Crowdfunding Is Now A Contract Between Company And Backer

Kickstarter is not a store. Indiegogo is not a store. Crowdfunding is not buying something — you’re merely donating some money, and you might get a reward for your pledge. Caveat emptor doesn’t apply, because there is no buyer, and no one can figure out what the correct Latin translation for ‘backer’ is. These are the realities that have kept Indiegogo and Kickstarter in business, have caused much distress in people who think otherwise, and have been the source of so, so many crowdfunding follies.

Now, finally, crowdfunding is being legally recognized as a store. The Register reports a court in England has ruled against Retro Computers Ltd and said it had formed a contract of sale with crowdfunding backer Rob Morton. For one person, at least, for one of their pledges, Indiegogo is a store.

The crowdfunding campaign in question is the Retro Computers’ Sinclair ZX Spectrum Vega Plus, a small device not unlike the Commodore 64 direct to TV joysticks. The Spectrum Vega simply plugs into your TV, reads an SD card, and plays old ‘speccy games. Clive Sinclair, the genius who brought us the Spectrum, strange flat CRTs, and a host of other inventions, was involved in this campaign. In the years since the campaign ended, there have been numerous updates and Retro Computers still says they intend to deliver the device. Morton, apparently fed up with the delays, brought a suit against Retro Computers for the grand sum of £584: £85 for the Spectrum pledge, £5 for shipping, and the remainder for travel expenses and lost wages for the court date.

District Judge Clarke of Luton County Court heard the case and ruled against Retro Computers, finding there was a contract of sale between Morton and Retro Computers Ltd.. Evidence included a number of copies of Morton’s order, a document the judge pointed out as saying ‘this order’ and not ‘this pledge’. Additionally, the judge found the fine print on Indiegogo does not negate a contract of sale; there was still an implied agreement between Morton and Retro Computers, and Retro Computers had breached the contract by not delivering a Spectrum.

It should go without saying that this finding does not apply to every project on Indiegogo, it does not apply to Kickstarter, and nor does it apply to every crowdfunding campaign. This does not even apply to all backers of the Spectrum Vega Plus. Still, there are hundreds of thousands of backers for crowdfunding projects that haven’t received what they paid for, and if nothing else this story gives just a little bit of satisfaction to anyone that’s still waiting on an undelivered product.

42 thoughts on “Crowdfunding Is Now A Contract Between Company And Backer

  1. This is a positive development. I’ve lucked out with buying things through crowdfunding, either because I’ve managed to avoid the pie-in-the-sky wishlist stuff, or because my standards are low and I’m satisfied with laser cut doodads, but I know lots of folks who have sunk money into products that will never appear. It needs to change.

      1. They HAVE sued Wall Street. That’s why the investment industry is heavily regulated by the SEC.

        Quite some time ago, US courts recognized that someone taking up money for an investment scheme and then choosing not to deliver was an anti-social crime. Sure there’s a million examples where this general idea isn’t applied, such as gambling, and there’s tons of people who have lost money with investments. But in general, it’s considered to be fraud to take up money and just stick it in your pocket and run.

        The little bit of magic that is going on with a lot of this ‘crowdfunding’ thing is that they have generally not been seen by the SEC as securities or investments. There have been cases where this wasn’t true (and is the big reason that none of the popular crowdfunding sites allow campaigns involving the purchase of real estate, or rewards that can be considered as more financially valuable than the money you’ve paid.)

  2. Its happen to me too– And my product was destined to be donated for charity– Made by Harvard students ! Endorsed by Bill Clinton and Bill Gates ! 5+ years later never received.

    Aside from just ‘taking the money and run’, unless somehow they terribly underestimated the cost involved here, I wonder what the hold up is. The emulators are already out there, the parts readily available, only slightly troublesome issue would be with the injection molding…. But this is not exactly a ‘revolutionary’ product with untested technology by far..

    1. “Endorsed by Bill Clinton” well there’s your problem
      jokes aside, crowdfunding has become a cesspit for the kind of people that want easy money. and the sites are no help, ’cause they’ve got their cut already.

  3. That will certainly provoke a thorough review process on crowdfunding sites to change the wordings used, both on the terms of service and on campaigns themselves, and that also will open the Pandora’s Box and give the final incentive for many unsatisfied backers to litigate many companies.

    I’m gonna grab the popcorn, hold my seat.

  4. I’m of a different opinion and say if you want to buy something from a store, go to a store and buy it. Kickstarter and Indiegogo are are clearly not stores. If you put money into a Kickstarter or Indiegogo project you should do so with the understanding that you might not get something in return. But this is good, we need places like this to encourage budding entrepreneurs.

