Placeholder Content Image

Convenient but susceptible to fraud: Why it makes sense to regulate charitable crowdfunding

<p>Within 24 hours of <a rel="noopener" href="https://theconversation.com/why-the-southern-us-is-prone-to-december-tornadoes-173643" target="_blank">devastating tornadoes striking six states</a> in December 2021, Kentucky Gov. Andy Beshear launched the <a rel="noopener" href="https://secure.kentucky.gov/formservices/Finance/WKYRelief" target="_blank">Team Western Kentucky Tornado Relief Fund</a>. That the leader of the state this disaster hit hardest would immediately tap into <a rel="noopener" href="https://www.councilofnonprofits.org/tools-resources/crowdfunding-nonprofits" target="_blank">crowdfunded charity</a> – raising money from the public directly – to complement relief dollars from official sources should come as no surprise.</p> <p>Crowdfunded donations have become a key source of disaster assistance – and often raise significant sums. In 2017, for example, football star J.J. Watt quickly raised more than $40 million help people affected by <a rel="noopener" href="https://www.houstontexans.com/news/j-j-watt-foundation-announces-hurricane-harvey-recap-and-2018-19-plans" target="_blank">Hurricane Harvey</a>. Following a series of Australian wildfires, entertainer Celeste Barber made a public appeal that eventually raised more than AU$50 million for the <a rel="noopener" href="https://eprints.qut.edu.au/200554" target="_blank">New South Wales Rural Fire Service &amp; Brigades Donation Fund</a>. And to date, the CDC Foundation has raised more than $51 million to support its “<a rel="noopener" href="https://give4cdcf.org/?utm_source=CDCF&amp;utm_medium=web&amp;utm_campaign=combat-coronavirus" target="_blank">Crush COVID</a>” campaign.</p> <p>What’s not to like about this new way to raise funds for a good cause? Well, as long as there has been charitable fundraising there has been the <a rel="noopener" href="https://theconversation.com/how-donors-can-help-make-nonprofits-more-accountable-85927" target="_blank">potential for scams</a>.</p> <p>As a <a rel="noopener" href="https://scholar.google.com/citations?user=uplx-M8AAAAJ&amp;hl=en&amp;oi=ao" target="_blank">law professor who studies the regulation of charities</a>, as well as a lawyer who has represented numerous charities and donors in legal disputes, I’ve seen that two aspects of charitable crowdfunding make it particularly vulnerable to fraud.</p> <p><strong>Sometimes it turns out to be crowd-frauding</strong></p> <p>In late 2017, a New Jersey couple posted an inspiring story on GoFundMe. A homeless veteran, they said, had come to the wife’s rescue after she ran out of gas on a highway exit ramp. Their “<a rel="noopener" href="https://abc7ny.com/homeless-hero-gofundme-money-stolen-from-man-john-bobbitt-gofund-me-go-fund/4690185/" target="_blank">Paying it Forward</a>” campaign raised more than $400,000 to help the veteran.</p> <p>Heartwarming, right? Trouble is, it was a lie. All three of the people involved in this trickery eventually <a rel="noopener" href="https://www.inquirer.com/news/mark-damico-johnny-bobbitt-kate-mcclure-gofundme-guilty-20211122.html" target="_blank">pleaded guilty to federal charges</a> of “<a rel="noopener" href="https://www.dicindiolaw.com/what-constitutes-theft-by-deception/" target="_blank">theft by deception</a>.”</p> <p>Fraudulent crowdfunding can also prey on political sentiments rather than just exploiting sympathy.</p> <p>In 2020, <a rel="noopener" href="https://www.justice.gov/usao-sdny/pr/leaders-we-build-wall-online-fundraising-campaign-charged-defrauding-hundreds-thousands" target="_blank">federal prosecutors charged</a> former senior Trump adviser Steve Bannon and three others with defrauding thousands of donors to a crowdfunding campaign for <a rel="noopener" href="https://theconversation.com/why-steve-bannon-faces-fraud-charges-4-questions-answered-144834" target="_blank">building portions of a wall</a> along the U.S. border with Mexico. Bannon and his partners allegedly instead used some of the funds raised to compensate themselves and pay for personal expenses.</p> <p>Although then-President <a rel="noopener" href="https://www.cnbc.com/2021/01/19/trump-pardons-expected-day-before-biden-inauguration.html" target="_blank">Donald J. Trump pardoned Bannon</a> in advance of any trial, the former White House aide still <a rel="noopener" href="https://www.forbes.com/sites/alisondurkee/2021/05/25/steve-bannon-officially-cleared-of-federal-charges-after-trump-pardon---but-this-state-probe-still-looms/?sh=1a58e95657c4" target="_blank">faces possible state charges</a>.</p> <p><strong>Reasons for vulnerability</strong></p> <p>Making a special website isn’t necessary to raise charitable funds this way. Some 45 million people donated to or created a fundraiser using Facebook from 2015 to 2020, raising over <a rel="noopener" href="https://about.fb.com/news/2019/09/2-billion-for-causes/" target="_blank">$3 billion for charities</a>, according the company.