In our last blog post on crowdfunding, Charles Landes, CPA took a deep look at equity crowdfunding, specifically how the Securities and Exchange Commission rules are shaping up as required by the Jumpstart Our Business Startups Act of 2012. However, equity crowdfunding is not typically one’s first introduction to this new funding approach. Many are first introduced to crowdfunding through one of the various crowdfunding platforms that exist, such as Kickstarter. If you are not familiar with crowdfunding through a platform like Kickstarter, the concept is relatively simple. A person or company comes up with an idea, determines the cost to create this idea and sets a funding due date. Projects also feature rewards based on the contribution, for instance, backers may receive a T-shirt or the actual product they are supporting. If the project fails to meet its finance goal by the set date, then the project is not funded.
Backers have funded all types of projects, from virtual reality systems, like Oculus Rift (which was recently acquired by Facebook), to dream cars, like a DeLorean Hovercraft. Other projects have gone on to win an Oscar and be featured at the Cannes Film Festival. However, not every project makes it. What happens when a funded project fails to deliver on its promise?