Understanding Crowdfunding Regulations: 3 Key Legal Takeaways

Untitled design (18)

The information and opinions expressed in this blog are for educational purposes only. This information does not constitute legal advice and is not a substitute for legal advice. John Taylor is not an attorney nor does he play one on TV. 

My previous article discussed how I have come to embrace crowdfunding as an enhancement to the fundraising activities of an organization.  However, I also cautioned that implementation requires full integration with the advancement/development office.  I listed a few reasons why I feel this is important.

One reason I omitted – because it deserves its own discussion – is that if you approach crowdfunding the wrong way, you could get into legal trouble.

Fundraising activities must be conducted under the jurisdiction of federal and state law.  If you represent a nonprofit organization and want your participants to be able to claim a tax-deduction for their contributions, there are strict IRS regulations and state laws you must adhere to.

If the advancement office is not involved in helping campaign groups understand these rules, not only can fines be levied, but you stand the chance of losing your tax-exempt status.  I don’t mean to rain on anyone’s parade, but this is the reality.

Crowdfunding, just like direct mail, phonathons, and personal solicitations, needs to be implemented by the legal book.

While I’m not going to go into the various state regulations here, it’s important to note that some 3 dozen plus states have their own solicitation registration requirements you must follow before you ask for a penny from donors in those states. To check the applicable laws in your area, visit the National Association of State Charity Officials.

What I am going to cover are the three key legal considerations you should be aware of to crowdfund without consequence.

1. Don’t Give Away the Farm.

Lots of organizations like to give incentives to folks encouraging them to give: t-shirts, bumper stickers, coffee mugs, etc.  And that’s just fine.  But the IRS has actually imposed limits on what you can give if you want to protect the full deductibility of the gift.  In 2016 (yes, that’s right – the IRS changes the limits every single year) you can only provide these tchotchkes if the donor makes a minimum gift of $53, and the combined value of all benefits is under $10.60. Key takeaway: make sure to check-in with any crowdfunding teams who have product-based campaigns or plan to incentivize with rewards to make sure they meet these criteria.

2. If You Do Give Away the Farm, Know the Hurdles.

Yes, you can technically give donors benefits/incentives that exceed these limits and still offer some deductibility.  But know it gets complicated.  In order to be in compliance, you must issue receipts that reflect not only the total amount paid, but describe in detail the benefits that were provided, what their values were (itemized), and the net tax-deductible amount (or at least a statement telling the donor to do the math and calculate their deduction – but that’s not very donor-centric). So, while it’s possible to navigate around my first recommendation, know the work involved and plan accordingly.

3. What Happens in Vegas Should Happen in Vegas.

Don’t turn your crowdfunding site into a gambling venue.  I know, I know: you would never do that. But keep in mind if your organization has ever made a statement along the lines of “All donors are entered into a drawing for an iPad – pre-loaded with Pokémon Go,” you already have.  Put into IRS terms, that’s a “game of chance.”

Consider these two important points before you attempt any kind of raffle strategy:

  • Any payment that results in some form of drawing entry – regardless of the amount paid and the value of the prize – 100% negates the tax-deductibility of the payment.
  • Even if you don’t care about tax-deductibility, every state has its own laws pertaining to “gaming.” Some do not allow it at all.  Others have interstate gaming restrictions.  Others have limits on the number of these activities an organization can conduct each year if not their primary business.  And others could cause a nonprofit organization to lose its tax-exempt status.

Bottom line: leave gambling to the dice-throwers in Vegas.

The laws governing fundraising activities may seem intense, but as crowdfunders it is simply a matter of being informed. All the more reason to seek advice from your advancement office before you launch – just make sure those t’s are crossed and i’s are dotted!

Community Funded (www.communityfunded.com) provides powerful yet easy-to-use digital fundraising solutions including Crowdfunding and Day of Giving products and services that help higher education, healthcare, and nonprofit organizations exceed their fundraising goals.

 

@communityfunded