What is crowdfunding and who's responsible when something goes wrong?
Until today I’d never really been on a crowdfunding website. Sure, I’d heard a lot about them – mainly when big projects had failed – but I never thought about it enough to dive into the T&Cs (terms and conditions) behind all of this. But someone mentioned to me recently that a lot of law firms either don’t understand, or completely underappreciate the relevance of, crowdfunding in today’s setting.
So I thought I’d put together this very brief guide on crowfdunding, highlighting some of the legal questions that can spring up when something goes wrong.
What is Crowdfunding?
1. Peter Molyneux (Godus) – Goal: £450,000 – Reached: >£500,000. Years after successful funding, still only incomplete and broken PC and mobile versions available, not even nearly feature complete, with rewards outstanding; team working on game has recently been gutted for new project, and many doubt full game ever coming to fruition.
2. Yogscast (Yogventures) – Goal: $250,000 – Reached: >$550,000 - >13,000 backers. Amid claims of misuse of received funds and misrepresentation, promised game never created, with backers receiving Steam keys for a couple of completely different games (TUG and EQN).
3. Exploding Kittens – Goal: $10,000 – Reached: >$8.5million – 220,000 backers. Physical card game that has just recently been funded; an example of how surprisingly successful certain projects can be.
When it All Goes Wrong
There are 3 parties involved in crowdfunding a game:
Now, there aren’t any “crowdfunding laws” so to speak – it very much comes down to each funding site’s T&Cs and general "contract law." Let's take a look at Kickstarter’s T&Cs seeing as they are one of the most popular sites.
As a backer, your main interaction is with Kickstarter – you’re logging onto Kickstarter's website, entering your Kickstarter account details. So you may be excused for thinking that, if the project you are backing goes bottoms up, Kickstarter would be your first port of call for a refund.
However, if you take a look at paragraph 4 of Kickstarter’s T&Cs, you’ll see that Kickstarter basically wants nothing to do with the backers – they make it very clear that they have no contractual relationship whatsoever with them:
“The creator is solely responsible for fulfilling the promises made in their project.“
This basically means that backers have no legal recourse against Kickstarter if the creator fails on any aspect of their promises – no right to a refund from Kickstarter, no right to take them to court, no right to anything. Why? Because at no point have Kickstarter promised backers anything – it all rests on the shoulders of the creator.
Backer v Creator
So backers have no contract with Kickstarter, but do they have one with the creator? The answer to this is made clear in paragraph 4:
“Anyone who backs a project is accepting the creator’s offer, and forming that contract [with the creator].”
Paragraph 4 then goes on to set out a whole bunch of things that the creator must do, for example:
“If they’re [the creator] unable to satisfy the terms of this agreement, they [the creator] may be subject to legal action by backers.”
So on the face of it, this looks amazing for the backers – if a creator fails to deliver any of the rewards, has seemingly done a runner with the money, or has produced something that is either so broken or different from the promised product, it’s likely they’ll be in breach of contract – slam dunk you’d think.
But even with such an ace in your back pocket, there are so many problems to overcome in trying to sue a creator for failing to deliver their game/rewards:
Implications for Backers and Creators
And therein lies the problem – there is a contract of some sort in place between the creator and the backers, but it’s a contract between two parties who have never met, about a product that doesn't have very defined specifications, to be released within an uncertain timeframe. Kickstarter projects are incredibly fluid by nature (which is one of the great things about them) but this brings with it a lot of problems.
In the rest of the business world, no one would ever contract like this – hours, days, weeks are spent pouring over every detail of a contract, and the parties take time (and perform something called ‘due diligence’) to determine the safety of their investment in the other party.
But pledging £10, £20 or £30 to a kickstarter is a much more throwaway type of investment where people are willing to accept a much higher degree of risk. Backers should remember that while they are technically investing in a certain product, it's really the people that they are putting their trust, and money, in.
So, it’s a strange bag. There are these (potentially) quite onerous contracts in place between the creators and backers, but you could also argue that their use is entirely minimal for the above reasons – in legal terms, you’d say there were severe problems with enforceability of the contract.
My recommendation to backers is nothing surprising
Do your homework into exactly who is receiving your money, and what exactly are they proposing to do with it? How tight are their game specifications? Have they already created a vertical slice of gameplay so they can get a rough estimate of how long it will take/cost to produce the remainder? Do they have any project management experience? Have they worked on similar products before? Have they ever managed a budget? Does their workforce line up with the scale of the promised game? Does their time line seem reasonable? Ultimately Kickstarter is a gamble, and you should never gamble more than you can afford to lose.
My recommendation to creators
Do not let this lack of apparent accountability go to your head – after all, these contracts are legally binding and someone could technically enforce them. This could be particularly dangerous if the creator is an individual, rather than a company/studio, since there could be something called 'personal liability' - meaning your own personal assets (car, house, bank accounts etc) could be at risk if you were ever taken to court. Not only this, but consider the reputational damage that will be dealt if your project fails, and the impact this might have on future jobs or investors.
But remember, you should never judge something solely by its failures - Kickstarter is an amazing funding option that has had some real success stories, creating many products that we may otherwise have never seen. Backers beware though - it could also be the easiest £50 you'll ever lose.
Header Photo: (c) owned by Square Enix - thanks for making Vivi so awesome!