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Understanding Your Kickstarter Liabilities

Kickstarter provides a unique opportunity to match those who dream big with people willing to pay in advance or give a small gift for the same. At the same time, it comes with a host of legal liabilities that few really understand.

When video game icon Peter Molyneux launched a 2012 Kickstarter campaign, fans around the world devotedly supported his vision of connecting up to fifty million players in a massive, god-game universe the size of Jupiter. [1] So convincing was the promotion that 17,184 people paid Molyneux’s studio, 22cans, over $850,000 [2] for a game expected nine months later.

Now a year and a half behind schedule and just 52% complete, Molyneux’s GODUS game world seems to be wobbling on its digital axis. [3] Its development staffing has changed considerably, and at least one insider believes that key game features are in question. [4] Fans are angry and bloggers are beginning to mumble the word lawsuit[5]

Truth be told, the legal issues surrounding failed Kickstarter projects are largely untested waters, but if recent lawsuits are any indication, then those venturing into this crowdfunding sea may be subjecting themselves to more risk than they realize.

Over the last six years, eight million people have spent more than $1.6 billion on Kickstarter, funding everything from children’s books to feature length films to potato salad. [6] Unfortunately, Kickstarter’s Terms of Service only broadly explain the complex legal relationship created between backers and campaign creators.

KICKSTARTER REWARDS

For example, Kickstarter uses the word reward to mean the goods and services backers receive after paying money to a campaign, leaving us to speculate whether T-shirts and video games and other tangible goods and services are incidental or integral to the transaction. While Kickstarter explains, albeit briefly, that their service is not a traditional storefront for people to sell currently-available goods and that the agreement between a campaigner and backer is contractual, they fail to disclose in detail that the sale of future goods, including those being pitched in Kickstarter campaigns, is wrapped in binding and enforceable law. [7]

“Kickstarter is not a store. People aren't buying things that already exist — they're helping to create new things.”

Few would argue that a farmer who sells wheat still growing in his fields has a legal obligation to deliver the ripened crop to his buyer when ready. In the same way, a software developer promising to deliver a finished product is under a similar obligation. Telling your buyer that you didn’t realize how much work it would take or deciding to develop something else mid-season hardly relieves you of your duty under the law.

KICKSTARTER PLEDGES

Kickstarter transactions are further clouded by the word pledge, which is used to describe the money backers spend on a project, leaving people to wonder, among other things, if the money is a tax-deductible donation.

In all likelihood, it’s not a donation at all. [8] First, Kickstarter doesn't allow donation-based rewards, [9] and second, IRS regulations allow only qualified non-profit organizations and registered charities to accept tax-deductible donations. From a legal perspective, donations are what you put in the offering plate at your local church, synagogue, or mosque; not what you give to Kickstarter campaigns.

GIFTS

On the other hand, Kickstarter backers may lawfully contribute gifts to a campaign, although it's left up to the campaignerbacker, and the IRS to figure out what percentage of a pledge is intended as a gift and what percentage is spent in anticipation of a Kickstarter reward. And that’s not an easy task.

Beyond deductions, a creator may be able to classify certain funds raised on Kickstarter as a nontaxable gift, and not income. [10]

U.S. tax law defines a gift as a transfer made out of affection, respect, admiration, charity, or like impulses, but the controlling factor is the giver’s intention. [11] Applying this to Kickstarter, regardless of what a campaigner thinks, it’s the backer's intention that matters.

DETERMINING GIFTS AND PURCHASES

In some cases, identifying a backer’s intention is straightforward. Consider that the lowest level GODUS reward is heartfelt thanks and access to exclusive backer forums. Here, one can form a reasonable argument that neither item has an ascertainable fair market value; that the backer's primary intention was to give a gift.

On the other hand, a pledge of £15 obligates Molyneux's studio to deliver one digital copy of GODUS, in addition to their heartfelt thanks. A popular digital game download site—Steam—currently offers GODUS for $19.99, so a £15 pledge is roughly equivalent to the real-world purchase price of the game. Here, it's hard to imagine that the buyer's intention is anything but to purchase a product.

BACKERS ARE NOT INVESTORS

Investor is another word people should avoid using when talking about Kickstarter campaigns. Backers are not investors because there is no assumption of risk and no chance of a monetary yield.

Back in 2012, when Palmer Luckey raised $2.4 million through Kickstarter to fund his Oculus VR headset, the backers who invested in his campaign didn’t see a nickel of the $2 billion he later received when Facebook purchased his company. Instead, those 9,522 early investors received the benefit of their contractual bargain: posters, T-shirts, and early headset prototypes.

Kickstarter agrees that there is no investment opportunity in a project:

We’re all in favor of charity and investment, but they’re not permitted on Kickstarter.” [12]

So, lest you think otherwise, no one is investing in a Kickstarter campaign by contributing money. [13] [14]

DANGEROUS WORDS

The problem is that when Kickstarter's participants assume that backers are investing or donating, and when they describe their products as rewards and money spent toward them as pledges or donations, they fail to recognize the contractual nature of the relationship. Peter Molyneux, for example, recently answered an interviewer’s question as to whether GODUS backers deserved a refund by saying “No. Because they didn’t buy a product.” [15]

RPS: “… do you not think after this much time that people … deserve their money back – isn’t that just basic business?”

Peter Molyneux: “No. Because they didn’t buy a product.”Rockpapershotgun.com interview (2/13/15).

Alarming as his answer may sound to someone who contributed to the GODUS project expecting to receive a copy of the game, it illustrates how wide a communication chasm can grow between campaigners and backers.

KICKSTARTER LIABILITIES

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