Light Enforcement Cushions Failed Crowdfunding Projects
Many jurisdictions are struggling to find an optimal middle ground that protects investors in crowdfunding campaigns without destroying their relatively unstructured and unregulated nature
For daily updates, subscribe to our newsletter by clicking here.Similarly problematic —but on a considerably broader, yet simultaneously individually less onerous scale—are the related issues regarding popular crowdfunding campaigns. While most investors are likely to see real returns in these campaigns—where they tend to on a whole invest less—in rare anecdotal cases, investors have paid out a lot, but received little or nothing in return. set relatively intricate rules for investing in crowdfunding equity campaigns. Some investors consider these regulations overly onerous: While currently, under Title III of the US JOBS Act, the SEC caps equity crowdfunding campaigns at a little over a million dollars, there have been recent requests to have that substantially increased to a number more in line with European crowdfunding regulations. The most common crowdfunding campaigns, those that reward investors, are currently also not well regulated. While statistically most reward-type crowdfunding campaigns actually deliver on their promises, there is a non-negligible percent of campaigns that leave investors with either a deficient product or no product at all; these are the ones that you read about. In the case of fraudulent reward campaigns, the government has been hesitant to step in, perhaps preferring private contracting by the relevant web platforms to solve the concerns. Until recently there have really only been two highly publicized instances where restitution actions have been taken. In one instance, billed as “the first enforcement action in the nation against a crowdfunded project that didn’t follow through on its promise to backers” the State Attorney General of Washington required a Kickstarter campaign to pay back its investors. In a second instance, the FTC claimed that the entrepreneur had sold the backers of his board game’s data to a third party. In that case the FTC settled, but the wronged funders were never paid back. Last month, the FTC may have finally begun its second public effort: reports indicate that someone from the FTC contacted a number of backers of an ostensibly smart backpack that failed to deliver. iBackpack raised nearly a million dollars over a number of crowdfunding platforms. Things are not looking good for the funders of iBackpack, as the inventor has been incommunicado for at least a year and neither the contact emails or the website still work.
Perhaps the reason there is no active enforcement in these areas is because in most cases investors, who typically invest relatively little and often appreciate the risks associated with backing inexperienced entrepreneurs, want only a mea culpa or some update as to the status of their product. In fact, the FTC catalogues only around 120 complaints over the past half-decade.
Or, perhaps the lack of government regulation relates to the seemingly lack of malicious intent in most crowdsourcing debacles. Reviewing some of the biggest and well-known crowdfunding failures, it seems that many fail because of ineptitude or inexperience by an entrepreneur that is forced to grow too quickly, not outright fraud per se.
Dov Greenbaum is a Director at the Zvi Meitar Institute for Legal Implications of Emerging Technologies, at Israeli academic institute IDC Herzliya.