Crowdfunding, or minimising risk?

[The Stationmaster]

It's worth pointing out that not all their projects involve Rapido. The 35T tanker, for instances, does not.

 

I'll say no more for fearing of speaking out of turn. I just thought it worth highlighting that it's not all (perceived or otherwise) skullduggery in the crowdfunding world.

 

Indeed it isn't all skullduggery but I'm left with a very distinct impression that in some instances it is simply seen as a way of avoiding financial commitment through somebody investing their own money in their business plan or proposition for a particular model rather than the Revolution trains approach.  Undoubtedly the 'Lococraft' scheme sounds more than a little dodgy and there is also the recent failure of the DJM Class 74 where it appears that little tangible has happened despite the commitment of money to the project plus somebody other than DJM is being left with the potentially considerable cost of refunding previously committed funds. 

 

One thing putting committed funds into a ring fenced account, soemthing differeent having to deal with the cost of putting that money in there and getting it back out in the event of a scheme coming to nought - back to my point about the business plan and financial management of such a scheme.

[jjb1970]

I am with Chris P Bacon on this, don't put in anymore than you're happy to lose. I do think that for a while the potential risks of crowdfunding (and I am talking about crowdfunding here, not pre-ordering) haven't been properly explained and it has been presented as just a bit of a jolly good wheeze to make models happen. There seems to be a shortage of information and a lack of clear substantive terms which make clear the mutual commitments of each party in many cases, and it seems to be presented as just another purchase. Usually if you consider investing money then you 'd expect the following:

 

• some sort of prospectus or business plan
• detailed information on planned project delivery, key project milestones etc
• detailed T&C's
• The prospect of a return

 

To me crowdfunding models isn't really an investment, it is an alternative source of finance for model producers. If crowdfunders received a share of the tooling (not that many would have any idea what to do with it) then that'd be an investment. As I see it, it is a form of model purchases  with the added risk of a financial investment thrown in but without the potential financial gain which is the payback for offering to put your money into an investment.

 

I'd stress again that if people like crowdfunding and are happy to take the risks, then fine and I really don't want to be a kill joy. My reluctance to get involved is as much because I don't like having commitments hanging over my head and a reluctance to agree to buy something without first having seen it as any servations over the financial side of things.

[34theletterbetweenB&D]

...crowdfunding ... isn't really an investment, it is an alternative source of finance ....

 That's the truth, irrespective of the business using this approach. I would only add to jjb 1970's  post that I do feel the concept has been taken into the  'overstretch' zone in model railway. Not unreasonable to ask the price of a round of drinks to enable an act to hire a venue and run an event in a month's time. Throw rather more than that in the hat and wait in hope for at least a year and likely much more? No appeal there to me, when there is an ocean of product on sale which the same money can obtain now.

 

Which in no way is a criticism of those proposing such crowdfunded schemes or participating in them: if it appeals then that's fine.

[Revolution Ben]

To me crowdfunding models isn't really an investment, it is an alternative source of finance for model producers.

Hi there,

 

From Revolution's point of view, we see it as a way of modellers coming together to make something happen that otherwise would not - especially for niche models in N where the numbers are more marginal than 00.

 

Take the Pendolino. Dapol announced it and cancelled it; Farish said clearly that they would not be producing one. For those modelling the WCML since 2003 - arguably Britain's key arterial rail route - the Pendolino is essential. So as N gauge enthusiasts we needed to find another way and the internet provided the opportunity for mass mobilisation of modellers to make it happen.

 

The success of that project gave us the confidence to consider other models either cancelled or dismissed by the main manufacturers, and we are steadily working our way through a limited programme based around these criteria. So far our main manufacturing partner has been Rapido - and they have done superb work and been a pleasure to deal with - but we have used other sources too.

 

Speaking more generally, I don't think there is a one-size-fits-all methodology for potential customers to adopt. Different projects have different funding, production and pricing.

 

I would suggest that anyone looking at backing a crowdfunding project should conside each project and the personnel behind it and then make a decision based on their own risk/reward balance for that particular item.

 

As a punter looking at crowdfunding projects by other people some I have backed and some I have walked away from after making a similar analysis.