    Now, having said this, I do believe that Kickstarter and Indiegogo could do far, far more than they currently do to protect consumers from fraud and naive entrepreneurs. A few suggestions.

    1) Require project budgets. As part of accepting the listing KS/Indie would review these budgets to determine if they are reasonable and cover all expected expenses. A lot of projects fail simply because the entrepreneurs way underestimate their expenses. They set their prices too low and it become impossible to fulfill the pledges. These budgets also need to address what happens if you get a low number of pledges.

    2) Pass the funds out in blocks of $500K max. Require that the project demonstrate provable, on budget progress against plan to get the next round of money. Notify backers before releasing the next funding round and allow them to opt-out with a proportional refund.

    3) KS/Ind need to be much more vigilant about projects and safety regulations. Sooner or later a KS project that skipped UL approval is going to burn someone’s house down and kill somebody. And then we’ll see where the lawsuits land.

    1. I agree with you. In Kickstarter/Indiegogo, one is donating to the builder, not buying something. People hear this, read this, but still want to consder it as buying something.
      Problem is, with too much management, KS/IG would need to have a lot of experts in many fields. Then to increase the % they charge from people. That would That would increase the cost of the things people build. And so on..

      1. Except in this case. The campaign in this court case stated EXPLICITLY that every person who backed the campaign at the applicable pledge level WOULD receive the product. This wasn’t some R&D funding – the product was ready for market and the CF platform simply used as a way to secure capital investment. That, along with the legal wording of the provided order / invoice – meant that this case was an exception to the rule – the judge himself stated that this is NOT a precedent-setting case.

    2. “you should do so with the understanding”

      Good. Now, understand that people may not necessarily have that understanding, and there are several kickstarter projects that openly abuse that fact.

      What you gonna do about them? Tough titty?

      1. Huh, yeah. You threw your money in without understanding what you were doing despite plenty of available information. Unless the project outright lied about the status when you made your choice – tough titties. Grow up and take some responsibility for your choices.

    3. If you put money into a Kickstarter or Indiegogo project you should do so with the understanding that the project might not meet the standards claimed or which you expect. And that the project might be delayed for a reasonable period of time. But you absolutely should expect the ones running it not to hop off with your money without delivering anything. If they want to be able to do that then they should run the kickstarter stating explicitly that there is no guarantee the project will be delivered at all, how many kickstarters do that?

  5. It’s actually the Vega Plus that’s the problem, not the original Vega. That plugged into a TV; the Vega Plus is (supposed to be) a handheld device, with a small screen.

    The whole thing has been plagued with trouble, thanks to a series of falling-outs (often legal) amongst the company staff, former staff and cohorts. Rights holders for the games haven’t been paid (or the charity that was supposed to be benefiting from donated license fees) and RCL have spent a fortune on lawyers and maybe 20 pre-production devices. Glad I knew enough about the company to not be tempted – also I have a plethora of ARM devices that can run Spectrum software already!

    1. What’s left of RCL are a joke. They only give out status updates when they get negative press, and then it’s like a kid at school saying ‘the dog ate my firmware’ or similar excuses blaming everyone else for their problems.
      They’ve sent nastygrams to news outlets such as the BBC and The Register to try and get articles about them removed.

      Quite often they roll out the excuse that most problems were due to 2 directors resigning, but gloss over the fact that they were (illegally) forced out of the business. RCL’s land grab backfired on them as they forgot the contracts stated that the IP remained with the ex-directors until paid in full, so there was a big delay as they had to start over.

      If the latest rumours are to be believed, RCL are trying to get backers IGG accounts closed if they mention this guys court victory on their IGG page. Not suprising really, RCL have screwed themselves, the MD taking big monthly ‘consultancy fees’ until the bank account is almost dry, so no money for a production run or refunds.

      Frankly the whole sorry farce could fill a book and would be worthy of a ‘Carry On’ film if only the cast were still alive.

      1. And sure enough, after this news hit the regular tech sites RCL come out with another ‘update’ that yet again does nothing but try and shift the blame again. Still blaming the 2 directors they forced out for taking their code with them.

        They must be running scared, after months of ignoring backers who repeatedly ask for a refund (despite an RCL director saying they’d give one to anyone who asks, yet in 2 small claims courts they said both backers aren’t entitled to one!), they now seem to be replying to them.

  6. The “crowdfunding” part wasn’t what made it a contract, at all. The promotional material, in which they told people they could “buy one” at a “discounted price” is what sank this project. The only part Indiegogo’s terms played in the whole thing is that the judge ruled that the terms did not over-ride the implicit contract generated by a “sale”. The sale was dictated by the language of the promotional emails that were sent out.

