Regulating Charitable Crowdfunding

70 Pages Posted: 4 Sep 2020 Last revised: 24 Mar 2021

Date Written: September 4, 2020

Abstract

Charitable crowdfunding is a global and rapidly growing new method for raising money to benefit charities and individuals in need. While mass fundraising has existed for hundreds of years, crowdfunding is distinguishable from those earlier efforts because of its low cost, speed of implementation, and broad reach. Reflecting these advantages, it now accounts annually for billions
of dollars raised from tens of millions of donors through hundreds of Internet platforms, including Charidy, Facebook, GoFundMe, and GlobalGiving. Although most charitable crowdfunding campaigns raise only modest amounts, on occasion a campaign attracts tens of millions of dollars
in donations. However, charitable crowdfunding also has its downsides. Donors may misunderstand how the beneficiaries will use the funds raised or a campaign that unexpectedly goes viral may overwhelm a small charity or greatly exceed an individual’s needs. There have also been instances of outright fraud, as well as concerns raised about money laundering and terrorist financing.

Existing laws relating to charitable solicitations and charities more generally have either uncertain or limited application to charitable crowdfunding. Broader fraud and money laundering laws may apply to the worst abuses, but government officials rarely invoke these usually criminal
statutes. The challenge faced by regulators is therefore whether and how to modify existing laws to address the downsides of this new activity without unduly inhibiting the generosity that charitable crowdfunding encourages. This challenge is made more difficult by the lack of information regarding both the positive effects and downsides of crowdfunding. Finally, existing scholarship relating to charitable crowdfunding focuses on either the motivations of donors or tax implications instead of addressing this regulatory issue, even as governments are developing proposals to address this activity.

This Article reviews the existing, incomplete information regarding charitable crowdfunding and theories for regulating in the face of uncertainty to develop recommendations for addressing this new and growing phenomenon. Given we know very little about the positive and negative effects of charitable crowdfunding, and given that any harms are likely modest, primarily financial, and often readily cured, I recommend that regulators should at this time only take two modest steps. First, they should require notification of designated beneficiaries to help ensure funds raised reach those beneficiaries. Second, they should require notification of regulators, but only for the small subset of campaigns that cross a relatively high threshold, to provide information about the scale and growth of charitable crowdfunding and help resolve any problems that arise with the largest campaigns. I therefore disagree with initial steps taken by some regulators to impose more comprehensive consent and administration requirements on many or all charitable crowdfunding campaigns because such requirements are unnecessary hindrances on this new and innovative way of encouraging generosity, given there is little evidence of widespread problems and any potential harm is almost certainly relatively small and easily remedied if it occurs.

Keywords: charity, solicitation, fundraising, crowdfunding, consumer protection

JEL Classification: K29 L31

Suggested Citation

Mayer, Lloyd Hitoshi, Regulating Charitable Crowdfunding (September 4, 2020). Indiana Law Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3686612

Lloyd Hitoshi Mayer (Contact Author)

Notre Dame Law School ( email )

P.O. Box 780
Notre Dame, IN 46556-0780
United States
574-631-8057 (Phone)
574-631-4197 (Fax)

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