FTC Unpacks Complaint Against Crowdfunding Campaigns Used by Backpack Company

Advertising Law

The operator of a deceptive crowdfunding scheme who told consumers he was raising money to develop a high-tech backpack and other products and then failed to deliver any of the products—and used most of the funds for himself—was hit with a Federal Trade Commission (FTC) complaint in Texas federal court.

Douglas Monahan operated iBackPack of Texas, which ran four crowdfunding campaigns that raised a total of more than $800,000 from consumers, the agency alleged. A 2015 campaign claimed that the company was working on a backpack that incorporated various technology components, including batteries for charging laptops and cellphones. That campaign raised roughly $720,000.

Although Monahan and his company originally estimated that the backpacks would be ready in March 2016, he launched a second campaign that month for the “iBackPack 2.0,” an updated version of the still undelivered original product instead of delivering any products. Consumers who pledged $299 would receive the new Wi-Fi version, the defendants promised later in the year.

The defendants made multiple representations that the products were being produced and finalized, including posting online videos and photos, the FTC said. The second campaign raised $76,694.

During the same time period, the defendants operated two other crowdfunding campaigns that raised roughly $11,000: one for the MOJO, a shoulder bag that incorporated batteries, cables and other electronic components, and a second for the POW Smart Cable, a magnetic USB cable system with various technology features.

Despite the multiple campaigns and repeated assurances that contributions would be used to produce and distribute the completed products, the FTC alleged that the defendants used “a large share” of contributions for Monahan’s personal purposes, including the purchase of bitcoins and the payment of personal credit card balances. The funds were also used for marketing efforts and other business ventures, according to the complaint.

Hundreds of consumers complained not just about the defendants’ failure to produce the products, but also about their threats to file lawsuits for libel and slander to silence the criticism. Only a small number of iBackPack consumers received refunds, and most of those came from the crowdfunding platform, the agency said.

“To this day, defendants have not used the funds primarily for development, production, completion and distribution and have yet to provide a single completed product to any consumers who contributed to the campaigns,” according to the complaint.

For the alleged violations of Section 5(a) of the FTC Act, the agency seeks injunctive relief, rescission or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten monies, and other equitable relief.

To read the complaint in FTC v. iBackPack of Texas, LLC, click here.

Why it matters: “If you raise money by crowdfunding, you don’t have to guarantee that your idea will work,” Andrew Smith, director of the FTC’s Bureau of Consumer Protection, said in a statement. “But you do have to use the money to work on your idea—or expect to hear from the FTC.” The agency reminded businesses that established consumer protection principles apply to new mediums as well, including crowdfunding platforms.