LEGALLY SPEAKING, IT DEPENDS: Crowdfunding Fulfillment

Christopher Schiller is a NY transactional entertainment attorney who counts many independent filmmakers and writers among his diverse client base. Follow Chris on Twitter @chrisschiller.

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I was intending to post a long, detailed article on a controversial topic for this installment, but, the all consuming management of our Kickstarter campaign for our short film took up the time I would have needed to concentrate on that one. Our fundraising success has brought to mind a subject for a column topic that I have yet to touch on in depth with the previous discussions about crowdfunding we've had so far. What happens when you successfully reach your goals? This article is all about the legal and business-oriented aspects of crowdfunding fulfillment.

Contrary to what you may want it to mean, crowdfunding fulfillment is not the warm glow you feel when you find yourself on the positive end of a fully funded campaign run. That's a great boost to the ego (and what filmmaker can't use one of those?) but it is also the start of a serious responsibility.

It helps to remember that crowdfunding campaign pledges are not the same as a store selling you a T-shirt. In a commercial establishment, the T-shirt contains all the value of the exchange. If the shirt isn't as expected, the entire exchange is impacted. In a typical crowdfunding exchange, the T-shirt or other bobble is not the only or even a main reason for the transaction. It is a token or keepsake to bring to mind the true goal of the exchange, furtherance of the project. (This ideal example gets convoluted when the object exchanged is integral to the project, like a manufacturer's first run of a new device. But the goal is still broader, the establishment of the manufacturing process, not the sale of that one item.)

This allows for some leeway in how the fulfillment can be handled but in no way diminishes the importance of it being handled in some way.

What kind of arrangement is established?

Legally speaking the agreement between a crowdfunding project and it's contributors is a rudimentary contractual one. Remembering our discussion of contracts, there is a “meeting of the minds” - both sides realize what is being discussed, and there is the “bargained for legal detriment” - the funder chooses their level of support and the crowdfunded project team commits to delivering what is promised. Some of the terms of the deal are expressly stated, others generally accepted or a bit fluid and some not determined at the initial deal making. But in most ways, a viable contractual agreement is formed.

Remember that not all contracts are similar. The contract with your lawn mowing neighborhood teenager is different than your purchase of a car from a reputable dealer. Every contract is different and should be considered along its own particular parameters. Because of the particulars of this kind of contract there are certain expectations that shouldn't be assumed. Again, this deal is not like a buying from a store. For instance, refunds aren't readily available or owed the purchaser if you don't like the product or there is a delay in delivery. Refunds from a retail establishment are actually calculated into the regular business costs of maintaining a sales outlet as a main function. It's part of maintaining a continuing relationship with happy customers. A crowdfunded project's main function is not to supply the objects of exchange in the campaign, but to do the grander thing that you're raising money for in the first place. And so the mechanisms to accommodate a “happy customer” aren't as applicable or effective.

This is one of the reasons that most crowdfunding service websites remind the potential funders that they are to evaluate each project on its own merits and judge for themselves whether they want to trust that the promises being made are going to be fulfilled. You pick your entry point and you take a risk you'll not get what you were promised as a gift. As long as the project uses the funds supplied in the manner stated to further the project's aims and not used for a vacation to Hawaii then your support is properly being used. There is still the issue of the contractual obligation to fulfill of what was promised but it doesn't rise to the level of “satisfaction guaranteed.”

Still no one wants to be taken advantage of and so on top of your own due diligence prior to supporting a project there are protections available to prevent the nefarious from taking advantage. The first level is the fund-seekers themselves. If they provide a lot of truthful information of who they are, what they've done before and how they intend to proceed if successful, then you can judge for yourself whether to risk supporting them. To some degree another factor is the reputation of the crowdfund platform. Some of these have express procedures in place and monitor those who use their services to seek funding, weeding out those who don't abide by the rules. Some platforms have a much more laissez faire attitude about protecting the funders, so, use your own judgement taking that absent layer of protection into account in these instances.

In the egregious cases there are the legal protections against fraud that can be sought through the courts. But proving legal fraud relies on an initial nefarious intent. An incompetent or unlucky situation alone would not rise to a level where the courts could help. And court cases are expensive. So being careful before giving your money is always prudent.

