Kickstarter, Indiegogo and Crowdfunder… these are all names synonymous with helping the startup get on its feet – using everyday people to help raise money to kickstart a campaign to have the funding to launch a business. Crowdfunding is defined as raising money to fund a venture from a large number of people, rather than a business entity, often done via the internet. So yes even you and I can be a small part of getting a business off the ground. But what happens when things go wrong? Who is liable and can you get your money back?

Case Study #1: The Torquing Group

The Torquing Group came up with a brilliant idea for a handheld drone, punting the so-called Zano as being “the world’s most sophisticated nano drone”, able to be controlled by a smart phone and take amazing selfies. By January 2015 they had raised a record-breaking £2.3 million from their Kickstarter campaign in less than two months. However by early November they had only shipped 600 of the ordered 15,000 Zano drones, and these were riddled with technical errors, ending with their cofounder and CEO Ivan Reedman unexpectedly leaving the Torquing Group due to “personal health issues and irreconcilable differences.” Their website disappeared as quickly as it arrived and the general feeling was that any remaining funds would go to creditors, leaving backers high and dry.

Kickstarter has since hired an investigative reporter, Mark Harris, to try and find out what happened to the money. He is hoping for his report to be ready by mid January 2016 – watch this space.

Case Study #2: Erik Chevalier

Erik Chevalier took to Kickstarter to pitch the idea for a dark take on the board-game, The Doom That Came to Atlantic City. It all looked above board and legit, offering backers of more than $75 collectors’ figurines as well as free games, and he soon had over 1200 backers raising over $122,000, way more than his original $35,000 goal.

This was in June 2012. By November of that year, nothing had materialised. Chevalier posted sporadic reassuring updates,but by July 2013 he was ready to throw in the towel. He released a statement claiming that the money was approaching a point of no return, having paid for software licenses, mini statues and artists. It was at this point that the Federal Trade Commission got involved, and found that Chevalier used what they called “deceptive tactics” to raise his money, after which he spent it on rent, relocating and other personal expenses. The FTC also claimed that Chevalier never hired artists or invested in the business as promised, and ordered him to pay a $111,793.71 settlement. This was however forced to be suspended as he was unable to pay.

This landmark case opened the doors for backers to potentially sue when things went wrong. Kickstarter has also since changed it’s Terms & Conditions to include the relationship between creators and backers and who is responsible for what: “When a project is successfully funded, the creator must complete the project and fulfill each reward. Once a creator has done so, they have satisfied their obligation to their backers.” It goes on to say that should a creator be unable to complete their project and fulfill rewards, they’ve failed to live up to the basic obligations of the agreement.

The contract also states that should this be the case, the creator is required not only to be very transparent as to where the funding has gone and what action they have taken to attempt to remedy the situation, and that they offer to return any remaining funds to backers who have not received their reward or else explain how those funds will be used to complete the project in another way. The Ts&Cs also state very clearly that the creator is solely responsible for fulfilling  their promises and should they be in breach, they may be subject to legal action.

This is very significant not only for backers, but probably more importantly for creators. It puts the boundaries in place and creates a safer environment in the ever growing crowdfunding arena, not only protecting backers from chancers and but also making sure that creators know what they are in for and what the legalities of not fulfilling their obligations to the best of their abilities may be.

The stats of failed projects

But at the end of the day, do we have any idea how many crowdfunded companies do actually fail? Well according to Professor Ethan Mollick of Wharton School of the University of Pennsylvania, who conducted an independent survey of over 500,000 backers, at least 1 in 10 projects fail, particularly those raising under $1,000. However generally the numbers show that most of the projects are successful, with 65 percent of the backers feeling that they were rewarded timeously.

Kickstarter believes that these numbers are acceptable, and that a 9 percent failure rate is reasonable for people trying to see projects to fruition. They do however understand that this might put some people off: “We respect that. We want everyone to understand exactly how Kickstarter works – that it’s not a store, and that amid creativity and innovation there is a risk and failure.”

It is reasonable to say that participation in any crowdfunding campaign is a measured risk. There is never a guarantee, so do your homework before making a decision, and hope to goodness sake that should things go wrong there’s money left over for a refund. But don’t hold your breath.

Have you ever been burnt by crowdfunding or are you on the other side, looking for backers? Let us know your stories.