On May 11, 2020, the Federal Trade Commission (FTC) announced a proposed settlement with the operator of a deceptive crowdfunding scheme—Douglas Monahan, who operated iBackPack of Texas—for raising money to develop a high-tech backpack and other products and then failing to deliver any of the products and instead using the funds for himself.
The advertising campaign claimed that the company was working on a backpack that incorporated various technology components, including batteries for charging laptops and cellphones, cables, and a Bluetooth speaker.
In our previous coverage of the complaint, we noted that established consumer protection principles apply equally to new mediums, including crowdfunding platforms. Monahan raised funds through multiple campaigns, repeatedly assured contributors that raised funds would go toward product development, and represented that products were being produced and finalized. In truth, however, the FTC alleged that “a large share” of contributions were used for Monahan’s personal purposes, including the purchase of bitcoins and the payment of personal credit card balances, as well as marketing efforts and other business ventures.
As part of the stipulated order, Monahan is permanently enjoined from directly or indirectly engaging in any future crowdfunding activities, meaning “funding or otherwise financing a project or venture by raising or soliciting money from multiple people, typically, but not exclusively, via the Internet,” and misrepresenting his ability to deliver any good or service, material refund terms, or any other material terms.
Additionally, the FTC leveled a monetary judgement of nearly $800,000, which is suspended due to Monahan’s inability to pay. The entire amount will be due if he is found to have misrepresented his finances.
Why it matters: While crowdfunding is a useful tool to raise money for a business venture or to support an innovative new project, the FTC has indicated that it takes crowdfunding scams seriously. Andrew Smith, the Director of the FTC’s Bureau of Consumer Protection, noted, “When companies like iBackPack misuse the money they raise, that’s when the FTC steps in.”