Understanding a project creator’s obligations to backers

A project creator has obligations towards all backers who have pledged on his project. These obligations are evident during the funding campaign and post campaign.

Key takeaways

  • During the campaign, a project creator should make a good faith attempt when interacting with backers, and accurately describe the quality and quantity of the product offered.
  • Post campaign, the project creator has two obligations: to deliver the reward and to refund if the reward cannot or will not be delivered.

Obligations during the campaign

During the campaign, a project creator should make a good faith attempt to:

  • accurately present the product or service offered via the project description;
  • accurately describe the quantity and quality of the product offered;
  • respond to backers’ queries;
  • interact with backers via FAQs, Updates  and Comments;
  • alert the backers to any third-party reviews of the product or other promotional material;
  • truthfully state any risks and legalities that may arise, such as manufacturing delays or copyright litigation.

The campaign is a critical time to establish the relationship between backers and project creators, and project creators should make a reasonable and good faith attempt to accurately represent themselves and their product to backers.

Obligations post campaign

Once the funding campaign ends, the project creator has two main legal obligations, namely to:

  1. fulfill the rewards offered in the campaign;
  2. offer a refund if the rewards cannot or will not be fulfilled.

Let’s look at each in more detail.

1) Obligation to fulfill the rewards offered in the campaign

Kickstarter clearly states that a project creator is legally obligated to fulfill the rewards. Before submitting a project for consideration to Kickstarter, a project creator has to agree to the following term and condition:

“If a project is successfully funded, you are required to fulfill all rewards or refund any backer whose reward you do not or cannot fulfill. A failure to do so could result in damage to your reputation or even legal action on behalf of your backers.”

Kickstarter’s policy is in addition to the underlying contract between the project creator and the backer. The transaction in a rewards-based crowdfunding campaign is a sale; this is because the campaign offers a tangible  reward that is commensurate to the value of the pledge, and that can be sold in the marketplace. The project creator receives income / revenue and the accounting treatment for the crowdfunding transaction is that of a sale, and the tax authorities in the US views it as a sale. Accordingly, the project creator and backer entered into a sale contract.

Furthermore, Kickstarter requires that project creators agree to make a good faith attempt to fulfill each reward by its estimated delivery date. “Good faith”, as from Wikipedia, is the:

” .. general presumption that the parties to a contract will deal with each other honestly and fairly, so as not to destroy the right of the other party or parties to receive the benefits of the contract.”

The backer completed his part of the sale contract in good faith when money exchanged hands at the end of the funding campaign. The project creator now has to complete his side in good faith.

The underlying assumption is that the rewards will be fulfilled in the quantity and quality, including any stretch goals, as described on the project page. This is a risk for the backer in the crowdfunding process, because the project creator may be a start-up with limited business experience, and the product quality may be impacted.

2) Obligation to offer a refund if the rewards cannot or will not be fulfilled

As per Kickstarter’s term and conditions:

“Project Creators are required to fulfill all rewards of their successful fundraising campaigns or refund any Backer whose reward they do not or cannot fulfill.”

I discuss the backer’s right to a refund more comprehensively in this post.

In conclusion

Because the project creator is trying to earn income from the rewards-based crowdfunding campaign, I would argue that he should make reasonable attempts to run the funding campaign in a similar manner and with a similar attitude as that to raise funds from investors. This approach is fair, because backers are committed to the project and willing to assume the risk involved in the crowdfunding transaction. Accordingly, project creators should respect backers in return.