Crowdfunding Challenges

The Minnesota Attorney General‘s office recently reached an agreement with an organizer of a crowdfunding effort based on some of the civil unrest in the Twin Cities. An online fundraiser was built with the intent of paying down student lunch debts. But you might guess what happened.

Crowdfunding has grown exponentially over the past several years. According to some statistical analysis, more than $17 billion is generated annually through crowdfunding efforts. It grew by more than a third during the past year. The issue isn’t people’s general hope to help others or even most individuals who start a crowdfunding effort, but that does not negate the fact that there are very few rules regarding these efforts. The IRS and state governments are finally beginning to catch up.

What happens if you live in one state, the recipient of the crowdfunding effort that you started lives in a second state and the money is going to be used, specifically as advertised, and a third state. Do you have to follow all three states’ rules? And how does the IRS view this?

Unfortunately, in this case in Minnesota, of the nearly $120,000 that was raised, most of it was taken and used for personal purposes by the original starter of the fund. Had it not got so much media attention, in the beginning, no one may have ever known. This is the hole of crowdfunding. The IRS is pushing for organizations that do crowdfunding to file a 1099K and some states are requiring crowd funders to register. But like with most things, government oversight and regulation are behind the curve. And sometimes that creates a really bad outcome that hurts the whole industry of nonprofit work.