The Failed Kickstarter - Legal Ramifications

Crowdfunding is a very useful tool to help a creative, whether that creative is a single artist, a pair of complementary inventors or a small group of designers, obtain access to the money needed to produce something and bring it to people willing to buy it. Some campaigns become very successful, some just barely meet their funding goals and some fail to get funded. Today we are looking what can happen in the legal sense when a project meets its funding goal but fails to deliver on promised backer rewards.

The Three-Way Agreement - The Creator, the Backer and the Site

In order to understand the legal consequences that may befall a failed project, we have to define the legal relationship between the three parties involved in any crowdfunding campaign. First we have the Creator, who runs the Campaign to fund a Project and intends to make something if the Project's funding goals are successful. Second we have the Backer, an individual who pledges their own money to the Project for an identified Backer Reward. Third we have the crowdfunding entity, such as Kickstarter or Indiegogo, which hosts the Project's campaign page, provides publicity and traffic to the page and governs behavior on its platform.

Kickstarter makes it very clear in its 2025 Terms of Service (ToS) that it is not involved in the arrangement between the Creator and the Backers and cannot be sued if a successfully-funded project fails to deliver on its promised Rewards. Through its terms of service, it imposes a contract between the Backer and Creator to which both must agree to use the services. 

While most of the ToS is written in "plain English", the terminology used to describe the relationship between a Backer and Creator is curious. Section 4 of the ToS, "How Crowdfunding Projects Work" begins with "backers agree and acknowledge they’re not buying something when they back a project—they’re helping to create something new, not ordering something that already exists." This language might suggest that a Backer is left at the mercy of the Creator as to whether a pledge is delivered, but one has to read further into the ToS to find this is not the case.

Section 4.2 states "a backer’s collected pledge operates as a conditional, multipurpose voucher." The use of the term "voucher" instead of a term like "preorder" may have been used to emphasize the ability of a backer reward to change as outlined in the ToS. Many "preordered products" do not exist at the time a buyer pays for his preorder. If someone "preorders" issues #1 of a newly created comic book with three variant covers, for example, then they will expect to receive three books with different covers.

When you normally preorder a product from a company directly you put down your money and wait for the product to be finished and delivered to you. Kickstarter does not operate as a payment processor or shipment fulfiller, those duties fall on the Creator. Kickstarter imposes a nominal requirement on the Backer to keep his delivery address current with the Creator and pay for shipping and import duties or commodity taxes. Similarly if a Buyer preorders from a company directly the buyer is responsible for updating his address with the company. These requirements do not distinguish a voucher as described from a preorder as they may only affect the timing of certain Buyer or Backer obligations.

From the Creator's end, the ToS does provide a level of flexibility if the Project does not turn out the way it was originally presented during the Campaign. Let me continue with my comic book example. Suppose the Campaign stated that one of the variant covers would be drawn by a certain well-known artist. Then in a campaign update it is explained that the artist left the Project due to "creative differences". So is the Backer automatically out one of the three books for which he pledged? 

The answer is "no", the ToS emphasizes flexibility in fulfilling rewards, not abandonment. The Creator can offer an alternate reward of equivalent value or credit toward an award of a higher value. A partial refund may be given. A new artist may be commissioned for the variant cover or a poster of existing artwork may be included instead.

Nonetheless, a Creator's liability is more limited by the ToS than a traditional preorder. If you back a preorder and it fails to deliver the product, you can sue the company which took your money. If a Creator is unable to complete a Project, it "must make a reasonable effort to find another way of bringing the project to the best possible conclusion for backers." They can meet this requirement by providing information to Backers, including explaining the difficulties encountered by the Project, how the Creator tried to meet those challenges, and where the money went. The Creator cannot lie or mislead the Backers on these points as stated in Section 4.3. Section 4.4 makes a Creator legally liable to Backers if they do not fulfill their Project or redeem the Pledges/multipurpose vouchers. If one reads Section 4.3 together with Section 4.4, a Creator can still fulfill a Project even though it failed to be carried through to completion.