</p> <p>And crowdfunding efforts can help people without <a rel="noopener" href="https://www.irs.gov/taxtopics/tc506" target="_blank">technically counting as tax-deductible charity</a>. <a rel="noopener" href="https://www.gofundme.com/" target="_blank">GoFundMe</a>, a popular charitable crowdfunding platform, lets people raise funds for both personal needs, such as covering medical expenses, and for specific charities of all kinds.</p> <p>Being fast and cheap to operate makes charitable crowdfunding ideal in some ways, not others. More traditional fundraising campaigns that rely on mailings and phone calls are time-consuming to establish. In contrast, it’s possible to set up a new campaign on GoFundMe that is then visible both nationally and internationally within a few minutes.</p> <p>In the wake of a highly publicized disaster, when many people are <a rel="noopener" href="https://theconversation.com/how-to-select-a-disaster-relief-charity-83928" target="_blank">looking for a quick way to help</a>, everyone – even governors – will want to move fast. Opportunities for fraud are perhaps at their peak.</p> <p>Compounding this problem: Laws governing charitable fundraising do not clearly apply to campaign organizers and crowdfunding platforms. As I detail in an article <a rel="noopener" href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3686612" target="_blank">soon to be published in the Indiana Law Journal</a>, state legislatures wrote those laws decades ago, when charities raised money either directly or using paid solicitors. As a result, those laws do not usually apply to individuals who voluntarily raise money for individuals or charities to which they have no formal ties. Nor do they apply to the recently emerged platforms where people crowdfund for causes.</p> <p><strong>California takes aim</strong></p> <p>So far, there’s no regulation taking shape to address these issues at the federal level.</p> <p>California became the first state to pass legislation specifically targeting charitable crowdfunding when Gov. Gavin Newson signed Assembly Bill No. 488 into law in October 2021. The measure, which will not <a rel="noopener" href="https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB488" target="_blank">take effect until Jan. 1, 2023</a>, requires both charities raising funds online and platforms hosting campaigns for specific charities to register and file regular reports with the state’s <a rel="noopener" href="https://oag.ca.gov/charities" target="_blank">Registry of Charitable Trusts</a>.</p> <p>The new law will also require these charities and platforms to make certain public disclosures and receipts, as needed. It will also require platforms to promptly distribute donations to the designated charities and obtain a charity’s written consent before soliciting funds for its benefit – with some exceptions.</p> <p>In my view, California’s new law is a good first effort.</p> <p>It places the burden of compliance on the charities themselves and the handful of online platforms engaged in this work, not on the numerous individuals who start campaigns. But it remains to be seen whether the registration, reporting, disclosure and other requirements will create enough transparency and accountability to sufficiently deter fraud without over burdening legitimate charities and platforms.</p> <p>I appreciate the difficult task legislators face in striking a balance that avoids both over- and underregulation. Lawmakers do not want to overregulate charitable crowdfunding to the point that generous individuals and legitimate charities shy away from launching campaigns because of the legal burdens of doing so.</p> <p>That is, all new laws and regulations, in addition to discouraging crowdfunding fraud, ought to encourage generosity.</p> <p>At the same time, lawmakers want to regulate charitable crowdfunding enough to ensure that all or almost all funds raised go the individuals and charities that the donors intend to support. Time will tell whether California and the states that follow its example have struck the right balance.<!-- Below is The Conversation's page counter tag. Please DO NOT REMOVE. --><img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;" src="https://counter.theconversation.com/content/172029/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /><!-- End of code. If you don't see any code above, please get new code from the Advanced tab after you click the republish button. The page counter does not collect any personal data. More info: https://theconversation.com/republishing-guidelines --></p> <p><em><a rel="noopener" href="https://theconversation.com/profiles/lloyd-hitoshi-mayer-1148002" target="_blank">Lloyd Hitoshi Mayer</a>, Professor of Law, <a rel="noopener" href="https://theconversation.com/institutions/university-of-notre-dame-990" target="_blank">University of Notre Dame</a></em></p> <p><em>This article is republished from <a rel="noopener" href="https://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. Read the <a rel="noopener" href="https://theconversation.com/convenient-but-susceptible-to-fraud-why-it-makes-sense-to-regulate-charitable-crowdfunding-172029" target="_blank">original article</a>.</em></p> <p><em>Image: Getty Images</em></p>

