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Why don’t crowdfunders have to register to solicit?

Your Legal Questions Answered

Why don’t crowdfunders have to register to solicit?

Every day, common-people (nonprofits as well) post projects on crowdfunding websites like Kickstarter and Indiegogo to fund various ventures like creating a music album, or producing a movie, things like that. Many of these are aimed at making a profit from money contributed to their campaign, since people often raise funds for their time and compensation involved in the project.

How come an individual who raises funds on these sites does not have to register with any states as a for-profit fundraiser or something similar? When I read the blurb on your site about for-profit fundraisers having to register and file their contracts with the state, it made me wonder how people who crowdfund are seemingly exempt from registering or complying with state laws.

Just because the crowdfunders don’t seem to register doesn’t mean that they are not supposed to.  But you have to differentiate among the types of requests being made on these websites.

Charitable solicitation registration is required when an individual or an organization seeks to raise funds for a charitable purpose or with a “charitable appeal.”  Individuals asking for funds to create a music album of their own music, or producing their own movie for sale don’t seem to be invoking a charitable appeal because there is nothing charitable about their work.  (They might have to worry about securities regulation, but most of their supporters get a free album or a ticket to the film, not an investment interest in the business.)

If a charitable organization were to ask for funds to make an educational film, or if an individual sought money to take underprivileged kids to the circus, those would be charitable appeals.  Individuals (even if not organized as charities) or organizations asking for contributions for charitable activities or with a charitable appeal would normally have register to solicit in the 39 states and the District of Columbia that have charitable registration statutes unless specifically excluded or exempted from registration.  They would have to register as charitable organizations because they are soliciting for themselves, and not as professional solicitors who ask for others.

But the charitable solicitation statutes were generally written in the 1960s for direct mail and door-to-door solicitations.  They have not kept up with changes in technology, and the regulators have a great deal of difficulty dealing with this kind of solicitation.  The state attorneys general agreed in the “Charleston principles” many years ago not to recommend prosecution for charities that have a “passive” website that can accept contributions if the charities don’t actively drive people to the site or actively solicit in the state.  They might apply that recommendation to the first gift obtained from within a state on a crowdfunding site.  But once the recipient says thank you and asks for more, that would be a new solicitation subject to registration.

The fact that those who are soliciting on a crowdfunding site don’t seem to register doesn’t mean that they don’t have to.  It may just mean they haven’t been caught.

Tuesday, October 14, 2014

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