Well, no actually. Most of it isn't legal. You have a legal responsibility to your shareholders to make good on your promises. Telling them you're going to be producing a product that requires X amount of capital to do is a contract. Failing to fufill that contract - particularly wilfully - is fraud. You can go to prison for that. It's the reason we don't see companies opening up everyday promising people the moon, blowing the money and fucking off.
This isn't the same thing as guarenteeing them a return on their investment, which no one is obliged to do, but you won't be in business long if you're actually making and your shareholders aren't. I don't know all the ins and outs of this case but it wouldn't surprise me if fraud charges were laid somewhere down the line. Just because it hasn't happened yet still doesn't mean it won't or can't later on.
Regardless, trying to move forward with this company brand/name is just bad business anyway you slice it. Just pull the plug already. How anyone could be so dumb as to give these guys donations boggles the mind. Oh well, fools and their money.
"There was no downside to cocaine. Period. If you have a chance to try it, I strongly recommend it." - Corey Wolfhart, Futureman