 

Cheers

 

Ben A.

[jjb1970]

Hi there,

 

From Revolution's point of view, we see it as a way of modellers coming together to make something happen that otherwise would not - especially for niche models in N where the numbers are more marginal than 00.

 

Take the Pendolino. Dapol announced it and cancelled it; Farish said clearly that they would not be producing one. For those modelling the WCML since 2003 - arguably Britain's key arterial rail route - the Pendolino is essential. So as N gauge enthusiasts we needed to find another way and the internet provided the opportunity for mass mobilisation of modellers to make it happen.

 

The success of that project gave us the confidence to consider other models either cancelled or dismissed by the main manufacturers, and we are steadily working our way through a limited programme based around these criteria. So far our main manufacturing partner has been Rapido - and they have done superb work and been a pleasure to deal with - but we have used other sources too.

 

Speaking more generally, I don't think there is a one-size-fits-all methodology for potential customers to adopt. Different projects have different funding, production and pricing.

 

I would suggest that anyone looking at backing a crowdfunding project should conside each project and the personnel behind it and then make a decision based on their own risk/reward balance for that particular item.

 

As a punter looking at crowdfunding projects by other people some I have backed and some I have walked away from after making a similar analysis.

 

Cheers

 

Ben A.

 

I think you make good points.

 

As with anything else in life there is good and bad. The risk/reward analysis is complex and to a large extent will be determined by the level of financial commitment, individual sensitivity to risk and assessment of the individual proposal. A lot of it does come down to trust and credibility. I'd stress that even though I haven't got involved in crowdfunding and am not a fan of it, it's nothing personal and I have the highest of respect for you and your partners efforts with Revolution and wish you every success (and I say that with total sincerity).

 

I think some of it comes down to the level of commitment. As others have said, if I was asked to throw a tenner into a pot to help something I supported happen I'd do it and just write it off if it fell flat (I've given enough donations to charities over the years with probably lower expectation of saving the world). However some of these projects require a serious commitment and one high profile one is heading into a four figure sum, that's a pretty serious commitment for most people. If I was to think of fronting up a four figure sum I'd expect comprehensive information, including a full proposal and project plan.

 

One question that comes to mind as the costs go up is what happens if people withdraw part way through?

[rue_d_etropal]

Crowdfunding came about because of the 2008 banking crisis. I think there was initially one company offering the service, where a project could be registered with an amount required and a time limit. People would then pay into the fund, and if the target was met in the time, then the project would go ahead. If the taget was not reached, then either it could be extended, or the money was refunded. The company would get a percentage of the total amont collected if the project went ahead.

 

Now everyone is jumping on the band wagon, and maybe some projects are not being set up as well as others. For somethin as complex as developing a new model loco, then it does not need to be done in one step.

Step 1 would be the initial planning and development, and obviously you would not expect as much from individuals to get this part of the projectup and running.

Step 2  only goes ahead if step 1 is completed, and a new crowd funding would be done to get the model into production. Costs might have gone up from when the original idea was put foirward, and the target amount would reflect that.

 

I think the problem is that some are trying to do the whole project in one crowdfunding,which is perceived as high risk, and the big target amount puts potential  funders off.It is also more difficult to sort out problems half way through, such as dealing with increased costs.

Some might think that only doing the initial development is a waste of money, but once done it can be put on hold, and used when there is enough interest. It could even be sold to another company that does want to produce that model, possibly cheaper than doing it themselves, but still beneficial to those involved in the development.

Edited May 5, 2018 by rue_d_etropal

[jjb1970]

Quite an interesting article here:

 

http://www.modernlawreview.co.uk/january-2018/promise-perils-crowdfunding-corporate-finance-consumer-contracts/

[The Stationmaster]

Quite an interesting article here:

 

http://www.modernlawreview.co.uk/january-2018/promise-perils-crowdfunding-corporate-finance-consumer-contracts/

 

That is very interesting, thanks JJB.   Definitely ought to make folk seeking crowd funding for a product think very carefully about the sort of contractual liability they are letting themselves in for if the project fails or if what they produce isn't up to scratch or crowd funders' expectations.    I think it again comes back to the things I said about trust and business plan and financial information as well.

