Washington Filmworks continues the conversation on crowd funding, this time with a focus on rewards. This guest post from Steve Edmiston completes a trilogy, which addresses the challenges faced by entrepreneurs choosing to take their filmmaking dreams to “the crowd.” Find the first two installments here:
Be Careful What You Wish For – The Ongoing Risk in Rewards
As with most competitive, consumer-facing technologies and services, crowd funding “best practices” are evolving with ever-increasing rapidity. Simply put, what worked a year ago may not work today. In the one year since my original posts for Washington Filmworks, Hollywood has “discovered” crowd funding. The Veronica Mars movie campaign topped $5,700,000; actor Zach Braff’s Kickstarter was funded at over $3,100,000; Spike Lee’s proposed film about humans addicted to blood raised nearly $1.5 million. Flame outs from unknown, inexperienced filmmakers abound: the campaign for Kate Allen is Getting a Life raised just $243 of a $5,000,000 goal, earning a headline in The Hollywood Reporter: “Is this the Worst Kickstarter Movie Campaign in History?” If you are interested in learning from other amazing flame outs, sadly, the Kickback Machine is no more, but www.kickspy.com provides useful stats and some search capabilities. There, you’ll find the cold truth – the average failed narrative feature film campaign raises 10% of its requested funding, or $2,863.
Crowd funding may still have a bit of that new car smell, but it’s getting big fast, and with the most significant alteration to the landscape (as of this writing) looming – a possible new gold rush of investment-based crowd funding, following the passage of the JOBS Act in 2012, and the SEC’s highly anticipated, recently issued regulations.
Yes, instead of a t-shirt, download, or other “reward” for your donation to the entrepreneurial venture, your $25.00 can now make you an investor.
Looking back and peering forward, one wonders if we can accurately identify, let alone apply, the lessons learned in such a fluid ecosystem.
The ultimate popularity of investment-based crowd funding, and the degree to which offering a share of ownership will cannibalize reward and donor-based crowd funding endeavors, if at all, are chapters to the crowd funding saga yet to be written. One sure bet seems to be this – the degree to which unhappy crowd investors will take up their complaints in traditional dispute resolution formats is sure to exceed the rate at which disputes are litigated following successful reward-based campaigns. And entrepreneurs that jump quickly into the crowd funding ring with investors may soon realize that satisfying their obligations for fulfillment with a movie poster, DVD, and signed script, is far, far preferable to facing a class action lawsuit from the film buffs holding a single share of your movie that (a) never got made or (b) never made money, particularly where clever lawyers can always find something important that you failed to disclose to your investors.
The bottom line is that we have a treasure trove of litigation-driven experience, dating back three quarters of a century, of just how badly things can turn out when the venture tanks and upset investors claim, rightly or wrongly, that they weren’t adequately apprised of all the material facts relating to the investment.
And they want their money back.
How is that t-shirt-and-poster, reward-based Kickstarter project looking now?
Only time will tell, but I suspect that we will see, after an initial flurry of investment-based crowd funding offerings, a rational allocation between the various types of crowd funding platforms (donor, reward, debt, equity), based upon the risk profiles and lessons learned in the crowd funding market space. In other words, unsophisticated “crowd” investors will learn the realities of high risk investing and will to a certain extent choose to allocate their future “investing” in emotional terms – and return to reward and donor-based crowd funding platforms where they are more likely to receive the literal and metaphorical reward for supporting the entrepreneur.
Which brings us to the point of this post – what have we learned, in the relatively short life span of modern crowd funding, about the legal risks of running a reward-based crowd funding campaign? While there is no backlog of case law to point to, we are seeing cracks appear in the veneer of civility around crowd funding practices, and (again, paying tribute to clever lawyers), we can begin to divine where these cracks may begin to leak lawsuits.
The Campaign Succeeded. What Could Go Wrong?