Money & Banking

Placeholder Content Image

Crowdfunding: A worthy cause or a waste of money?

<p>When Nicole Leybourne, 23, was in Tokyo on a modelling assignment last month, she saw a dog in the window of the pet shop close to her apartment and she fell in love.</p> <p>Love does strange things to people, and so she went a bit mad. In the middle of the night, she lay awake thinking about ways to set the dog free. She spent solid time at the shop where he lived, watching and cooing at him, hurrying staff to fill up his water. One day she asked what would happen if he didn't get sold; they said you don't want to know.</p> <p>Leybourne, an Aucklander who lives in Perth with her fiance, had it all planned out: She would raise the money she needed to buy the dog ("I didn't give him a name, because I didn't want to get too attached"), take him to Perth, and when she came home to New Zealand for a month each year, he would stay with her friends.<br /> <br /> She took to the crowd funding site PledgeMe, with a picture of the sad little pooch and her appeal summed up with the heading Save This Dog's Life. She wanted $3500, she said, "to buy and take this dog on an aeroplane home with me".<br /> <br /> "Every time I walk past his eyes look so sad and he looks bored out of his mind in his small glass box," she told possible pledgers.</p> <p>It was a tall order. It's not hard to find a sad dog in the window of the town you live in, let alone asking people to help you buy one and travel internationally with it.</p> <p>In an age where more people than ever are asking for money, Leybourne was up against some intense and varied competition on the numerous fundraising and campaign sites that have emerged in the past few years: help me get to the cheerleading champs, to the synchronised swimming champs, to the body building champs, to publish my book, to study ballet, clarinet, mathematics, to get married, to visit my lover, to buy a bike, to get to a beauty pageant, help, help, help! Help the Island Bay Grade C men's team get to the nationals in Taumarunui. Help my dog get cleft palate surgery. Help the Sweet Adelines get to Las Vegas.<br /> <br /> There's no doubt such sites have helped save, change and improve lives, and some of the outcomes are real heart warmers. Givealittle is loaded with stories of sick people who have received help they wouldn't have been able to access otherwise, and Pledgeme has put muscle behind a heap of businesses with its project and equity campaigns. But what of the rest?<br /> <br /> The campaigns that are so ridiculous, their very presence seems vaguely offensive? The ones that ask for things that in my day would have had me outside The Warehouse buttering cheap bread for a sausage sizzle, or picking up an extra shift at work?<br /> <br /> A young guy meets someone he likes on an OE and now wants money to go and be with him back in Germany: "To do this I need help, flights aren't cheap and neither is surviving in a new country, but with a few months of work on my part and the help of much appreciated donations, I know that I can make it to go be with him." I have very little sympathy for this type of campaigner, but those who run the sites say I don't have to give him money – and they are right. I won't be.</p> <p>It takes very little to start up a fundraiser on PledgeMe, or Givealittle. PledgeMe rules are that applicants "can't break the law or do anything too evil", says head of communications Jackson James Wood. Both sites like to let the crowd decide if the campaign is a goody, and more often than not the crowd decides that it is.