The cards are stacked against a Nashville, Tenn., entrepreneur who allegedly failed to deliver on promises he made to backers of his successful Kickstarter campaign.
In a lawsuit filed May 1, Washington State Attorney General Bob Ferguson claims Edward J. Polchlepk III (professionally known as Ed Nash) never delivered the horror-themed deck of playing cards he promised to hundreds of campaign supporters. Nash ran the campaign under his company, Altius Management, which is described as an entertainment and artist management firm.
Kickstarter is one of many crowdfunding sites that give grassroots entrepreneurs a platform to raise funds from a large pool of backers. The site has raised more than $1 billion from 6.1 million backers since it launched in April 2009. “Veronica Mars” star Kristen Bell famously raised $2 million to film a movie version of the popular TV show last year. But not all Kickstarter campaigns are as successful. At last count, the site reported nearly 80,000 campaigns failed to reach their fundraising goals vs. 61,000 fully-funded projects.
Nash was one of the lucky ones. He launched his Kickstarter campaign in October 2012 with a goal of raising $15,000 needed to fund production of high-quality playing cards marketed to magicians, card collectors and retro-horror movie buffs. By Oct. 31, 2012, he had far exceeded his goal, raising more than $25,000 from 810 backers.
Like all Kickstarter campaigns, supporters of fully-funded campaigns are promised a special reward in exchange for their donations — the higher the donation, the more tempting the prize. For example, Nash promised one deck of playing cards in exchange for a $9 donation, two decks and a special button for a $25 donation, and a dozen original sketches of card artwork for $35 donations.
In a message on his campaign, Nash promised delivery of cards and other gifts by December 2012. But his backers never received their rewards, Ferguson alleges. Nash did not a return a request for comment on Monday.
“Consumers need to be aware that crowdfunding is not without risk,” Ferguson said in a statement. “This lawsuit sends a clear message to people seeking the public’s money: Washington state will not tolerate crowdfunding theft.”
Ferguson is seeking fines of up to $2,000 per backer. As it stands, the lawsuit only involves 31 of Nash’s backers who were from Washington State. If more backers jump on the bandwagon, the total restitution could top $1.6 million.
Kickstarter warns backers that the company is not liable for any campaigns that fail to deliver on their promises. Essentially, their message is to donate at your own risk.
“We want every backer to have an amazing experience, and we’re frustrated when they don’t,” Kickstarter spokesman Justin Kazmark told Yahoo Finance. “We hope this process brings resolution and clarity to the backers of this project.”
Other crowdfunding sites like IndieGoGo and GoFundMe have similar policies, but the case against Nash could possibly change the way they react to complaints today.
“Kickstarter makes its funds by having as many people investing in these [campaigns] as possible,” says Jay Brown, director of the Corporate and Commercial Law Program at the University of Denver Sturm College of Law. “If people start thinking it’s too risky … it might put pressure on them to do a better job at policing these kinds of investments.”
Is crowdfunding too risky to bet on?
Nash isn’t the first Kickstarter to burn his backers and likely won’t be the last. Unless campaign creators put a cap on the number of rewards they will deliver, they can easily be overwhelmed by demand when projects become a runaway success.
That’s what happened in 2011 to John Eades and Michael Ferreri, the founders of Vera flip-flops. Eades and Ferreri raised $52,618 from more than 1,000 backers to manufacture their eco-friendly sandals but couldn’t handle the demand. It took them three years to make good on their promise.
“I think there’s a view held by a lot of people that the process of raising funds through Kickstarter is not very risky,” says Brown. “This [case] demonstrates that in fact it can be very risky.”
But what really makes the case stand out, Brown says, is the fact that it’s bound to be one of the most public examples of a crowdfunding campaign gone wrong.
“The fact that this is going to be in court and display the risks of crowdfunding to the public for a while to come, I think it will influence the mindset of people who want to contribute,” he says.
If you've been burned by a crowdfunding campaign, your best course of action is to file a complaint with the Better Business Bureau or send a complaint to your state attorney general. In Nash’s case, the BBB in Nashville assigned his company, Altius Management an “F” grade.
At the end of the day, it’s probably best to treat crowdfunding like a charitable donation — donate at will, but understand you may never get anything back in return.