• Did the FTC’s update to the Mail or Telephone Merchandise Rule Change Crowdfunding?

    What is it like to work at the website Kickstarter, a global privately funded crowdfunding company? According to its website, “It’s fun!” They are a “friendly group of people” who “do a lot of things together: happy hours, trips, workshops, movies, lunch, and a lot of laughing.” About half of the 108 employees works on the website design and the other half works directly with the community.

    What does Kickstarter do? They connect project funders or backers to project creators, who provide rewards when they reach specific monetary goals for their project. Kickstarter boasts it is has raised over $1.5 billion on 78,000 projects funded by over 7.8 million backers. For their cut Kickstarter receives 5% of the funds raised. Kickstarter sounds like a fun, successful business, but what is the catch? Most businesses struggle in some manner, especially new businesses like Kickstarter. The catch is simple and ignored, project creators are taking the money and not providing rewards. What protects individual backers from being taken for a ride by project creators? What prevents a creator from walking away money in their pocket?

    Nothing. Last year I signed up for my very first Kickstarter project, Taylor Beck’s “Learn iPhone App Development” course on Kickstarter. Beck raised $54,626 from 656 backers, who contributed $83 average apiece. Initially very active at first Beck removed his online presence in August with no course provided to backers and has not been heard from since. I found I am not alone, there is a website http://www.kickscammed.com devoted to the topic.

    Just how many individuals have been kickscammed? It is very hard to find this information. Kickstarter conveniently does not share this information or make it easy to figure out. One has to look at the comments section of the project to see if there are frustrated backers and sometimes those are hard to deciper. In my cursory research I have found over 180 undelivered projects, some years old with backers still leaving irate comments. These 180 undelivered projects include about 296,000 backers who contributed 22.2 million dollars. While these creators maybe did not initially intend to not finish their project, they may have gotten in over their head and just given up. When this happens the backers are frustrated, vent their frustration, but have no way of seeking retribution. I am sure there is higher, but more research needs to be done.

    Unfortunately there are currently no laws concerning crowdfunding. Back in 2007, before Kickstarter was created, the Federal Trade Commission asked for comments to revise their Mail or Telephone Order Merchandise Rule to include the internet. In September 2014, the rule was finally adopted to become the Mail, Internet or Telephone Order Merchandise Rule. The rule says that, unless a time is stated merchandise must be shipped within 30 days. If it cannot be shipped within that time frame, the seller must inform the buyer and received consent to ship the product late.

    The process of revising this rule began before crowdfunding was popularized and before Kickstarter was created. When a project is created on Kickstarter, the creator specifies an “estimated delivery” date. How would the Commission’s rule apply to these projects? In theory, if the delivery date was going to be postponed, the creator should have to get consent from the backers to deliver the project later. Crowdfunding though is in a gray middle area. It acts like an investment company, but, instead of getting a share of the company for funding a project, backers get rewards. They get an actual product in their hands. Where does Kickstarter fall? Under the Commission’s Rule or under some other set of investment rules?

    Shortly after the rule was put in place, in October 2014 Kickstarter updated its Terms of Use page to recognize a contract is being created between the project creator and project backer. It also added a whole section describing what the creator’s responsibilities are to the backers. But for all the fun employees are having, Kickstarter wants no part in enforcing these rules. It says, “Kickstarter is not part of this contract — the contract is a direct legal agreement between creators and their backers.” Even if Kickstarter states they are not involved in the contract are they since they get a cut of the funds? Is their statement valid? What is worse is that Kickstarter will not even help these burned backers with legal redress. Customer service can only be contacted by email; there are no public phone numbers available to backers. The responses to inquiries all sound very similar including words, such as; aspirations, amazing, enabled, supporters, and envision. Questions are evaded and help is not provided. Backers cannot unite and all 296,000 backers must act as individual swimmers treading murky waters to get their money back.

    What could be done to help these burned backers? For one Kickstarter could allow backers to communicate with one another through direct messages and or forums. They could also provide a group email, ie the sender sends an email to one email address and it emails every other backer in the project. Right now Kickstarter encourages backers to communicate through comments. Using the comments section is not a very effective tool to reach all the backers. There are often many comments. If backers do not check Kickstarter often, and who would after five years, they have no idea anything is being done. Hoping other backers will see comments, respond, and join a common forum is an arduous and slow process.

    Two, Kickstarter could provide information on what to do when backers feel they have been wronged. It would especially help international backers who are not familiar with laws of the particular country. Currently backers can file complaints with various agencies, and Kickstarter could list these agencies. As a side note backers are finding it hard to get them to help even from these agencies. The agencies either want more people complaining or do not want to become involved in the unclear language and rules of Kickstarter.

    Three and perhaps the most important Kickstarter could update the backbone of the project websites to include firm dates for project releases and an indicator easily showing if certain rewards are complete. Including an indicator would make it very apparent if the project had been completed. If creators could not fulfill the release date, they would have to update their project. Of course project creators could always extend the date a few years or change it over and over. To counteract this, the date change could be limited to three changes and a specific time frame, say six months each time.

    I can understand why Kickstarter does not want to become involved in enforcing their rules: it does not want to be liable for the funds. However, I cannot understand why the company does not make it easier for backers to make sure project creators deliver their projects. It would take more time and man power, but, without further effort on its part, the number of burned backers will keep growing and is one of the largest threats to its existence.