The money raised by Lab Zero's Indiegogo campaign was withheld by Paypal over concerns backers dissapointed by the character lineup would ask for a refund.
The campaign raised $829,000 for DLC, giving backers the chance to vote for which characters would be added to the fighting game.
PayPal froze the account over concerns that those who didn't get the characters they wanted would ask for a "chargeback", leaving the online payment system on the hook for up to $700,000.
"Whee! Paypal's freeze on our account is making it so that I can't pay people today," Lab Zero CEO Peter Bartholow wrote on NeoGAF.
"I am pretty f***ing pissed. I sent them all the documentation they asked for last night, hoping it would be resolved today, but didn't hear anything back."
Bartholow said he immediately filed a complaint with the Consumer Financial Protection Bureau because "this whole thing seems decidedly non-kosher."
Paypal has since unfrozen the account but holds $35,000 as collateral.
"...hopefully that will become unrestricted in the near future," Bartholow told GamesBeat. "But now that we have unrestricted transfers on Paypal again, we shouldn’t need that money anytime soon if they can’t be convinced to release it.”
Paypal asked Bartholow if his studio was good for the money if customers asked for chargebacks.
"I said "No," because, well... we're not?," wrote Bartholow
"The whole point of crowdfunding is to give us the money to develop stuff, not take out a loan."
The issue revolves around the risks associated with crowdfunding campaigns. Customers can ask for their money back and if it's already been spent by the developer it comes out of Paypal's pocket.
“I think it’s sketchy, but their logic sort of makes sense,” explained Bartholow
“Basically, they are terrified of chargebacks. If we spend all the money and don’t deliver and everyone [wants] chargebacks, PayPal is concerned they will be on the line for it."
"So, they are effectively treating it as a loan. I mean, the guy flat out said: ‘Until the threat of chargebacks has passed, PayPal is effectively financing your development.’”
Bartholow says his studio is braving the guns and won't wait to begin production until the risk of chargebacks passes, as some card holders retain this right for up to a year.