes another person to disadvantageously dispose of their own or someone else’s property by misleading them, or by taking advantage of a mistake or inability to adequately understand the action undertaken shall be subject to the penalty of deprivation of liberty for a term of between 6 months and 8 years.

The Polish government supports the approach proposed by the Commission intended to develop and exploit the potential of crowdfunding in the European Union, arguing that at the current stage no binding regulations should be introduced in this sector. According to the position held by the government, we should now focus on monitoring the market and identifying possible barriers for development or dangers to the participants. Only at a later stage we will be able to consider taking regulative action (position available here).

Crowdfunding should be seen as a highly positive phenomenon both for consumers and creators. Without it, perhaps, Zbigniew Bródka wouldn’t have won a gold medal in Sochi, and there would be no film titled “Joanna”, albums by Michał Urbaniak… or the “Awesome Cat Calendar” (a calendar with cats in “magical” outfits). We will closely follow the development of regulations in this scope.