Wednesday, April 23, 2014
Crowdfunding for Nonprofits: Solicitation or Matchmaking?
“Crowdfunding” appears to be all the rage. Investopedia defines crowdfunding on the most basic level as the “use of small amounts of capital from a large number of individuals to finance a new business venture.” In the earliest days, crowdfunding was basically a plea for money – see the artistic ventures funded primarily through Kickstarter. The problem with that model, of course, is that one could not get equity in return for your contribution – after all, that starts to look an awful lot like a securities offering, and the SEC has issues with that. The Jumpstart Our Business Startups (or, pithily, JOBS) Act of 2012 was designed in part to loosen the securities regulations on small business, so that there will be greater flexibility in the ability to offer equity in return for contributions through crowdfunding (or at least there will be when the SEC gets around to issuing regulations on the matter.)
So what about nonprofits? A recent article in TechCrunch, cited by the Chronicle of Philanthropy, notes the website Crowdrise recently received $24.0 million in financing.
Crowdrise.com (note: it’s a for-profit site) allows you to “create a fundraiser” for your event. It appears that it isn’t limited to charities, although the site links to Guidestar.org in order to filter the bona fide Section 501(c)(3)s from the merely well-intentioned. There seems to be a lot of fundraising teams for fun runs and the like, as well as fundraisers for sick individuals and medical expenses. Some of these might qualify for a Section 170 deduction if given directly to the organization; other, such as the fundraisers for medical expenses, wouldn’t qualify for a deduction, no matter how well intentioned. Crowdrise does state:
Your donation to a US-Based 501(c)3 charitable organization through CrowdRise is 100% tax deductible to the extent allowed by law. We will email you a receipt that meets all IRS requirements for a record of your donation. If you are asked to provide a paper receipt for IRS purposes, please print out a copy of your email receipt. If you lose your receipt, email email@example.com and we'll send you a duplicate. Be sure to include your first and last name and the email address you used to make the donation. Donations to indviduals [sic] are not tax-deductible.
Crowdrise receives a transaction fee for each contribution made, which varies depending on the manner in which the transaction is consummated.
From a regulatory stand point, should we worry about this? In the for-profit world, we have the SEC and its state law counterparts. The IRS won’t (and shouldn’t) get involved, it seems to me, unless we are worried about charitable deduction issues. That being said, is this high tech direct mail, and should it be regulated as such? Take, for example, the Illinois Solicitation for Charity Act, which defines a professional fund raiser as one who receives “compensation or other consideration… on behalf of a charitable organization residing within this State for the purposes of soliciting, receiving or collecting contributions…”
Or is Crowdrise just an intermediary – it makes no legal representations that what is does is charitable or tax-deductible, necessarily. I’d be curious to know how state regulators are approaching sites like Crowdrise from a solicitation regulation stand point, and how the Charleston principles would apply to such a website?
I too have been thinking about this issue lately. It came to my attention through requests to review other matters; incidental to the document review I was performing, it occurred to me that it's tough to square the breadth of some states' solicitation statutes (e.g., Hawaii) with services like Active.com (registration services at an administrative fee for races, including charity runs) and Kickstarter. I began wondering if I were the crazy one when I seemed to be the only one who thought there might be problems, but perhaps this is simply one of those issues that goes largely unnoticed until some state penalizes the potential solicitors.
Posted by: Nonprophet | Apr 24, 2014 10:29:45 PM