Kickstarter has always prided itself on vetting its crowdfunding campaigns, as well as its ability to detect and remove fraudulent crowdfunding campaigns quickly. While that may have been the case in the past, some recent campaigns signal that Kickstarter might be getting a little too relaxed in their standards.
Until recently, Kickstarter had differentiated itself from other reward-based crowdfunding platforms by holding its campaign creators to a higher disclosure standard and aggressively curating campaigns before they were allowed to be made public. Kickstarter previously had numerous rules (written and unwritten) that needed to be followed in order for a person to launch a campaign and make it public. Moreover, even when all these rules were followed, Kickstarter would often reject campaigns for its own internal (and often undocumented) reasons. While this made it tremendously more difficult for users to launch a crowdfunding campaign than on rival sites such as Indiegogo, it also led to one of the highest campaign success rates in the reward-based crowdfunding industry (estimated at above 40% versus 10% or less on competing platforms). That was the past, however, and as they say in marketing, “You’re only as good as your last headline.” This is particularly the case with Kickstarter where recent headlines seem to paint a different, much uglier, picture of Kickstarter’s campaign vetting efforts.
First, back in early June of this year, Kickstarter announced that it was making some significant changes to its campaign rules. These changes included, among others, decreasing the required campaign “description” section from a minimum of 1000 words to only 300, as well as opening up the ability to create campaigns for previously banned products (e.g. bath and beauty products). Most notably, Kickstarter introduced a “Launch Now” option that allows campaign creators to bypass the traditional human-based approval process entirely, relying instead on Kickstarter’s supposedly improved internal fraud detection “algorithms.”
“The feature uses an algorithm incorporating thousands of data points to check whether a project is ready to launch — things like the project’s description, rewards, funding goal, and whether the creator has previously launched a project.”
Many people believe these rule changes were in response to losing some larger campaigns to their competition (e.g. the Gosnell Movie Campaign). Whatever the reason for the rule changes, I believe that taking the human element out of the equation pretty much entirely has led to some campaign decisions that are questionable at best.
Take for example the Potato Salad crowdfunding campaign that went viral. In his recent Kickstarter campaign, Zack “Danger” Brown elicited funds to help him make a batch of potato salad. By the time his campaign closed on Saturday, he managed to far exceed his$10 goal by raising over $50,000 from 6,911 backers. Is this seriously the type of crowdfunding campaigns Kickstarter wants to be known for? Don’t get me wrong, I can appreciate that this particular campaign started as somewhat of a joke and, thankfully for contributors, the campaign creator has been upfront about using the additional proceeds for certain charitable and civic endeavors. That being said, right now there are over 170 active “copycat” campaigns on Kickstarter and the next person who receives a ton of money for one of these joke campaigns might not be so honest. Not only do these types of campaigns give crowdfunding a bad name, they simply invite fraudulent activity. Relaxed rules or not, joke campaigns like these should not be allowed to be launched or, at the very least, they should be cautiously monitored or capped in some way so as to avoid overfunding (particularly astronomical overfunding as in this case). If not, the credibility of Kickstarter (and potentially the crowdfunding industry as a whole) may be irreparably jeopardized.
If the worst thing Kickstarter did recently was allow people to overpay for potato salad, I might give their new procedures the benefit of the doubt. However, recent campaigns created by the Pashanin brothers raise serious doubts about the quality of projects currently being allowed on Kickstarter and the effectiveness of their fraud protection measures. In November of 2013, brothers Maksym Pashanin and Denys Pashanin launched a crowdfunding campaign to create a new game called “Confederate Express.” The campaign was successful, raising nearly $40,000 (well in excess of their $10,000 goal) from over 2,386 contributors. In exchange, contributors were supposed toreceive a free copy of the game which was to be released in June of this year. Well June came and went and campaign contributors never received the game as promised. In response to comments from backers, the Pashanin brothers simply responded that the delay was the result of “company restructuring.” So who cares, just another case of a failed crowdfunding campaign, right? Wrong, there is much more to the story.
