What You Should Know About Crowdfunding as Facebook Readies the Feature

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Facebook soon will launch its own personal crowdfunding platform, which, like GoFundMe and other websites, will let individuals publicly ask for financial help, for their own benefit or someone else's.

The social media giant's foray into personal fundraising could make it a big player in a crowded field that attracts billions of dollars annually. A 2015 survey by the Pew Research Center found that one in five Americans has donated to a crowdfunding campaign, with about half giving from $11 to $50. 

A big reason this kind of crowdfunding has become so popular is that it makes it easy to directly assist individuals facing difficult—or joyous—life events, or trying to put money together for a good cause.

For instance, on GoFundMe, the largest personal fundraising site, a Florida woman was recently seeking $50,000 for stem cell therapy for her young son, who she said had suffered a brain injury. A community in Washington state used crowdfunding to drum up more than $100,000 to save their beloved independently owned movie theater. Others have used crowdfunding to raise money for their weddings or to help pay their student debt.

Clearly, crowdfunding can make a huge difference in people’s lives. But is this kind of giving an effective way to spend your charitable dollars? Is it safe? How do you know you’re not funding a fraud? Before you give money to a crowdfunding campaign, it pays to understand the possible drawbacks and know how to avoid them. 

Giving Through Crowdfunding

One concern is that it can be difficult to know whether a crowdfunding campaign is legitimate. Indeed, there have been instances of what Daniel Borochoff, head of the charity watchdog group CharityWatch, terms crowd-thieving: people taking advantage of others’ good will. In one case, an Iowa woman was placed on probation after she pleaded guilty to misrepresenting that her daughter had cancer in a crowdfunding campaign. 

Although some crowdfunding websites say they check out the campaign organizers, the fine print says you’re essentially giving at your own risk.

But just because there are some bad actors doesn’t mean all players are bad. In fact, the number of cases of fraud on crowdfunding sites seems to be “remarkably small,” says Devin Thorpe, author of "Crowdfunding for Social Good."

And there certainly have been instances of scam charities as well. But nonprofits have much more oversight, making them relatively easy to check out. Charities typically have to be registered with the states in which they raise money, and they usually must prepare documents showing how they spend their contributions, including independent audit reports and publicly accessible tax returns. In addition, many national nonprofits, as well as some local ones, are evaluated by charity watchdogs, the BBB Wise Giving Alliance, Charity Navigator, and CharityWatch.

Another possible drawback to crowdfunding: Unless you’re giving to an actual charity, which you can do on some crowdfunding sites, your gift probably isn’t tax-deductible, says Bennett Weiner, who heads the BBB Wise Giving Alliance. That’s because the Internal Revenue Service generally doesn’t allow deductions for gifts to individuals.

Crowdfunding sites typically take a portion of the donations. Facebook says it intends to charge a fee equal to 6.9 percent of the contribution, plus 30 cents per donation. It says the money will be used for payment processing, fundraiser vetting, security, and fraud protection. It says its goal is to “create a platform for good that’s sustainable over the long-term, and not to make a profit.”

YouCaring, GiveForward, and GoFundMe charge a processing fee equal to 2.9 percent of the donation plus 30 cents. GoFundMe also charges an additional 5 percent platform fee. So if 150 people contribute $20 each to a GoFundMe campaign, the website would siphon off $282 of the $3,000 donated, or more than 9 percent. (Nonprofit charities also typically use some donation dollars to cover fundraising.)

Another major issue, Thorpe says, is that crowdfunding campaigns sometimes take in far more than their stated goal. One GoFundMe campaign seeking $25,000 for a new car and auto insurance for a 56-year-old Michigan man raised more than $350,000. Even if a campaign says it will donate any excess to charity, there’s no guarantee that it will, Thorpe says.

Some worry that crowdfunding may divert contributions that would otherwise go to charities that help many people or entire causes, not just individuals.

“I think it can steer philanthropy in the wrong direction,” Borochoff says. “What about the 70 million people in near starvation in Africa? Maybe the best way of helping is to build a road, build a school, build a sewer.”

What to Do

Here's what you should do if you're thinking of giving to a crowdfunding campaign:

Consider giving to people you personally know. Contributing to campaigns to help your family or friends increases the chances that your money will be used for its intended purpose, Weiner says.

If you do give to a stranger, don't be the first one to do so. The people who initially give to a campaign often are relatives or friends of the person who stands to benefit, Thorpe says. They, in effect, validate the legitimacy of the campaign for everyone else. If you don't know the person and there are few or no donations, give elsewhere, he says.

Avoid overfunding. If a campaign has reached its goal, assume it doesn't need more and give elsewhere, he says.

Read comments. Crowdfunding platforms often allow people to make comments on the campaign. Find out what others are saying, Weiner says.

Give directly. Even if someone is using a crowdfunding platform you can bypass it and give directly by check or another method of payment, especially if you know the person collecting the money. Giving directly prevents the crowdfunding platform from siphoning off part of your donation, Borochoff says.

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