Edited May 6, 2018 by The Stationmaster

[jjb1970]

One general piece of advice I'd offer everybody, from suppliers, retailers, customers and anybody else should it be of any use is this - business is business, money is money, friends are friends and hobbies are hobbies. Whenever people allow personal feelings and sentiment to enter into what should be strictly financial considerations then things can end up going badly wrong and it tends to be when money and sentiment become intertwined that things turn nasty.

 

Nothing I've written on this subject is intended to say anything about persons or what I think of any companies. Maybe I'm a bit anal on this subject but what I think of an individual or a company has nothing to whatsoever to do with whether I'd happily offer them financial support in terms of investing in a venture. Maybe it's because I've been a commercial engineer and worked in roles negotiating contracts, contract delivery and such like (both as a seller and a buyer) but I see no issue in separating money from sentiment. I am still friends and on good terms with plenty of people I've been in violent dispute with over commercial contractual issues because people in that sort of environment tend to recognise that the two worlds of friendship and money shouldn't get mixed up. So nothing I've said on this subject is meant as offering opinions on people or their products.

 

Just a bit of general advice, which I suspect is nothing new to most RMWeb'ers.

[Andy Y]

Quite an interesting article here:

 

http://www.modernlawreview.co.uk/january-2018/promise-perils-crowdfunding-corporate-finance-consumer-contracts/

 

A very useful piece for customers and suppliers alike.

 

I have extracted the most relevant elements of the article below which shows that it's not permissible to abdicate any responsibilities to the rights of the consumer because it is crowdfunding rather than a conventional transaction and that there is the potential for a consumer to take civil action for recovery for non-performance or inadequate quality as they would have with any other retailer. Therefore, even if a supplier warns a customer that they may not receive a refund or the product, existing law overrides this and there is a liability to be met. As we see with conventional traders non-performance or non-delivery does not necessarily mean that a refund will be received as that would depend on the solvency and liquidity of the supplier.

 

Reward crowdfunding (CF) contracts are (conditional) undertakings to transfer title to future goods, or to provide future services. Although the funder bears part of the risk of business failure, these contracts are neither designed to be cash‐settled nor involve the funder receiving a return that varies with the profitability of the business. Consequently they are not classified as ‘financial instruments’ or ‘securities’. As a result, reward CF is not regulated as a public offer by the FCA in the UK or as a securities offering by the SEC in the US. Rather, offerings of this type are subject to general contract law and consumer protection obligations, because entrepreneurs raising funds are doing so in the course of their business, whereas reward backers are typically acting as individuals outside the course of their business.

 

In the UK (and indeed the EU more generally), where several mandatory rules of consumer contract law appear to be applicable to reward CF agreements. First, founders offering their products as rewards are likely to find that funders will enjoy non‐waivable rights to a refund after delivery of goods or commencement of a service if they are unhappy with the quality of what they receive. The most extensive such entitlement is the unconditional ‘right to cancel’ under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (CCRs), which implement the EU's Consumer Rights Directive. The CCRs grant consumers purchasing under a distance sales contract an unconditional right to cancel within 14 days of receipt of the goods, whereupon the supplier must reimburse the amount paid by the consumer. A ‘sales contract’ is defined as ‘a contract under which a trader … agrees to transfer the ownership of goods to a consumer and the consumer pays or agrees to pay the price’, including any contract that has both goods and services as its object’, which would seem apt to cover many cases of reward CF. Although financial services contracts, defined as ‘services of a banking, credit, insurance, personal pension, investment or payment nature,’ are excluded from the CCRs, a typical reward CF arrangement would not fall within the scope of this exclusion. There may also be similar, albeit more circumscribed, mandatory cancellation rights available for longer periods under the Consumer Rights Act 2015, or the Unfair Trading Regulations 2008 (UTRs).

 

Second, the UTRs make it a criminal offence of strict liability, punishable by up to two years’ imprisonment, for sellers to make misleading statements or to omit material information in relation to consumer contracts. The consequence of this is likely to be an increase in the cost of producing materials describing reward CF offers so as to avoid potential criminal liability.

