I’ll be on Nonprofit Radio this Friday at 10:30 am PT / 1:30 pm ET talking with host Tony Martignetti about crowdfunding laws. Catch us live on Talking Alternative or a few days later on iTunes (where you can also find our previous discussion on crowdfunding).
Crowdfunding is defined as “the practice of funding a project or venture by raising many small amounts of money from a large number of people (the “crowd”), typically via the Internet.” An estimated $16.2 billion was raised globally through crowdfunding in 2014 , and that number has been projected to reach $34.4 billion in 2015 . According to a 2013 study commissioned by the World Bank, crowdfunding is projected to become a $90-96 billion dollar industry by 2025 , almost twice the size of the global venture capital industry today.
Forms of Crowdfunding
While there are several ways of categorizing crowdfunding, the most common forms are commonly referenced as donation crowdfunding, rewards crowdfunding, and investment crowdfunding.
- Donation crowdfunding involves asking the crowd for a gift.
- Rewards crowdfunding involves the promise of some return benefit to the crowd. If the return benefit is of negligible value, this is a form of donation crowdfunding. If the return benefit is considered a form of pre-selling by a startup for-profit, it may be a form of investment crowdfunding.
- Investment crowdfunding involves the selling of equity (e.g., stock) or debt (e.g., note promising a rate of interest).
Nonprofits and Crowdfunding
Nonprofits that use crowdfunding most commonly do so as a form of fundraising. Often, they will provide a reward to help induce a donation, but the value of the reward will not exceed the amount of the donation. This will help ensure that at least part of the donor’s payment will be eligible for a charitable contribution deduction.
Nonprofits may also be able to engage in investment crowdfunding but because they generally have no ownership structure (and therefore no equity), this would be limited to debt crowdfunding. In contrast, a nonprofit’s for-profit subsidiary or joint venture may be able to engage in equity crowdfunding.
Nonprofits experienced with fundraising may question whether donation crowdfunding significantly differs from more traditional forms of fundraising. Donation crowdfunding typically is project-focused and time-limited and targets a broader group of prospective donors who are more interested in the project than the organization. While there remains an absence of laws specifically regulating donation crowdfunding, the focus of such campaigns raises several legal issues of which crowdfunding nonprofits should be aware.
Areas of Discussion
I expect Tony and I may discuss some of the following topics:
- The difference between business and charity crowdfunding
- Reward crowdfunding – what issues arise when charities give something of value to their crowdfunding donors?
- Raising funds for specific distressed individuals – how is this done and how should it be done?
- Is crowdfunding by nonprofits really like the Wild West with little protection for donors?
A Moving Target: The regulation of online fundraising platforms (The Nonprofit Times)
Technology Evolves Fundraising, But Charleston Principles Remain Unchanged (The Nonprofit Times)
Kickstarter tax fix: Bill would exempt crowdfunding efforts from state sales and B&O taxes (GeekWire)
Crowdfunded Entrepreneurs, Tripped Up by the Taxman (The New York Times)
Disaster Relief: Meaning of “Charitable Class” (IRS)
IRS Gift Substantiation and Disclosure Requirements (last reviewed/updated 01/3/17) (Center for Non-profits)
Later this year, I’ll be speaking at the Annual Conference of the National Association of State Charity Officials (NASCO) about crowdfunding. If you have any major points you’d like me to make on behalf of what the nonprofit sector is seeking in terms of charity regulations related to crowdfunding, send me an email – gene @ neolawgroup.com.