Kickstarter and legal obligations

Dan Rogers is a lawyer with twenty years of experience. He specializes in the gaming industry. In his blog, Rogers shared his thoughts on what legal difficulties can be expected for a developer who decides to launch his project using the Kickstarter service. We offer an abbreviated version of the text in Russian.

In 2012, the icon of the gaming world Peter Molyneux launched his Kickstarter campaign. Fans around the world have faithfully supported his idea. It was supposed to unite 50 million players into a huge universe the size of Jupiter. The power of Molineux’s persuasion was such that 17 thousand people paid his studio, 22cans, more than $850 thousand – secured by a brilliant game that was to be released nine months later.

Now, when a year and a half has passed since the expected release of the game, and it is only 52% finished, the Molineux game world called GODUS seems to be about to come off its digital axis. The composition of the development team has changed significantly, and one of the people involved in the project claims that the key features of the game are questionable. Fans are furious, and bloggers are starting to mutter about lawsuits.

The legal issues accompanying a failed Kickstarter project, of course, lie in uncharted waters, but judging by the lawsuits already filed, those who dared to travel the seas of crowdfunding are at greater risk than they might assume.

Over the past six years, more than eight million people have spent about $1.6 billion on Kickstarter. They financed everything from children’s books and feature films to potato salad. Unfortunately, the Kickstarter user agreement only explains in general terms what the legal relationship is between the sponsors and the creators of the campaign.

Kickstarter Rewards

For example, Kickstarter uses the concept of “reward” to denote the goods and services that sponsors will receive after they invest money in the campaign, leaving us wondering whether T-shirts, games, etc. are accidental or an integral consequence of the transaction. Yes, Kickstarter explains, albeit briefly, that the service itself is not a store in the traditional sense of the word, and that the agreement between the sponsor and the creator of the campaign is contractual. But at the same time, he does not inform that the sale of goods, including those distributed during the company on Kickstarter, is regulated by the relevant laws.

“Kickstarter is not a store. People don’t buy something that already exists- they help create something new.”

A farmer who sells what is still growing in his field is legally obliged to deliver the harvest to his customers when it is ripe. The game developer is bound by similar obligations, who undertakes to create something. If you tell the buyer that you didn’t realize how much effort it would take from you, or try to develop something else right in the middle of the process – this will not release you from your obligations to the law.

Deposit

Kickstarter transactions are vaguely referred to as “collateral”. It is this word that is used to denote the money that sponsors spend on the project. This makes people, among other things, wonder whether “pledges” can be considered donations – they are deducted from taxes under American law.

Despite all the similarities with the donation, this is not it. American law stipulates that only registered non-profit and charitable organizations accept donations. From the point of view of the law, devouring is what you put in a box with a slot in your church, synagogue or mosque, and not what you sponsor a Kickstarter campaign with.

Gifts

Kickstarter sponsors can invest in a project not as a “pledge”, but as a “gift”, although only the one who started the campaign – or the one who gave money for it – will be able to distinguish one from the other.

Thus, if desired, the creator of the company can try to identify the funds collected on Kickstarter as a tax-free “gift”, and not as a profit from the project.

American tax law defines a gift as a transfer made out of affection, respect, admiration, or similar motives. The determining factor is the intention of the donor. In relation to Kickstarter, this should mean that only the sponsor’s intention is important.

What are gifts and what are purchases?

In some cases, it is not difficult to determine the sponsor’s intention. The simplest reward in the GODUS project is a heartfelt thank you and access to an exclusive sponsor forum. Neither has a market value. So, the £5 bill that the sponsor paid for these things is a “gift”.

On the other hand, a deposit of £15 obliges Molineux Studio to provide not only a heartfelt thank you, but also one digital copy of GODUS. On Steam, the game can be purchased for $19.99. So the sum of £15 is more or less equivalent to how much the game costs “in the real world”. In this case, the sponsor was clearly going to make a purchase.

Sponsors are not the same as investors

Investors is a word to avoid when talking about a Kickstarter campaign. Sponsors are not investors, because they are not responsible for the project and do not have the opportunity to receive income from it.

Back in 2012, Palmer Luckey raised $2.4 million using Kickstarter to create an Oculus VR helmet. The sponsors who invested in his project did not see a penny of the $2 billion he later received from Facebook for his company. Those 9 thousand people received only the promised: posters, T-shirts and helmet prototypes.

Kickstarter confirms that there is no opportunity to invest in projects.