    It’s a pity; this could have been a useful lesson in “how-to not run a crowdfunding campaign”. Instead we get a lesson for the scam-artists out there on weasel words and how to avoid being liable for lying.

    1. Agreed, they were hamstrung by their own legally binding statements, and suffered the consequences from an amateur marketing campaign.

      As a company owner you are legally liable for your employee’s behavior, but it is rarely enforced in western culture. A CEO can be sued if their employee pissed on the Kellogg packaging line, but for some reason most people still ate the cornflakes without a lawsuit — and quickly forgot it happened.

      Crowd-funding should be treated more as a rolling credit-line based on inventory valuation, and withdrawn if the board members start to falter or funding/credit providers give a contractual-noncompliance vote. Thus, operating just like a real bank that has consequences for failure to ship product.

      However, if you know the risks and their business plan, than demanding a refund for being ignorant is silly.

  7. I nominate “caveat patronus”, using the Latin word/root for “patron”, which while it does have the meaning of “paying customer”, also means one who supports the work of _something_. The second definition from Dictionary.com (which I’d link but would rather not get caught by a spam filter): “a person who supports with money, gifts, efforts, or endorsement an artist, writer, museum, cause, charity, institution, special event, or the like: “.

  8. This opening of the article is likely not very true:

    “Crowdfunding is not buying something — you’re merely donating some money […] These are the realities that have kept Indiegogo and Kickstarter in business”

    This is not what kept Kickstarter and Indiegogo in business. Perhaps it was the intended legal reality, but certainly not the publicly recognized reality. Pretty much all of the Indiegogo and Kickstarter business is founded on the impression they ARE a store. It looks like a store, it advertises like a store (emphasis on the reward), it sells like a store, one pays like in a store. Some fine print and some wisenheimers touting that fine print don’t change that.

    If Kickstarter wasn’t a store? Then it whouldn’t sell rewards, but donations for development. And leave open what the exact outcome is or how much exactly the final thing costs. These were separate sales.

    With this in mind I’m very glad to see Kickstarter and Indiegogo now being treated like a store.

    1. … further to this, I think the better commercial users of Kickstarter do treat it as a store, and the stated point of the campaign is to lock in enough pre-sales to finance a production run. I’ve only ‘backed’ (prepurchased) from two campaigns, and in both cases I did receive a viable product, acceptably close to the promised deadline (give or take a month)… and I’m entirely happy with the process, so far, as well as the opportunity to get early access to a couple of cool things. Maybe I’ve just been lucky.

      1. Yes, agree with this. You can tell when a Kickstarter campaign is simply a pre-order event for an established business and/or product. Those are worth supporting. When all you see on the campaign page is an Arduino board or RPi prototype, move along…. unless you are a philanthropist.

  9. About dam time. So many starry eyed dreamers and/or scamming sellers on Kickstarter and IndieGoGo that hide behind the veil of “you supported development of a product”. Read the page where you pledge your money. It specifically states “you will receive” and lists the items you are pledging for. That constitutes a “sell” in almost any legal system in the world.

    I for one hope this rocks Kickstarter and IndieGoGo into a mad dash to update all legal verbiage on their sites and in their agreements. The intent of crowdfunding sites is that you become a stakeholder of some sort to the success of the product. To pledge money and get nothing should be an outright crime, unless the pledges specifically detail that you are pledging the development of the product with no promise of gaining physical property from the transaction. It’s not rocket science people, but since there is a sucker born every minute, it sometimes seems like common sense is rocket science.

  10. The campaign in this court case stated EXPLICITLY that every person who backed the campaign at the applicable pledge level WOULD receive the product. This wasn’t some R&D funding – the product was ready for market and the CF platform simply used as a way to secure capital investment. That, along with the legal wording of the provided order / invoice – meant that this case was an exception to the rule – the judge himself stated that this is NOT a precedent-setting case.

  11. Don’t you just long of the good ol’ days of venture capital? There would probably have been some tax breaks for investors and they get to share in the profits (if any). The crowd model is win-win for the money-seekers: they put (next to) nothing in and get everything out.

  12. I am doing a thesis on #crowdfunding, trying to differentiate motivations of sponsors going for the project-based model (Kickstarter and Indegogo) and subscription model (Patreon and Drip).

    If you would like to have a summary of the #thesis at the end of the #research I would be happy to oblige. It would be a great #help if you could take part in the survey and share it with others

    It takes at most 5 minutes to complete

    Link to survey
    https://docs.google.com/forms/d/e/1FAIpQLSdPnqkNLCz1p7xZAwgfHSz8abAzq3zVJ6MJLsw8Sh17dUUEFg/viewform

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