Sat Dec 18

Why it makes sense to regulate charitable crowdfunding

Written by: Lloyd Hitoshi Mayer, Professor of Law, University of Notre Dame

Within 24 hours of devastating tornadoes striking six states ^[1] in December 2021, Kentucky Gov. Andy Beshear launched the Team Western Kentucky Tornado Relief Fund ^[2]. That the leader of the state this disaster hit hardest would immediately tap into crowdfunded charity ^[3] – raising money from the public directly – to complement relief dollars from official sources should come as no surprise.

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 Hurricane Harvey ^[4]. Following a series of Australian wildfires, entertainer Celeste Barber made a public appeal that eventually raised more than AU$50 million for the New South Wales Rural Fire Service & Brigades Donation Fund ^[5]. And to date, the CDC Foundation has raised more than $51 million to support its “Crush COVID ^[6]” campaign.

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 potential for scams ^[7].

As a law professor who studies the regulation of charities ^[8], 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.

Sometimes it turns out to be crowd-frauding

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 “Paying it Forward ^[9]” campaign raised more than $400,000 to help the veteran.

Heartwarming, right? Trouble is, it was a lie. All three of the people involved in this trickery eventually pleaded guilty to federal charges ^[10] of “theft by deception ^[11].”

Fraudulent crowdfunding can also prey on political sentiments rather than just exploiting sympathy.

In 2020, federal prosecutors charged ^[12] former senior Trump adviser Steve Bannon and three others with defrauding thousands of donors to a crowdfunding campaign for building portions of a wall ^[13] 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.

Although then-President Donald J. Trump pardoned Bannon ^[14] in advance of any trial, the former White House aide still faces possible state charges ^[15].

Former White House aide Steve Bannon surrounded by photographers

Steve Bannon was pardoned by former President Donald Trump, for whom he previously served as an aide, in 2021. AP Photo/Craig Ruttle ^[16]

Reasons for vulnerability

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 $3 billion for charities ^[17], according the company.

And crowdfunding efforts can help people without technically counting as tax-deductible charity ^[18]. GoFundMe ^[19], 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.

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.

In the wake of a highly publicized disaster, when many people are looking for a quick way to help ^[20], everyone – even governors – will want to move fast. Opportunities for fraud are perhaps at their peak.

Compounding this problem: Laws governing charitable fundraising do not clearly apply to campaign organizers and crowdfunding platforms. As I detail in an article soon to be published in the Indiana Law Journal ^[21], 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.

California takes aim

So far, there’s no regulation taking shape to address these issues at the federal level.

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 take effect until Jan. 1, 2023 ^[22], requires both charities raising funds online and platforms hosting campaigns for specific charities to register and file regular reports with the state’s Registry of Charitable Trusts ^[23].

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.

In my view, California’s new law is a good first effort.

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.

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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.

That is, all new laws and regulations, in addition to discouraging crowdfunding fraud, ought to encourage generosity.

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.