As crowdfunding grows in importance for charities, legal experts are starting to explore what kind of regulations might apply to the new way of giving.
The Securities and Exchange Commission is drawing up rules for businesses that sell equity stakes through crowdfunding. But most charity regulation falls to the states, and some legal experts wonder if commercial sites that help raise money for nonprofits fall under charitable-solicitation rules.
“Connecticut does not require crowdfunders to register as paid solicitors, but the issue remains an open one,” said John Neumon, fraud division director in the state’s consumer-protection department.
Take a site like CrowdRise, which charges transaction fees of up to 5 percent for each donation. “I think there is a case that they may be a fundraising consultant, or even in some states a paid fundraiser, depending on the definition you use,” said Elaine Wilson, an associate law professor at West Virginia University. Many states require such groups to register and file reports.
Gene Tagaki, a nonprofit lawyer, said crowdfunding sites might be off the hook if they simply host nonprofit campaigns but don’t solicit on their behalf or control the donations. Still, he wrote in the Nonprofit Law Blog, they are operating “in a gray area of the law.”
Several commercial crowdfunding sites reject the idea that they qualify as fundraisers. “We don’t raise any money ourselves,” said Robert Wolfe, chief executive of CrowdRise. “We’re a platform for others to raise money.”
Jorge Hernandez, founder of Darelicious, which raises money for nonprofits based on dares and takes a 10-percent cut, said his site considers itself a “pass-through, no different from PayPal.”
Charity regulators are guided by the so-called Charleston principles for regulating Internet fundraising across state lines, which were drafted by the National Association of State Charity Officials in 2001. Updates have been contemplated for several years.
Washington State requires entities to register as commercial fundraisers if they are compensated to solicit or receive charitable donations in the state, said Sarah Shifley, an assistant attorney general. Whether that applied to a crowdfunding site would depend on two things, she said in an email: “Whether the site could be considered as making the solicitation” as opposed to simply providing a web-based service and whether it received the contributions or they went directly to the charity.”
Ron Ruman, press secretary for Pennsylvania’s secretary of state, said state lawmakers had not acted on crowdfunding, but applying charity regulations was “certainly conceivable.”
Fraud Warnings
Attorneys general in Michigan and North Carolina both issued consumer alerts in June warning people about donating to crowdfunding sites. Michigan’s Bill Schuette encouraged people to be sure of an asker’s identity and noted that state law bars fundraising for charities without authorization.
One of the more prominent crowdfunding scams happened in Missouri after the Joplin tornados in 2011, when the attorney general reached a settlement with a group that was fraudulently collecting donations on CrowdRise for victims in the name of a Catholic Charities chapter and a Lutheran church.
But Rose Spinelli, a crowdfunding consultant, said she worries about “the watchdogs out there who are looking for the fraudsters.” Part of the power of the new phenomenon, she said, is its ability to self-regulate: “The beauty of crowdfunding is there are so many eyeballs on a single thing.”