As was evident after the horrific shooting in Orlando on June 12th, crowdfunding has become the most visible, and arguably the most effective, way to quickly raise money and awareness for a charitable cause triggered by an event. The Nonprofit Quarterly previously reported that a single crowdfunding campaign to support the Orlando victims raised $4 million from more than 87,000 people within a day after the attack. And five days later, reportedly, more than 300 crowdfunding campaigns raising $6.2 million for victims of the shooting were set up on GoFundMe, which is just one of more than 2,000 crowdfunding websites.
However, while the magnitude and reach of crowdfunding are substantial, there remain many misperceptions and issues to be understood and managed by nonprofits, donors, and regulators.
What is Crowdfunding?
Crowdfunding is a term used to define an effort to generate capital investments or funds for a project, cause, or enterprise by acquiring funds from many individuals. This is typically accomplished by raising small amounts of money from a relatively large number of people (the “crowd”) on the Internet.
The global crowdfunding industry expanded by 167% to reach $16.2 billion in 2014, up from $6.1 billion in 2013. The industry reached $34.4 billion in 2015. In another study commissioned by the World Bank in 2013, crowdfunding is projected to become a $90–96 billion dollar industry by 2025, almost twice the size of the global venture capital industry today.
Types of Crowdfunding
Crowdfunding can be categorized into three broad types: 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).
For charitable causes, popular crowdfunding platforms include GoFundMe, CrowdRise, and Indiegogo/Generosity. To host a campaign, these platforms charge fees that range from 0% to 5%, in addition to third-party payment processing fees that can be an extra 3 or 4% plus $0.20 or $0.30 per donation, or more for international campaigns with non-USD bank accounts.
Crowdfunding for Charitable Purposes
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. While nonprofits may also be able to engage in investment crowdfunding, they generally have no ownership structure (and therefore no equity), and so such efforts are limited to debt crowdfunding. In contrast, a nonprofit’s for-profit subsidiary or joint venture may be able to engage in equity crowdfunding.
Donation crowdfunding typically is project-focused and time-limited and targets a broader group of prospective donors who are more interested in the project or cause than a particular organization.
Also growing more prevalent are personal crowdfunding campaigns, in which an individual, friend, family, known supporter, or unrelated person sets up a campaign to benefit a specific person for their medical expenses, education costs, or other reasons. Exceptional campaigns like this that made the headlines include the effort to buy a car for a 56-year-old Michigan man who walked 21 miles each day to and from his factory job, and campaign for a vacation for the bus monitor who was bullied and verbally harassed each day by a group of middle-schoolers in New York. The latter raised over $700,000 by more than 30,000 backers. Nonprofits are cautioned against trying to divine the formula for what makes a campaign go viral and instead plan realistically.
Crowdfunding by Nonprofits
Nonprofits soliciting charitable contributions must comply with applicable state laws, including any charitable registration requirements, in each of the states in which they are making such solicitations. Currently, 39 states and