 

Third, the Consumer Rights Act, which implements the Unfair Contract Terms Directive, provides for substantive control of ‘fairness’ of non‐core terms in contracts between businesses and consumers. While specification of the main subject matter and the price are excluded from such scrutiny, terms purporting to exclude liability for non‐delivery or late delivery are not. Attempts by an entrepreneur to make a funder bear the risk of outright non‐delivery might well be seen as creating an unfair ‘imbalance’ in the contract – the consumer having paid the ‘price’ but the entrepreneur purporting to be relieved of the obligation to deliver. However, late delivery, given the context, is more likely to be something it would be reasonable to provide for as a contingency.

 

The foregoing points have not received express attention from regulators in the UK, seemingly because reward CF falls outside the FCA's jurisdiction. The net effect of these provisions, and especially the right to cancel under the CCRs, appears to upset the risk‐sharing in reward CF described above: the entrepreneur now bears all the risk that the product does not turn out satisfactorily. This is likely to make reward CF considerably less appealing in the UK than the US for an entrepreneur considering funding options. While there may be other explanations, this variation in treatment is consistent with data on the use of reward CF, which appears to be under‐used in the UK relative to the global norm.

 

To conclude this section, we briefly review the main points of contrast. The UK's consumer protection framework makes it difficult to establish a risk‐sharing agreement for reward CF, whereas the rules applicable in the US do not. In contrast, the mandatory disclosure obligations imposed by US securities law make it more expensive to launch equity CF campaigns there, whereas the exemption for small offers in the UK has the opposite effect. 

 

 

Reference - https://onlinelibrary.wiley.com/doi/full/10.1111/1468-2230.12316 - text relating to US instances are not included in the quote above.

 

  

It would appear that the law is substantially different in the US so if US-based crowdfunding platforms are utilised then the consumer's rights may not be as strong as they are if the crowdfunding is exercised within the EU.

[jjb1970]

This indicates that the share of risk is actually the opposite of what has been generally assumed for reward crowdfunding, i.e. it would appear to rest primarily with the seller as buyers still benefit from various consumer protection laws and regulations. That should reassure potential buyers, providing of course they join an offer which is subject to UK or similar EU laws.

 

Something else it indicates is the need for clarity on a lot of this stuff. I'd stress that this is for mutual protection of both sellers and buyers. The last thing I'd want is for sellers promoting a crowdfunding venture end up in a legal quagmire because of avoidable erroneous assumptions. Understanding your obligations and liabilities is pretty important for sellers. For the buyer they would understand what they'd committed to and what their rights were.

 

I'm not having a go at any company here, and I have the highest of respect for some of the people using crowdfunding type models to bring products to the market but from what I can see there is a real need for clearly defined T&C's and greater clarity regarding respective obligations and rights. That is for the benefit of both sellers and buyers.

[woodenhead]

  

It would appear that the law is substantially different in the US so if US-based crowdfunding platforms are utilised then the consumer's rights may not be as strong as they are if the crowdfunding is exercised within the EU.

Well thank goodness we are in the EU............

[Zomboid]

I would be interested to know the legalities of a transaction where a British consumer buys something from a British supplier via a service which is hosted on an American server.

 

Common sense would seem to dictate that British law should apply, but I bet m'learned friends would make a lot of money finding out for sure.

[chris p bacon]

Correct me if I'm wrong, but the fact that the server is in the US wouldn't matter as it's just the means of communication. The British supplier being based here is what would matter. 

 

Now if they were in the Cayman Islands or Jersey etc.....that might be different..

[Steadfast]

For me a big part of do I support the crowd funder, assuming it's a product I'd like, is trust.

Do I trust the people behind the project? What's their last record? Who else is involved(manufacturer etc). There are those I wouldn't touch with a barge pole due to constant cancellations, iffy past personal dealings, poor previous product quality etc. Then there are those who even without delivering their first product provide cohesive and joined up proposals that lead to a first and then continued orders.

I'm tired, I've waffled, but trust. That's what's key to me

 

Jo

[Bernard Lamb]

For me a big part of do I support the crowd funder, assuming it's a product I'd like, is trust.

