WSJ Technology | Angus Loten | June 11, 2015

A Portland, Oregon man has agreed to settle with the Federal Trade Commission over charges he used “unfair or deceptive acts” to raise $122,000 from more than one thousand online backers on Kickstarter, a popular crowdfunding site.

The backers were led to believe they were funding a new board game, but the game’s maker instead spent the cash on personal items, such as paying his rent and moving expenses, the FTC said. Kickstarter itself faces no charges in the case.

The move marks the first time the agency has taken legal action to protect online users in the booming crowdfunding industry, which comprises more than 1,250 online platforms worldwide that together raised $16.2 billion last year, up 167% from 2013, according to crowdfunding research firm Massolution.

According to Massolution, entrepreneurs and startups accounted for 40% of total crowdfunding dollars in 2014, compared to just 27% in 2012 and far ahead of the online dollars raised for social causes, films and performing arts, real estate and music.

Kickstarter says broadly that it is aimed at raising funds for creative projects, from “experiences” to “art” but it prohibits projects that are raising money for charity or for financial incentives, like equity, according to its website.

Erik Chevalier in May 2012 launched a 30-day online fundraising campaign on Kickstarter, seeking to raise $35,000 to create a fantasy board game called “The Doom That Came to Atlantic City,” according to the FTC’s complaint, filed Wednesday in the U.S. District Court for the District of Oregon Portland Division.

Mr. Chevalier said on his project’s Kickstarter web page that he would use the funds to cover the costs of product development, production and distribution, among other startup expenses, the FTC complaint said.

To entice contributors, Mr. Chevalier, presenting himself as the owner of The Forking Path, Co., promised them rewards, such as advanced copies of the game for pledges of $75 or more, and ornate pewter game pieces for pledges above $105.

The game’s Kickstarter page also included a video of Mr. Chevalier describing the game and players gathered around a prototype. When the fundraising campaign closed on June 6, 2012, it had raised $122,874 from 1,246, including over 1,000, or about 85% of backers, who had pledged more than $75 each, according to the complaint.

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Over the next year, Mr. Chevalier posted sporadic updates on the campaign’s Kickstarter page, citing ongoing delays caused by patent infringement and manufacturing issues, among other obstacles.

But in July 2013, he abruptly canceled the project, saying in an online post that after paying to form the company, make the game pieces, move to Portland, get software licenses and hire more artists, the “money was approaching a point of no return.”

This week, FTC officials said Mr. Chevalier instead spent the money on himself and a separate, unrelated project.

Under the settlement, Mr. Chevalier is barred from raising cash on crowdfunding platforms. A $111,793 fine was suspended due to Mr. Chevalier’s inability to pay, according to the agency.

In a statement, Kickstarter spokesman David Gallagher said fundraisers on the site have “an incredible track record when it comes to following on their promises.” But those that “abuse our system and backers’ trust expose themselves to legal action,” he said.

Jay Mayfield, an FTC spokesman, said the agency had received hundreds of complaints about Mr. Chevalier’s venture, he said.

More than three-fourths of crowdfunding projects face delays, some for several years, before promised rewards are delivered to backers, according to Ethan Mollick, a professor of management at the University of Pennsylvania. Yet outright fraud is rare, he said.

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