Entertainment Law Alerts

June 12th, 2015

FTC Offers a New Weapon Against Donation Crowdfunding Fraud

In a prior alert, we analyzed two fraudulent crowdfunding campaigns in which the people running the campaigns did not deliver on the promised product or services. In one case, the Oregon Attorney General declined to pursue Erik Chevalier, who had raised more than $122,000 promising a game and special pewter game figurines, but instead used the money to move to Oregon. In another case, the Washington State Attorney General had filed a complaint in May 2014 against Edward Polchlepek, who had raised over $25,000 from more than 800 contributors for a playing card game and other rewards which were not delivered by the promised date in December 2012.

Now, the defrauded consumers in the Oregon case have had some legal satisfaction. In an FTC release on June 11, 2015, the FTC announced that it had brought and settled its first case involving crowdfunding against Mr. Chevalier and his fraudulent game.

The FTC entered into a settlement order with Mr. Chevalier in which he agreed not to make further misrepresentations about crowdfunding campaigns, and/or fail to honor stated refund policies. The order also bars him from disclosing or otherwise benefiting from consumers' personal information obtained as part of his campaign, and requires him to destroy consumer information within 30 days of an FTC request to do so. The FTC also imposed a fine of almost $112,000.

This recent FTC order shows that defrauded consumers now have a strong federal remedy in addition to existing state law remedies. The existence of a federal remedy is significant: as we have seen, state attorneys general may have differing views about whether a particular crowdfunding campaign violates state law. In addition, it offers a remedy even after a State Attorney General has elected not to prosecute in a particular case. The Washington and FTC cases are reminders that anyone considering a donation crowdfunding campaign will have to either deliver on the promises by using the money for the purposes stated in the campaign, or refund any remaining amounts if it turns out that the intended benefits cannot be delivered.

Note that crowdfunding for equity or debt - rather than for products or services - is now legal under the new Regulation A. (You can read more about Regulation A here.)

If you have any questions about crowdfunding compliance and enforcement, please contact Thomas D. Selz at (212) 826-5535 or Tselz@fkks.com.