Terms of Service (“TOS”), sometimes referred to as terms of use agreements, are the ubiquitous footer link that typically contains a large block of text, often ignored by users (and sometimes website operators). However, the importance of these agreements should not be overlooked for any website. And terms of service agreements for crowdfunding platforms should address a number of industry specific points.
The TOS is designed to form a contract between the website and its user. And the first thing the TOS should accomplish is laying out the terms to create that contract. For any contract to be formed, both parties must consent to be bound by the contract’s terms and conditions. A TOS is no different.
The TOS identifies the method in which the user assent to the TOS’s terms, which is generally accomplished by simply using the site (called a browsewrap agreement) or by requiring the user to affirmatively click on an “I Agree” button (called a clickwrap agreement). Some sites may use a combination of the two, but only require an affirmative action when the user intends to make a purchase, donation, or otherwise bind themselves to an enforceable action.
Crowdfunding platforms should carefully consider the rules, regulations, and disclaimers they wish to include regarding the creation and submission of user generated content. Examples include:
The goal is to become a trusted source for both projects and contributors alike. The TOS provides platforms or portals the opportunity to place some responsibility on the project creators while gaining the option to use their projects as advertisements for the platform itself.
There should be no confusion regarding the funding triggers of your projects. Will you require the funding goal to be met to charge credit cards? Do you release any funds collected regardless of satisfying the funding goal? Are contributors entitled to a refund if the funding goal is met? How is your percentage determined and when are you paid?
Many crowdfunding platforms choose to offer a number of project plans with different funding triggers. Flexibility is an asset for potential projects, but your TOS must clearly identify the terms and conditions of the project. After all, this is how you get paid.
Waivers and disclaimers are an integral aspect of all TOS agreements. Care should be taken to address your right to modify the TOS, limit the acceptable uses of the site, and select the proper forum (a specific court or arbitration in a specific location) to resolve any disputes. While many of these provisions are standard, they should be tailored to your specific preferences.
In the crowdfunding space, the TOS should also address what steps, if any, you will take to ensure the listed project is authentic. For many, it is advisable to specifically disclaim that your platform cannot guarantee the project creators will use the raised funds in a specific manner or that the project creators will provide the promised rewards for supporting a project.
For crowdfunding platforms that facilitate equity offerings under Regulation Crowdfunding (Reg CF), 17 C.F.R. Part 227, or under state intrastate crowdfunding exemptions such as Michigan’s Public Act 264 of 2013, the TOS must address several additional regulatory compliance requirements. Equity crowdfunding platforms are regulated by the SEC and must be registered as funding portals with both the SEC and FINRA under Section 4A(a) of the Securities Act of 1933, 15 U.S.C. § 77d-1.
The TOS for an equity crowdfunding platform must address:
Crowdfunding platforms face a unique dispute resolution challenge. Unlike a typical e-commerce transaction between two parties, crowdfunding involves at least three parties—the platform, the project creator, and the backer—and disputes can arise among any combination of them. A well-designed TOS must address how disputes between the platform and project creators are resolved, how disputes between project creators and backers are handled (and to what extent the platform has any role), and what law governs each type of dispute.
Mandatory arbitration clauses with class action waivers are particularly important for crowdfunding platforms, which face potential exposure from large numbers of small-dollar backers. Without a class action waiver, a platform could face a class action lawsuit even for relatively minor technical violations of its TOS. Courts have consistently enforced arbitration clauses and class action waivers in e-commerce and platform contexts under the Federal Arbitration Act, as confirmed by the Supreme Court’s decisions in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), and American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013).
Crowdfunding platforms and portals are embarking on a new world. As with the old world, problems will arise. And when they do, your TOS will be left defending your position. This post describes some, but not all, of the provisions that should be included in any crowdfunding platform or portal’s TOS.
Take the time to obtain a TOS you are satisfied with and invest time to review it every so often as the regulatory landscape evolves. This will build a solid foundation for your business to stand on. Contact the crowdfunding lawyers at Revision Legal today for assistance drafting or reviewing your platform’s terms of service.
Fraudulent crowdfunding campaigns—where project creators raise funds with no intention of delivering on their promises—expose platforms to legal and reputational risk even when the platform is not the party perpetrating the fraud. While Section 230 of the Communications Decency Act generally shields platforms from liability for third-party content, Section 230 does not protect against federal intellectual property claims or against liability arising from the platform’s own conduct. A platform that knows a campaign is fraudulent and allows it to continue may face exposure under a variety of theories that Section 230 does not immunize.
A well-drafted TOS limits the platform’s exposure by clearly disclaiming any guarantee of project authenticity, requiring project creators to represent the truthfulness of their campaign materials, establishing a process for reporting suspected fraud, and reserving the right to remove campaigns that violate platform policies. The TOS should also describe the platform’s process for handling fraud complaints from backers and make clear that refund disputes between backers and project creators are between those parties alone, subject to any platform policies that expressly address refunds. Contact Revision Legal’s crowdfunding lawyers today to ensure your platform’s TOS adequately addresses fraud risk.
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