One shorthand way to predict likely lawsuits is to examine a platform’s terms and conditions of use. On Kickstarter, a brief dive into the “Rules and Conduct” section provides a map for potential litigation between the players. Kickstarter makes it abundantly clear that your campaign is an offer to enter into a contract with “the public” and that a contract is formed upon acceptance of your offer. But “breach of contract” is just a gateway drug to the kinds of disputes that can arise. Here’s just a taste – Kickstarter prohibits any action that:
- infringes any patent, trademark, trade secret, copyright, right of publicity, or other right of any other person or entity, or violates any law or contract;
- you know is false, misleading, or inaccurate;
- is unlawful, threatening, abusive, harassing, defamatory, libelous, deceptive, fraudulent, tortious, obscene, offensive, profane, or invasive of another’s privacy;
- is made in breach of any legal duty owed to a third party;
- impersonates any person or entity;
- fails to abide by all applicable local, state, national, and international laws and regulations;
- abuses other users’ personal information.
- fails to deliver a reward, or fails to make good faith attempt to fulfill reward, by estimated delivery date.
Roughly translated, you may get sued by members of the “unhappy crowd” for any and all of the above, and Kickstarter wants no part of it. So much for “free money.”
Those that pledge to campaigns are not off the hook. According to Kickstarter, your pledge binds you to, among other things, assure you have sufficient funds or credit available at the campaign deadline to ensure that the pledge will be collectible.
Rest assured, Kickstarter makes it clear that it is not a party to this agreement and can in no way be liable for anything that goes wrong.
- Kickstarter is not liable for any damages or loss incurred related to rewards;
- Kickstarter is released from claims, damages, and demands of every kind, known or unknown, suspected or unsuspected, disclosed or undisclosed;
- You will defend, indemnify, and hold Kickstarter harmless from all liabilities, claims, and expenses, including reasonable attorneys’ fees and other legal costs, that arise from or relate to your use or misuse of, or access to, the Service;
- Kickstarter limits its own liability for direct damages to… wait for it… $100.00
So – are lawsuits flying?
No. Well, not flying, at least not yet. This may be in part because the “crowd” recognizes the risk inherent in a new venture, particularly where the failure to fulfill the reward is a product of an otherwise transparent, good faith effort by the campaign. Or this may be in part premised upon the fact that the “crowd” proven itself somewhat effective in filtering fraud during the campaign, preventing a transfer of funds in the first place. Or this may be because the amount of money in dispute for an individual donor is so small that there is no economically viable recourse absent – you guessed it – crowd funded litigation (read: class action lawsuits).
If the lawsuits aren’t yet flying, it is easy to find “fuel” for brewing disputes on numerous internet websites and social media platforms that underscore examples of high profile fundraising successes that have stumbled during fulfillment, leading to vast reservoirs of negative comments from those that pledge.
And there are signs that the lawyers may begin to catch up. For example:
- A Kickstarter donor filed a lawsuit for a refund following a failure to receive the reward after a 2011 campaign intended to fund a standing iPad mount named “Hanree;” the lawsuit was alleged by some to have caused the campaigner’s bankruptcy.
It seems safe to say that breach of contract and misrepresentation-based claims will be seen more frequently as the success of crowd funding continues. Only 25% of successful Kickstarter campaigns finish (fulfill) on time. While 75% of successful campaigns ultimately fulfill, a 25% failure rate would seem to be a “bright shiny object” for clever legal counsel, particularly when crowd funding campaigns so frequently are staffed by less experienced entrepreneurs, and where the disclosures of the venture’s numerous risks (that one would see in a private equity offering) are currently a rare sighting on a crowd funding campaign page.
About Steve Edmiston: Steve is the founder of Quadrant45 Law, LLC, and is Of Counsel to the Invicta Law Group, PLLC, where he focuses his 27 years of experience for his business, IP, and entertainment industry clients. He is also a screenwriter and producer, with feature films including The Periphery Project, Crimes of the Past, A Relative Thing, and Farewell to Harry. His award-winning short films include local favorite The Day My Parents Became Cool, and his current project, The Maury Island Incident, is the recipient of funding assistance through the Filmworks Innovation Lab.