What keeps certain crowdfunding platforms like Indiegogo from falling within the commercial fundraiser regulations?

Crowdfunding for charities is not a new concept, but the use of third-party crowdfunding platforms, such as Indiegogo and GoFundMe have become extremely popular in the past few years. These crowdfunding platforms not only provide a venue to host charitable campaigns, but they also manage donations and track the progress toward the fundraising goals. In exchange for these services, the crowdfunding platforms charge a fee. For example, Indiegogo charges a fee of 4% for projects that meet their funding goal, and 9% for projects that partially meet their funding goal.

In 2013, it is estimated that $5 billion was raised through global crowdfunding with about 30 percent of that total going to social causes. With so much money being raised for charities through crowdfunding platforms, why aren’t these platforms regulated as commercial fundraisers?

A commercial fundraiser for charitable purposes is defined under California law as any individual, corporation, or other legal entity that for compensation does any of the following:

• Solicits funds, assets, or property in California for charitable purposes.
• As a result of a solicitation of funds, assets, or property in California for charitable purposes, receives or controls the funds, assets, or property solicited for charitable purposes.
• Employs, procures, or engages any compensated person to solicit, receive, or controls funds, assets, or property for charitable purposes.

While crowdfunding sites, such as Indiegogo, do receive compensation for hosting campaigns on their websites, Indiegogo does not appear to actually solicit funds (request gift or money) on behalf on the charity. Instead, the actual content of the campaign is controlled by the campaign creator and it is up to the campaign creator to provide a compelling enough story to raise funds. Indiegogo does not actively solicit individuals to donate to campaigns on its website, but instead it provides an online platform where potential contributors (or donors) can review and select from hundreds of different campaigns for both charities and for-profit entities.

In addition, crowdfunding platforms generally do not themselves, and do not through compensated persons, actually receive or control the funds solicited by individuals or organizations for charitable purposes. The funds raised on Indiegogo are processed through PayPal and are disbursed to campaign owners once the campaign is completed.

Many crowdfunding sites are apparently aware of the potential confusion as to whether they fall under states charitable solicitation laws, including the California commercial fundraiser statute. On its website, GoFundMe posted a special note to regulatory agencies:

We do not engage in any solicitation activities; such activities are carried out by our users on their own initiative. Additionally, our “Charity Donations” are processed through a separate business entity, FirstGiving.

There has also been some discussion as whether the Charleston Principles, a set of nonbinding guidelines in response to the proliferation of web site solicitations developed by the National Association of State Charity Officials (“NASCO”), could provide any guidance on the potential regulation of charitable fundraising through crowdfunding platforms.

These Principles attempt to address the type of online solicitation activities by charities that would trigger a state’s registration requirements. Generally, the following activities will require a charity to register for online charitable solicitations:

• A charity is domiciled in the state and passively or actively solicits contributions over the internet.
• A charity is domiciled in the state and its principal place of business is located in that state.
• A charity is not domiciled in the state, but its non-internet activity in that state would require registration under existing law.
• A charity solicits donations through an “interactive website”; and the charity either: (i) “specifically targets persons” located in the subject state for solicitation; or (ii) receives contributions from the state on a “repeated and ongoing basis or a substantial basis” through its website.

These guidelines were drafted before crowdfunding platforms such as Indiegogo and generally address actions by actual charities raising funds; however, there is language in the guidelines that give the impression that state regulators anticipated the regulation of such platforms.

The Principles provide an exemption to the registration requirements for “entities that provide solely administrative, supportive or technical services to charities without providing substantive content, or advice concerning substantive content”. However, if these service providers do more than simply provide technical services and actually solicit or promote a website, then registration may be required. Compensation for services based on the amount of funds raised may be a strong indication the entity is doing more than simply providing technical services. If these Principles were binding, one could argue that sites such as Indiegogo, who charge fees based on the amount of funds raised may be required to register with the state.

However, the reality is that the law has not caught up with technology and most state laws regarding charitable solicitations and commercial fundraisers were drafted before the popularity of charitable fundraising on crowdfunding platforms. At this point, it appears they operate in a gray area of the law. Although the Charleston Principles may have anticipated fee-based service providers such as Indiegogo and the potential need to regulate them, these principles are nonbinding. As the popularity of charitable fundraising on crowdfunding platforms continue to grow, it will be interesting to see if and how the states will regulate them.

Resources:

Charitable Solicitation Regulations: Frequently Asked Questions (Adler & Colvin)
The Long Arm of Charitable Solicitation Law (Charity Lawyer Blog)
Internet and Social Media Solicitations: Wise Giving Tips (NASCO)
Indiegogo Terms of Conditions
GoFundMe Terms and Conditions
Crowdfunding For Good Now A Growing Global Movement (Forbes)

 

Michelle Baker is a San Francisco-based attorney interested in social impact.