Once those funders have made the choice to give you their money, as the campaign runner, it is up to you to follow through to deliver what you promised. Even though the setting is less rigorous for a crowdfunded campaign than a commercial store or other for profit, ongoing business, it still has contractual elements and there are more than legal issues at bay here. Reputation is a big one. If you are striving to produce a final product such as a film, or establishing yourself as a legitimate player in the industry, damaging your reputation just starting out makes your goals much more difficult to reach. Though your funders may give you some slack around the edges, you seriously need to show you can perform at a professional level in all things. And that starts in crowdfunding fulfillment of your promises.

Somewhat ironically, crowdfunding campaigns are rarely run by people experienced in running a crowdfunding campaign. Therefore it is rare to fall back on your own experience getting through the typical hiccups one may encounter. That's why the best and most successful crowdfund stories all start their tale talking about how they researched everything they could to be ready. Just because you've never run a campaign doesn't mean that you can't learn from the experiences of others. Your experience may be different from those who've done it before you, but, their insight might help you get around those difficulties you might encounter with a little bit of awareness of what could go wrong before it does.

Planning has to be catered to your expectations of the dynamics of your own campaign. For example, a common pledge item is a themed T-shirt commemorating the project. What price is proper for such an item? I mean, it's just a T-shirt, right? You'd be surprised the variance in supply sources for T-shirts nowadays. Different quality and printing costs, minimum buys to take advantage of the economics of scale, length of delivery time, the variable list goes on and on. You need to research where you will be sourcing your T-shirt and the particular factors involved with that choice before you can know the range of costs that your project will encounter. Then you are ready to decide where your price needs to be set. But even then one size does not fit all.

$50 t-shirts may be properly priced for small run recoupment. If you expect thousands, the offering price can be lower because your supplier can take advantage of the economics of scale. If you expect thousands and get tens, you'll be eating the loss. If you expect tens and get thousands, hiring an outside fulfillment company to handle the overwhelming demand might suck up all that wonderful, though fleeting, profit. Anticipating potential responses will help even the most successful campaigns within the realm of doability while keeping sane. And don't forget to include the costs of shipping to your funder in your calculations. Even with many of the crowdfunding sites now facilitating the calculations of shipping costs for domestic and international targets, a miscalculation here could drain the resources that were to be dedicated to the project's actual goal.

One of the biggest obstacles crowdfunding campaigns encounter is delay. How do you estimate how long it will take to do something you've never done before? It is human nature to anticipate the rosiest picture of events derived from the enthusiasm of a fully funded project on the horizon. Even those who prudently plan can run into unanticipated delays from suppliers, product flaws or world events. What's the best thing to do in these situations?

Communication is key. If a project is delayed for whatever reason or an obstacle is encountered often the first instinct is to try to fix the problem or get around the issue first. Then once the dust is settled you might tell everyone what happened. Maybe. But the reality is that the dust never settles in a moving project. It is quite easy to forget that there are people who are keenly interested in what you are doing and aren't there beside you knowing the day to day struggles. From their perspective they have given you support and then are abandoned as if their usefulness is no longer valued.

Tell those who have supported you what's going on. They want to know. They'll understand. Heck, they supported you when you weren't even this far along. They deserve to come along for the ride as the roller coaster keeps moving down the track, the ups and the downs.

From my own experience I have supported a large number of crowdfunding campaigns. With that large number I have had some rapidly fulfilled pledges and some that I'm still waiting for years later. I have had some campaigns that have gone incommunicado after they took my money. I only know of their great progress from reading the trades. I have had some marvelous experiences with other projects where they've kept the funders fully informed through every hiccup and delay. Even when nothing was happening, they took the time to let us know that nothing was happening. They are still struggling with that project reaching for its goals. To tell the truth, I'm much prouder having supported the still struggling and communicative project than the one that wracked up all the success but didn't tell me about it.

Guess who would get my money next time? That's kind of crowdfunding fulfillment in a nutshell. What do you know? Maybe it is that warm glow after all.

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