Do I trust the people behind the project? What's their last record? Who else is involved(manufacturer etc). There are those I wouldn't touch with a barge pole due to constant cancellations, iffy past personal dealings, poor previous product quality etc. Then there are those who even without delivering their first product provide cohesive and joined up proposals that lead to a first and then continued orders.

I'm tired, I've waffled, but trust. That's what's key to me

 

Jo

 

But is not the principle of crowd funding that it only happens once?

You put your idea into the public domain, you raise funds, you produce and distribute the product.

You should then have enough cash in reserve and a viable working business plan to be able to raise money for your next project via conventional sources.

I would be very wary of any one who comes back wanting more money to introduce a second product.

My oft quoted comment of busy fool comes to mind yet again.

 

I would never get involved with crowd funding. I would rather invest a much larger amount in a business that had an idea as to where it was going and how it was going to get there.

Bernard

[PMP]

But is not the principle of crowd funding that it only happens once?

You put your idea into the public domain, you raise funds, you produce and distribute the product.

You should then have enough cash in reserve and a viable working business plan to be able to raise money for your next project via conventional sources.

I would be very wary of any one who comes back wanting more money to introduce a second product.

My oft quoted comment of busy fool comes to mind yet again.

 

I would never get involved with crowd funding. I would rather invest a much larger amount in a business that had an idea as to where it was going and how it was going to get there.

Bernard

In answer to ‘once’, no, not at all. All examples following are based on reward crowdfunding, ie you don’t invest in the company, just the individual product item. Where I talk of income, it’s in relation to the business owners, is this how they make their living? In model railways I can think of one start until that took your ideal route, and they now trade as a small supplier at shows and have a presence on here. They produce excellent materials too, I’ve used them, I don’t know if the supplier is full time or not or if it’s a supplementary business to other income.

 

The next one I can think of has made product, has been well accepted and is doing further production on staged crowdfunding. Different to the first example, production costs are far higher hence the requirement and common sense approach to using this funding. I believe the business is secondary income to their primary income.

 

Example three has not yet made product, but is very close, and is likely, in my opinion to be a success. Their technique used a two stage crowd fund, sort of 50% down and 50% to complete. I believe this too is a secondary income with primary income from other sources.

 

Examples 2&3 because of what they make take substantial sums of money to manufacture, so going to the bank manager to get a viable deal would be unlikely. However having chosen their items carefully they’re attracting interest to fund successful projects. Communication with their customers has been clear, concise, and consistent throughout the projects.

These three teams have built UK businesses that work using a reward crowdfunding model. The business model doesn’t need to be ‘once only’ as example 2, and I feel example 3 will demonstrate in due course. They show what can be achieved for the hobbies benefit subject to taking a professional business approach, across all factors of the company’s operations.

[The Stationmaster]

An interesting question in reward crowd funding is whether or not any management fees or admin costs are included.  In those of the examples quoted by PMP which I can identify I would presume that any such costs would be no more than administrative costs in the process of bringing the reward crowd funding scheme to fruition because clearly there are going to be such costs. The relevant question is then are estimates of such costs separately identified in the business plan and any financial information relating to the project?

 

But what if it is a manufacturer seeking to use reward based crowd funding to finance something they are either unable or not prepared to take the financial risk of developing from borrowed capital?  Do they then charge what amounts to a project management fee in a addition to the necessary admin costs of the project and is it separately identified as such?  Presumably the inclusion of such fees in the overall reward funding scheme would increase the cost and anyone contributing to the project would need to understand that - and presumably any such fees would also need to be declared as income for personal taxation purposes?  As the development of a product would normally include such fees, drawn perhaps as salary or as profit at the time of product sale I am presuming such would happen if the manufacturer uses reward funding or is their labour provided free of charge as their contribution to the process and all they would take would be whatever is necessary to cover direct admin costs?

 

The other side of the latter coin comes from the information uncovered by JJB and now posted by Andy because if the crowdfunders decide to withdraw not only is the whole scheme threatened but the manufacturer carrying out the project could find themselves working for nothing, which seem to be not the safest way to carry on employment!

