The Crowdfunding Debate Affects Nonprofits

(A still from Kickstarter, a popular crowdfunding platform.)

It’s hard for one to miss the proliferation of crowdfunding campaigns. They have become part of the popular landscape, with friends and families running fundraisers through a number of online portals that allow them to raise funds for all manner of projects. Nonprofits stand to benefit from this fundraising model, which generates excitement and grassroots curiosity for compelling campaigns and ideas. Some are even arguing it’ll help solve many of charity’s failures.  The crowdfunding landscape, however, is quite complex, and certain legal and tax issues remain unsettled. Let’s take look at some of the nuances surrounding crowdfunding, including what may happen to the industry in the near-term future.

A crowdfunding campaign can take on many different forms. In its most popular incarnation, it involves individuals soliciting what are essentially gifts to jump-start a project, product line, business, or organization. Popular platforms for this model include Indiegogo, Kickstarter, and GoFundMe. Campaign hosts may offer later perks, guaranteeing a product that will in part be developed with gift donations, delivered to the donors after project completion.

Entrepreneurs and startups can also offer equity interest in their companies. This type of crowdfunding has people excited, with some analysts arguing that it heralds a democratized approach to raising capital, pulling more people than ever before into equity markets. The Obama Administration’s 2012 JOBS Act was meant to ease some SEC tax regulations, including those affecting taxes on crowdfunding. The debate is far from over, however, and taxation on crowdfunding campaigns is yet to take a firm shape.

Taking cues from the crowdfunding exemption movement, architects of the JOBS Act sought to formalize crowdfunding’s privileged status as a more-or-less unregulated method of raising capital. Protected in Tittle II of the JOBS Act, the unregulatory character of crowdfunding was sharply opposed by regulators and SEC officials, largely over concerns that a complete absence of regulation would expose inexperienced investors to fraud.

With the approval of Title IV earlier this year, all aspects of the JOBS Act have been formally approved, reviewed, and deemed ready for implementation. A couple of facts – however – have complicated the debate and all but guaranteed that the discussion is going to continue. Many investors are skeptical that there will be any benefit for small business, who – under SEC rules – have no state-exemption for offering securities. In other words, an individual raising capital would face far too many fees for compliance across the country to even make a crowdfunded equity campaign feasible.

Furthermore, a number of frauds have spotlighted the potential for crowdfunding abuse. The industry is a little confusing, with some funders evidently buying into jokes more than products. Take for example the potato salad that raised over $50,000. There is – in a word – an informality to the crowdfunding world. On a less humorous note, consumers have into projects and groups that never came to fruition.

Washington recently required Ed Polchlopek, III to pay $54,841 in damages to defendants who donated to his crowdfunding campaign. Allegedly run to construct a specially-designed set of playing cards, his campaign never followed through on its promises.  The Washington state  Attorney General’s office has decided that the case infringes rights guaranteed in the Consumer Protection Act.

This and other scandals – including fake accounts that raised money for Eric Garner’s family following his tragic death, disappearing the money into cyberspace – will likely bring regulation (and taxation) back to the forefront of discussion. As states offer different and conflicted rulings, regulators and legislators are sure to reenter the debate.

PricingPrivacy PolicyRefund Policy