Allan Ellis, founder of popular Bit Torrent tracker, Oink.cd, was acquitted of conspiracy to defraud by a jury at Teesside Crown court on Friday.
Ellis, 26, was the first person in the UK to be prosecuted for file-sharing. He ran Oink, from his flat in Middlesbrough from 2004 until it was closed down in a police raid in October 2007.
In that time Oink facilitated the download of 21 million music files, the court heard.
Ellis said he started to the site to improve his computer skills, "to better my skills for employability." He told the court he built the site with a free template equipped with torrent file-sharing facility.
The site was initially hosted on Ellis' home PC, but by 2007 this couldn't cope with the traffic, so the operation was moved to a commercial server in Amsterdam.
Users were asked to make a donation to invite friends to join the site and prosecutors claimed that Ellis received up to £11,000 a month in donations.
Ellis said the donations were only to pay for keeping the server up to date.
A spokesperson for the BPI, which represents the music industry, said the verdict was "hugely disappointing".
"The case shows that artists and music companies need better protection," he wailed.