It is important to note that even with a preorder the company who took the preorders should have the traditional contractual defenses availble such as impossibility, impractability or frustration of purpose which may allow excuse the company's inability to perform. In my comic book illustration, if one of the artists commissioned for a variant cover dies before starting work, then it would be impossible to perform that part of the contract. But if the books were printed in another country to save money and those books were seized by a local authority on a bogus charge of indecency, it may be impractical to pay a large "fine" (bribe) to get those books released or dispute the charge in the local courts. Finally, if the book was presold on the basis that it would narrate the journey of the Kansas City Chiefs to win Super Bowl LIX, then the purpose of the book would be frustrated because the Philadelphia Eagles won that game. 

The ToS may be more generous to Creators than your standard contractual defenses but it will not excuse gross mismanagement or misappropriation of Backers' funds. Someone referred to a Kickstarter Backer as an "angel investor" instead of a buyer, and perhaps that the ToS's provision of a "I did my best" defense does put a Backer in a weaker position than a Buyer to obtain recovery. However, an investment vehicle of any kind owes a fiduciary duty to its investors to act prudently and diligently on their behalf and to be honest in their communications with them. If a Backer is dissatisfied with a failed Project's explanation or direction, it may very well be up to a judge or a jury to decide whether the Project "used funds appropriately" and the Creator "work[ed] diligently and in good faith to bring the project to the best possible conclusion under the circumstances."

Kickstarter campaigns do not get funded if they do not reach their funding goals. The money is returned to the backers. Indiegogo, another popular crowdfunding platform, unlike Kickstarter has a campaign funding option called flexible funding (as opposed to fixed funding, which acts like Kickstarter) which allows the Creator to keep the funds pledged even if it does not meet the campaign's funding goal. Regardless of the funding option given, the Indiegogo Terms of Use make it clear "that as a Campaign Owner, you are solely responsible for fulfilling the obligations of your Campaign and delivering Perks. If you are unable to perform on this, or any of your other legal obligations, you may be subject to legal action by Contributors."

The Remedies and the Obstacles

Unfortunately, approximately 9-10% of successfully funded Kickstarter Campaigns fail to deliver anything to their Backers and just about 13% of those Backers receive refunds. If you regularly pledge to crowdfunding campaigns the odds of getting burnt will increase over time. When people shell out their hard-earned cash and receive nothing but empty promises that turn into radio silence in return, they are likely to get angry. And when people get angry, they start to look to their legal options.

The Backer has a right to sue for undelivered rewards, regardless of whether the Creator has an "I did my best" affirmative defense as outlined above. That brings me to an obstacle likely to be encountered by many Backers, where do they sue? Section 17 says you have to sue in the State of New York, but that only applies if a Backer is suing Kickstarter, not a Creator. The Creator could be located almost anywhere in the world. Only a court with personal jurisdiction over a party can compel the party to be sued to answer that suit in its courts.

It is established that a seller of a product on a site like eBay generally does not consent to personal jurisdiction of another state's courts to be sued in them. The United States Constitution requires minimum contacts between an individual or corporation and a state which is not their domicile or state of incorporation before that person or entity can be sued in that state's court system. International Shoe Co. v. Washington, 326 U.S. 310, 317 (1945). The contacts must be "continuous and systematic", Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S. Ct. 2846, 2851 (2011), not just "random, fortuitous or attenuated." Burger King Corp. v. Rudzewicz, 471 U.S. 462, 473 n.15 (1985). Casual eBay sales do not rise to the level of continuous and systematic contact with a buyer's state. Winfield Collection, Ltd. v. McCauley, 105 F. Supp. 2d 746, 749 (E.D. Mich. 2000); Boschetto v. Hansing, 539 F.3d 1011, 1019 (9th Cir. 2008). So unless the seller has a nationwide presence or a substantial business selling through eBay, you have to sue the seller in his or her own state. Dedvukaj v. Maloney, 447 F. Supp. 2d 813, 816–17 (E.D. Mich. 2006). 

