When Crowdfunding Goes Wrong

Stoel Rives attorneys Thomas Woods and Connor Olson authored an article in Law360 titled “When Crowdfunding Goes Wrong.” The authors discuss how crowdfunding has become increasingly popular and accessible as a means of funding innovators’ and startups’ development of their ideas, thanks to the Internet and smart technology. However, clarification of the legal landscape and challenges facing those who use crowdfunding to finance a project is still a work in progress.

Woods and Olson note that crowdfunding has become  a powerful means of funding the development of projects, occasionally raising tens of millions of dollars to fund such products as video games, a smartwatch and a beehive honey extracting box. They also note the increasing number of lawsuits filed by or on behalf of those who contributed who did not receive either what they were promised or a refund.

The authors conclude with a crowdfunding checklist for inventors and entrepreneurs:

• be sure how their campaigns will be affected by consumer protection and other laws as the legal boundaries to crowdfunding practices are solidified by litigation and government regulation;

• realize that certain crowdfunding campaigns are pure transactions for goods between manufacturers, sellers and consumer, not investment or donation opportunities requiring only best efforts in return in achieving an early and preliminary campaign message;

• be aware that because of the borderless nature of crowdfunding, they may be subject to lawsuits in states with laws that heavily favor consumers and may be ordered to pay restitution, fines and fees well in excess of the amount they originally received.

“We have no illusions that the siren of crowdfunding won’t continue to lure many hopefuls, but they would be well advised to watch as future test cases further clarify the risks and liabilities,” they write.

Read “When Crowdfunding Goes Wrong,” published October 15, 2015. (Subscription required.)

To read our legal alert on the subject, go here.