First, in early July of this year the Pashanin brothers (this time through their company “Kilobite”) launched a new Kickstarter campaign to fund the creation of a different game called “Knuckle Club” which was allowed to go live. So, despite the fact that the Pashanin brothers never delivered the promised rewards in their first Kickstarter campaign, Kickstarter’s new “algorithm” somehow allowed them to publicly open a new campaign (maybe consumer fraud isn’t one of the “thousands of data points” checked by the algorithm). As if that wasn’t bad enough, even when Kickstarter was made aware of this fact, as well as other fraudulent activities that the Pashanin brothers are currently involved in, they still made no efforts to suspend the new campaign.
It turns out that campaign backers aren’t the only ones getting taken advantage of by the Pashanin brothers. It was recently reported that the Pashanin brothers are currently illegally “squatting” in a California condominium that Maksym Pashanin previously rented and are refusing to leave (citing a California law that protects squatter’s rights). To make matters worse, this is apparently not the first case of squatting these brothers have been involved in. When this story was made public, of course campaign backers took to the Kickstarter chat boards. In response to questions from backers about the undelivered games and their refusal to leave the condominium, you would think that the Pashanin brothers would have a good explanation for their actions or at least some humility. Such is not the case. In response, Maksym Pashanin simply wrote on July 26th: “Ok guys, what’s the latest deets on the drama? 10/10, would squat again” (translated, 10 out of 10 times I would squat again). This has led to a flurry of angry comments from backers such as Ryan George who wrote:
“This is unbelievable. People dig up a bunch of the bull***t that you’ve been putting others through, and all you have to say to the people who gave you nearly $40,000 in good faith is “10/10, would squat again.” People who clearly work much harder than you do to get their money wanted to see this idea come to fruition. They trusted you to do what you promised. I’m offended you don’t even have the humility or decency to tell us what is going on.”
Backers took their complaints a step further demanding that Kickstarter step in and take some kind of action. For over a week, however, Kickstarter refused to take any action, or make any comments whatsoever, other than to recite the portion of its Trust & Safety page which says that people contributing money should “do a little research first” and that “Kickstarter doesn’t evaluate a project’s claims, resolve disputes, or offer refunds — backers decide what’s worth funding and what’s not.” Only after the story went viral did Kickstarter FINALLY decide to suspend the campaign, shutting it down on Saturday, August 2nd.
Just to recap, since the loosing of Kickstarter’s campaign rules and the introduction of its improved internal “fraud detection algorithms,” Kickstarter has allowed a potato salad campaign to raise over $50,000 and a pair of law-flouting, condo-squatting brothers to set up a second campaign despite having defrauded backers on a previous campaign (not to mention who knows how many other questionable campaigns). Then, to make matters worse, even when directly alerted to the fraudulent activities of campaign creators, Kickstarter failed to step in and take action until it became a PR problem for them. This situation is not just a problem for Kickstarter, it is a problem for the crowdfunding industry as a whole.
Like it or not, Kickstarter is essentially the public face for the entire crowdfunding industry. While there are obviously several other large players currently in the industry (particularly debt and equity portals), when you mention crowdfunding to the average person the first thing they say is “Oh, you mean like Kickstarter?” This representation may have been alright when Kickstarter’s campaign vetting procedures were the highlights of the industry, but their standards are fast becoming untrustworthy at best. Such poor vetting standards not only reflect badly on Kickstarter but gives the entire industry a black eye at a time when the industry can least afford it. I mean how can we get people to believe in the viability of crowdfunding (in particular debt and equity crowdfunding) as a legitimate financial alternative/investment when all they see are headlines about potato salad and squatters??? I think that for Kickstarter’s sake and the sake of the industry, they might want to reconsider putting so much reliance on their current computer algorithms and instead rely a little more on human common sense.
Anthony Zeoli is an experienced transactional attorney with a national practice. Specializing in the areas of securities, commercial finance, real estate and general corporate law, his clients range from individuals and small privately held businesses to multi-million dollar entities. Mr. Zeoli is also an industry-recognized crowdfunding and JOBS Act expert who, most recently, has drafted a bill to allow for an intrastate crowdfunding exemption in Illinois, a copy of which can be found on his website: IllinoisCrowdfundingNow.com. Anthony is also currently actively involved with the entrepreneurship program at the University of Illinois at Chicago as both a mentor and a student advisor and is an active advisory board member of the New York Distance Learning Association (NYDLA).