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Kickstarter Mimics the SEC

Posted in JOBS Act

As my regular readers (hi mom!) know, I’ve spent a lot of time blogging about Crowdfunding under the JOBS Act.  They would also know that this equity-offering form of Crowdfunding is different from the crowdfunding used by Kickstarter and Indiegogo, where artists and inventors raise money from crowds of donors, rather than investors. 

A quick overview for the uninitiated:  artists, musicians, inventors and entrepreneurs all can use Kickstarter or Indiegogo to raise funds for a specific project: money to make a film, record an album, or bring a new product to market.  These projects are marketed to potential donors using engaging YouTube videos accompanied by written descriptions and a list of potential perks a donor will get based off of how much they give.  Usually, small amounts gets you a thanks and nothing more; larger amounts should get you something tangible (the to-be-recorded album, or the product); and even larger donations means you should get some special perks too (like a signed album, or even a private concert). 

Note how I said “should get”?  That’s because Kickstarter, the more famous of the two, has received some less-than-outstanding press lately.  Projects that have raised fantastic amounts – $10 million for a watchmaker, $600 thousand for a lightbulb - have failed to produce the promised products, angering the donors who expected something in return.

Kickstarter policy states that failed projects should refund money, but the website lacks any real mechanism to enforce that. 

Kickstarter has responded: not by creating a claw-back mechanism, but by changing the rules about how a project can be advertised.  In a blog post entitled “Kickstarter is not a store“  Fundraising projects for products and computer hardware now have stricter requirements on what they can say to potential backers.  This is all in an effort to temper expectations amongst these backers, who have unrealistic expectations of success.

Most notably, to me, is the new “Risks and Challenges” requirement, which will force the projects to explain the perils that lie ahead for their vision.  As Felix Salmon notes, bringing a product to market is a difficult process full of all sorts of unexpected pitfalls and problems. 

To me, this sounds a lot like the SEC’s requirements on issuers of securities, both public and private.  The SEC requires issuers to explain the risks facing the company.  Public companies have much larger risk disclosure requirements, but even a company making an offering under Reg D has to notify purchasers of the perils involved.

What’s next for Kickstarter?  The company clearly is looking to improve its market.  It’ll be fascinating to see what other rules they’ll place on their “issuers” to make Kickstarter more efficient.