First crowdfunding fraud enforcement action by State Attorney General

As many in the crowdfunding space are now well aware, the Washington State Attorney General has brought a case against the sponsors of the Asylum Playing Card Kickstarter campaign.  The lawsuit alleges the campaign made misrepresentations to project backers that constitute “unfair or deceptive acts in trade or commerce“.

The basic facts alleged by the state are that Altius Management, a Nashville, TN based company, raised $25,146 from 810 project backers through a Kickstarter campaign for its Asylum Playing Cards that closed on October 31, 2012.  The campaign indicated that delivery of the playing cards was estimated to be around December 2012.  The Attorney General’s office then alleges that not a single consumer has received the playing cards.

Under the Kickstarter Terms of Use, project sponsors are legally bound to fulfill rewards promised in their campaigns or refund any backer whose reward the sponsor does not or cannot fulfill.  Kickstarter even warns project sponsors that this provision of the Terms of Use can service as the basis for legal recourse if a sponsor does not fulfill its promises.

Non-fulfillment of promised rewards is pretty common in crowdfunding.  Project sponsors may try but fail to execute, find themselves overwhelmed or, in some cases, should have realized they had no basis to make the promises they did.  What makes this a significant news story is the Washington State Attorney General throwing the full force and weight of the state behind recovering the funds contributed to the campaign and assessing civil penalties authorized under the Washington Consumer Protection Act.  If the state is willing to take action against a campaign that received $25,146 in funds (with only 31 project backers from Washington State), what would it be willing to do with respect to a securities crowdfunding campaign under new Section 4(a)(6) that involves larger amounts of money and more forms of liability under federal and state securities laws?

Washington State, like many states, has a robust set of anti-fraud provisions in its securities laws that could have applied if the Asylum Playing Card campaign had involved a sale of securities.  Recall that the JOBS Act does not preempt states from enforcing their anti-fraud rules.  For instance, the campaign stated that the “deck files are set to be delivered” to the playing card printing company.  The campaign also stated that “we will rush to create, manufacture, and ship … as soon as possible …”  While noting that some of the timelines were dependent on others, it is conceivable that these statements were material to the decision by backers to put money into the campaign.  If the campaign made these statements knowing they were not accurate or complete, or made recklessly because they were not in position to deliver the deck files or rush their actions, those statements could constitute violations of RCW 21.20.010.  As a result of such violation, each backer would have the right of rescission of the investment, plus 8% interest, in a civil suit against the company.  However, if the state decides that the project sponsor “willfully” violated the prohibition on misleading statements, the sponsor could be found guilty of a class B felony, facing up to 10 years imprisonment or fine up to $500,000.

Whether the case is brought under consumer protection statutes or securities statutes, it appears that the Washington State Attorney General’s office is getting ready for more these types of cases.  Following the announcement of the case against Asylum Playing Cards, the office stated to Taylor Soper with GeekWire that “we hope this sends a message to other potential project creators to take their responsibilities seriously.  We look forward to bringing more cases, if necessary, to protect consumers.”

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