FTC Acts Against Deceptive Crowdfunding Scheme

The FTC recently filed claims against Douglas Monahan for operating four crowdfunding schemes in which consumers were told their contributions were going towards the development of high-tech backpacks and bags; however, according to the complaint, Monahan never produced any products and used the funds for personal expenses.

Monahan’s Crowdfunding Scheme

In 2015, Monahan began crowdfunding for the development of the iBackPack, a backpack that would include laptop and phone chargers, USB cables, and a Bluetooth speaker. Monahan told contributors that the backpack would be completed and distributed by March 2016. Despite missing this deadline, Monahan started a second crowdfunding campaign in April 2016 to produce the iBackPack 2.0. Thereafter, Monahan began two more crowdfunding campaigns, one to develop a shoulder bag that would include batteries and cables, just like the iBackPack, and one to produce a magnetic USB cable system. Monahan raised over $800,000 without ever producing any of these products.

The Alleged Violations

According to the complaint, Monahan used the campaign funds for personal expenses, including bitcoin purchases, ATM withdrawals, paying off personal credit cards, and advertising to raise additional funds. Only a small fraction of the funds were actually used to send individual chargers to select consumers. Monahan also made several false statements in order to continue the crowdfunding schemes, including an announcement that the USB cable system was complete and would be received within six weeks. According to the FTC, hundreds of consumers complained about Monahan’s practices, and Monahan threatened those consumers who contacted him directly with their concerns or refund requests.

Takeaway

Regardless of the outcome, this case serves as a reminder that the funds raised through crowdfunding must be used primarily to develop the product that is promised and should not be used for other expenditures. Companies who engage in crowdfunding should carefully review their expenses to ensure compliance with crowdfunding requirements.

This article was co-authored by Law Clerk, Megan Rzonca.

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