Even though there are differences between an online auction and a crowdfunding campaign, the application of the caselaw dealing with the former is applicable to the latter. In most cases the Backer must sue the Creator in the Creator's home state or country. This may be fortuitous for the Backer if the Creator and Backer reside in the same state unless the state court has venue rules requiring the Backer to sue in a court geographically convenient for the Creator but not the Backer. Trying to sue someone who resides in another state may be far more trouble than it is worth, especially if the Backer only pledged a few hundred dollars. Travel time and expenses to and from court, which are rarely recoverable in a judgment, could easily exceed any judgment obtained. And even if a Backer obtains a judgment, the Creator may not have any collectible assets, may only be a defunct corporate entity (piercing the corporate veil is often difficult and is another instance of where an "I did my best" defense may defeat the claim) or may go into bankruptcy. At least a Backer would be treated as a general non-priority unsecured creditor in bankruptcy, meaning they have priority over investors and stockholders but not over secured creditors (mortgage and lien holders) or priority creditors (taxing authorities, employees to certain compensation limits).

A class-action lawsuit may be a remedy as it allows a number similarly-aggrieved individuals for whom it would be impractical to file suit individually to form a collective class representing all the aggrieved to sue a wrongdoer for the total amount it owes to the wronged. Class action lawsuits are complex to litigate and require lawyers to represent the class plaintiffs. (While you can represent yourself in court pro-se, you typically cannot represent another person). Lawyers are not going to take a class action case on a contingency fee basis unless the defendant likely has the money to pay a potential judgment. The defendant will also be paying its own lawyers and those bills may significantly reduce the money it can offer as settlement. Unless the Kickstarter received millions in funding and the Creator still has substantial assets after the Project's failure, no good lawyer is likely going to touch that case.

Suppose a Campaign successfully concluded but rewards have yet to materialize after the proposed Project completion date. Statutes of limitations limit low long after a breach of contract an injured party may sue. Six years after the breach is a typical period but periods vary from state to state and certain types of contracts may have longer or shorter periods. Tort-like claims such as fraud/misrepresentation and violation of consumer protection laws often have shorter periods than contract claims. This time is not measured by the date a Backer pledged to a campaign but the time the Creator indicated the Project's pledges would be fulfilled. Updates which explain that the time for fulfilling pledges has to be delayed may extend (toll) the deadlines of limitation statutes, but those updates should be specific with new fulfillment dates. Vague statements that amount to "we're still working on it" and "we'll be having an update really soon" are not going to extend the limitations period. Moreover if the date by which the statute of limitations would bar a lawsuit is coming close, it may be wise for a Backer to file suit if there was anything less than concrete extension dates given for the Creator's performance.

In cases of conduct which arises to the level of fraud on the part of a Creator, a Backer's sole avenue to obtain some form of justice may be to contact law enforcement. The Federal Trade Commission or the attorney general's office of the Creator's state may be willing to look into egregious cases of potential fraud or failure to deliver. For the Coolest Cooper failure, there was some relief to project backers after the Oregon attorney general's office got involved.

To summarize, legal recovery for a failed Kickstarter is one that exists in principle but is generally illusory. In Kickstarter cases, an ounce of prevention is truly worth a pound of cure. A prudent Backer should thoroughly investigate the history of the Creator, their involvement in previous projects, their reputation in the community. Most Creators do not materialize out of thin air, they have histories. Dig into the socials, crawl through the forums, ask around on the discords. If no one has heard of them before or they have histories full of controversy, you should consider that to be a red flag. See where they're getting their product manufactured, is that area functioning like a well-oiled Engine of Industry or a Third-World Hell? Does the pledge cost allow for sufficient overhead, costs increases and the like? Ultimately never pledge more than you can afford to lose and do not expect a product to be delivered on time.