</p> <p>Wood says the success rate on PledgeMe is more than 50 per cent. Givealittle general manager Lynne Le Gros doesn't know the numbers, but "the norm for many is to over-exceed their goal". After three weeks, the guy who wants to reunite with his German lover has raised $4, so that says it all, really.<br /> <br /> When a Juliette Hogan dress I had spent months stalking online was reduced from $1200, I put a picture of it on my Facebook page and asked in jest if anyone hada spare eight-hundy to hook me up. "Start a crowd funder! I'll chuck 10 bucks at ya!" wrote a friend.<br /> <br /> I could never. Mostly because I would feel out of place next to more worthy causes than wanting an overpriced dress, and also, truth be told, I'd worry too much that my friends would think me cheap.<br /> <br /> "If you want a dress and your friends like you enough and the rewards are good enough, who are we to decide whether you getting it is a good idea?" says Wood. "It all comes down to whether you have a crowd and if you sell it well enough."<br /> <br /> If nothing else, it could be a way to test your mates. Nicole Leybourne doesn't have a Facebook page, so she was off to a bad start when she launched her ambitious save the dog campaign. She wasn't too worried that people would think she was being a goof, because she already knew she was. "That this girl has fallen in love with this dog in Japan, I think it was ridiculous," she says with a laugh. "But I think there is so much that's bad in the world, sometimes it's nice when you see something a little bit quirky."</p> <p>Christchurch high school student Rhianna Sutherland had an idea for PledgeMe that was about as quirky as you could get. The 17-year-old was sitting in her bedroom one night when she decided to do something "completely random". She looked at her cactuses and thought she wouldn't mind some more. She started a PledgeMe fundraiser called My Mini Cacti Need Friends.</p> <p>"I was just doing it for the lols," she says.</p> <p>Sutherland was inspired by Zak Brown, the guy who launched a campaign through a kick-starter site in America, asking for $10 to make potato salad. He raised more than $50,000. Sutherland's target was $7 and she made $10. Success.<br /> <br /> There's something to be said for random fundraisers, created purely for the lols. They don't have that whiff of scrounging about them. Maybe that's why the potato salad guy did so well. Ian Crouch, a writer for the<em> New Yorker</em>, says Brown's was a freak case of winning the internet lottery. While the potato salad guy was getting inundated with questions about how he was going to put the funds to good use, Crouch argued he should do whatever he wanted with it. Not every moment has to be an Oprah one.<br /> <br /> Nicole Leybourne's dog is still in the shop, as far as she knows. A friend in Japan keeps her updated with pictures of it sitting in the same sad little spot. Through PledgeMe she raised $30 of the $3500. "I was really gutted. Like, I thought maybe people would feel sorry for this dog. He would have had a nice little life," she says. "But it's not to be."</p> <p>Have you tried crowdfunding?</p> <p><em>Written by Aimie Cronin. Republished with permission of <a href="http://www.stuff.co.nz/" target="_blank"><strong><span style="text-decoration: underline;">Stuff.co.nz</span></strong></a>.</em></p>

Money & Banking