[jjb1970]

In the case of reward crowdfunding I think that if you consider it to be an alternative sales model in which upfront product development and manufacturing costs are transferred to the customer rather than being funded by the supplier rather than as an investment then ongoing crowdfunding has some logic. Personally I stick to more conventional channels in which I buy a model when it is delivered to retail channels for the reasons I've already given, but I do see the attraction of crowdfunding for others.

 

I agree with others that trust is essential, and perhaps a consequential quality which derives from trust is credibility. And part of that comes from how those marketing the products communicate with potential customers, the clarity of information provided, how they respond to questions, previous performance and product delivery etc. And perhaps most importantly, that gut feeling that tells you whether this is somebody you're happy to trust. I certainly think there are people promoting crowdfunded models that I'd be happy to support if I was to take an interest in such projects.

[jjb1970]

Something else that I think may be worth clarifying is the relationship between the supplier and retailers where there is some sort of agreement in which a retailer acts as the "order taker" and "banker" but where the project is actually being managed by a supplier. Regardless of disclaimers about who is who, as a customer I think I'd want some surety about who to go to in the event of something going wrong, and I'm guessing that would be the retailer acting as the order taker/banker? I don't suppose it matters which party it is so long as it is clear where the division of responsibility is.

[The Nth Degree]

But that still won't give you absolute guarantees about the project. If a third party is holding the funds, how are they going to be used for the project if the project relies and depends upon them? At one point they will have to be released with no tangible product in anyone's hand. If an organisation were to underwrite the process that would be a different matter, but they would then be acting as an investor or lender.

 

Funding by parties who have a vested interest in its success is a good way for under-resourced organisations to get access to cheap cash. There has to be a clear business plan with defined milestones and an easy way for funders to communicate with the project manager, and for the project manager to communicate with the funders on a regular basis.

 

If crowdfunding is not the answer, then easy access to cheap funds must be provided by someone or something. At the moment there is a large hole in funding provider's portfolios of products, and it happens to be exactly at the level where small manufacturers need it.

[jjb1970]

My question was more about who is responsible if a third party such as a retailer is involved as order taker or banker. Is the retailer liable for refunds and liabilities or the supplier? If reward crowd funding is subject to consumer protection laws in the UK then presumably it is the retailer as the party who is paid by customers? Either way it is a question which should be clarified I think.

[Grovenor]

Does this situation arise? I have not seen it.

Regards

[Andy Y]

My question was more about who is responsible if a third party such as a retailer is involved as order taker or banker. Is the retailer liable for refunds and liabilities or the supplier? If reward crowd funding is subject to consumer protection laws in the UK then presumably it is the retailer as the party who is paid by customers? Either way it is a question which should be clarified I think.

It may sound a glib answer but it's who you pay the money too (and receive an invoice or receipt from), as one recent case shows this may not be the retailer promoting a project.

[dpgibbons]

My question was more about who is responsible if a third party such as a retailer is involved as order taker or banker. Is the retailer liable for refunds and liabilities or the supplier? If reward crowd funding is subject to consumer protection laws in the UK then presumably it is the retailer as the party who is paid by customers? Either way it is a question which should be clarified I think.

 

If the retailer takes the order, even as a financial intermediary, then under consumer law they would be liable for refunds if the item is not delivered. 

 

The recently cancelled Class 74 project had Kernow taking deposits and DJM as the project developer. Kernow repaid the deposits in full and bore the cost of associated fees. 

 

For DJM's current APT project it seems that Durham Trains of Stanley have stepped back from any financial role and DJM are invoicing customers direct (see thread in this forum), so customers would likely have no action against the retailer. DJM have attached a crowdfunding caveat to these orders suggesting that the customer's money is at risk if the project does not deliver. However as previous posts here illustrate it is likely that normal consumer law would still apply, with customers having the right to cancel and to receive a refund from DJM in the event of non-delivery.

 

The latter also implies that if a crowdfunder has multiple projects invoiced directly, then these would not be legally ring-fenced from each other. If one project fails then the crowdfunder would be liable to make refunds from its other assets, including perhaps funds from other projects. 

Edited May 8, 2018 by dpgibbons