Crowdfunding – new way to fund raise for charitable causes

By Andrew Zashin*

Crowdfunding, at its simplest, is the funding of some cause or venture via a large number of small contributions. That is, the concept is to raise money by calling upon a large number of people to each make a small contribution.

Clearly, this is not a new concept. After all, the humble idea of “taking up a collection” for something has been around for millennia. But the internet and social media have revolutionized the concept and given it a catchy name.

The concept is being used to fund the development of new products and ventures (think Kickstarter or Indigogo). But it is also being put to use in the area of charitable giving. Websites like GoFundMe, which is arguably the most successful and best known (to such extent that the phrase “I/he/she/they started a GoFundMe” has entered the common vernacular), allow anyone with an internet connection to set up a fundraiser for any cause of their choosing.

Most typically, such a crowdfund request will point to a specific individual or group of individuals, for example, a classroom looking for supplies, a family whose primary breadwinner has been diagnosed with a terminal illness, or the victims of an unexpected disaster. Requests run the gamut, with some seeking only a few hundred dollars and some raking in multiple millions of dollars.

For recipients, this type of fundraising is quick, easy, and often quite effective. The organizer of the fundraiser need only create a page on the crowdfunding site, and share the link with family and friends via social media. If the cause is compelling, ideally it will then be passed on to more and more potential donors, and hopefully attract a large response.

Typically, the hosting site will charge a flat fee per transaction, or take a small percentage of what is donated. The page creator can set up some rules as to who can access the funds. And, so long as the donations do not involve the sale of goods and services, they typically will not be taxable.

For the donor, though, no matter how “charitable” the cause, the contribution will probably not qualify as a tax-deductible charitable donation; donations are usually only deductible when made to qualified organizations that are intended to benefit a broader swath of the population, rather than the typical crowdfunding campaign that is intended to benefit one or a few named individuals. Further, it may be subject to gift tax rules if it exceeds the annual limit ($15,000 for the 2018 tax year).

“Philanthropy” and “charity” are not quite synonymous, and the rise of charitable crowdfunding makes some traditional philanthropic organizations uneasy. Crowdfunded campaigns are generally started in order to address an immediate concern. They neither have, nor require, a longer term vision.

For example, say a homeless person finds a bag full of cash deposits that a small business owner dropped on the way to the bank. Instead of keeping the money, he works to find the rightful owner and returns it. The business owner, grateful for the return of the cash, is compelled to repay this good deed by setting up a crowdfunding campaign for the benefit of the good Samaritan. This is great news for that individual.

But it does absolutely nothing to help the wider systemic problem of homelessness in the city. A concern is that while this one-off type of fundraising “feels good” and is very popular with the individual donor, it allocates donations in a way that accomplishes less overall good than could be accomplished with the type of longer term, sustainable plan that a philanthropic organization or other established charitable organization is likely to have.

But, ultimately, crowdfunding appears to be here to stay. The platforms for giving are changing as fast as technology advances. And, the options available to potential donors are much wider than ever before. And, ultimately, it is difficult to characterize more choice in charitable giving as anything other than a good thing.

This article originally appeared as a column for the Cleveland Jewish News.