“We are all for charity and investments, but they are not allowed on Kickstarter.”

 

 

Excerpt from the Kickstarter website

Forbidden words

The problem is that when Kickstarter campaigners believe that sponsors are investing, donating or pledging money to them, they lose sight of the contractual basis of the relationship with the sponsor. For example, Peter Molineux once answered a journalist’s question whether GODUS sponsors deserve to have their money returned to them, “No. They didn’t buy anything.”

Such an answer is in itself a warning to those people who invested in the GODUS project, wanting to get a copy of the game. It perfectly illustrates what a giant gap of misunderstanding can appear between the creator of the campaign and the sponsor.

Obligations Kickstarter

The legal consequences of reward-based crowdfunding are more serious than one might assume. For example, refusal to deliver promised services or goods may entail not only private civil lawsuits, but also certain actions on the part of the government.

Government measures

A year before Molineux launched his campaign, Edward Polchlepe, with his studio Altius Management, raised $25,146 from 810 sponsors. In exchange for their money, he promised a deck of horror-style cards and some other goods. Two years after the end of the project, not a single sponsor has received anything from the promised. Of these defrauded sponsors, thirty-one lived in Washington State.

As a result, in May 2014, the Attorney General of Washington State filed the very first consumer lawsuit from Kickstarter participants, in which he accused Polshlep of misleading, refusing to provide the promised reward and refusing to return the money. The case is still ongoing. If it ends not in favor of the accused, then Polshlepe will be forced to pay about $ 1.6 million, which is much more than the amount he received from sponsors.

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The expressions that a Kickstarter campaign participant chooses to communicate with their sponsors are very important, because they actually serve as advertising communication. A certain amount of exaggerations cannot be dispensed with; they are even permitted by law to a certain extent. However, if the stated promises are not fulfilled, the sponsors can sue the campaign participants for violations of the terms of the contract, false advertising or fraud.

Returning to the Molineux project, we can conclude that “a universe the size of Jupiter” is an acceptable exaggeration. But the inability to provide a widely advertised multi-player mode can already lead to problems with the law.

Professionals and consumers

With Peter Molineux and his game, part of the problem is in the history of the project. For decades, Molineux presented his ideas to publishers who were knowledgeable enough to determine where the limits of the possible were, and who could distinguish wishful thinking from reality. They repeatedly made deliberate bets, knowing that some of their projects were doomed to perish ingloriously. In addition, they signed contracts with Molineux to reduce risks.

“We’re trying to do something ridiculously ambitious here…”

 

 

Peter Molineux in an interview with Game Beat at the GDC conference

But those enthusiastic expressions that are used behind closed doors of large studios to “sell” a project are unacceptable where ordinary consumers are involved. In this case, there is a high risk that the court will consider the advertisement misleading.

“I, in general, am not afraid to lie. I am afraid that I will start making promises, and due to circumstances that I cannot control, I will not be able to fulfill them. But it can’t be called a lie, right?

 

 

Peter Molineux in an interview with Rockpapershotgun

No responsibility

Kickstarter has recently updated its terms of use, where, perhaps, it has outlined with the greatest clarity the relations existing between campaign participants and sponsors.

“When a participant launches a project on Kickstarter, he invites those who wish to enter into contractual relations with him. Anyone who sponsors the project accepts the offer and enters into this contract.”

 

 

Kickstarter Terms of Use

But at the same time, Kickstarter refuses to act as an arbitrator in controversial cases. If the campaign ends in a lawsuit, the Kickstarter terms of use make it clear that the resource has nothing to do with it.

“Kickstarter is not responsible for any damage or damage incurred as a result of using the service. We do not interfere in disputes between users or between users and third parties related to the service. You are solely responsible for any damage caused to any party.”

 

 

Terms of Use Kickstarter

Summing up

Peter Molineux has not been put on trial and is unlikely to be. At the same time, his campaign, his false promises and his slowly losing patience with sponsors – all this gives others the opportunity to reconsider their own interaction with Kickstarter.

Kickstarter is unique: it connects those who are not afraid to dream with those who are not afraid to pay for these dreams. At the same time, before taking money from those who rely mainly on words, participants should realize that according to the law and for moral reasons, it is their duty to give what they promised.

Note: this article is presented only and exclusively for informational purposes. For any advice in the field of law, you should contact a lawyer.

Other materials on the topic:

• Peter Molineux has released a new mobile game
• Peter Molineux: Mobile games don’t connect people