An Update on The Law and Crowdfunding: What You Need to Know Before You Click ‘Post’
COVID-19. The Nova Scotia killings. Canadians are starting crowdfunding campaigns like never before. The legal implications are immense.
“It’s a rare occasion that from great tragedy comes great generosity.”
Those were the words of Justice Neil Gabrielson of the Saskatchewan Court of Queen’s Bench in 2018 as he approved the distribution of millions of dollars donated in Canada’s largest ever crowdfunding campaign to date - money raised for the players and families affected by the Humboldt bus crash.
Mr. Justice Gabrielson may have been wrong in one regard. Canadians are compassionate people, and their generosity is extraordinary in the face of suffering and senseless death. COVID-19. The horror of the mass killings in Nova Scotia. The recent rise in crowdfunding campaigns, and of the money donated, is unprecedented. Canadian figures are hard to come by, but The New York Times has reported that corona-virus campaigns in the U.S. spiked by 60 per cent over a four-day period in March alone.
All of which is more than admirable. But what has been lost in all this is the recognition of the legal implications resulting from these good intentions. The Humboldt fundraising campaign - which raised $15.2 million from more than 140,000 donors - is a prime example of the kinds of repercussions no one first involved in setting up the appeal anticipated.
The issue there was fairness and a lack of detail about how exactly the funds raised would be divided amongst the beneficiaries of the fundraiser. Should a family who had lost their child receive more, or a family whose child would need a lifetime of support due to their injuries? What of a player who was not as physically damaged, but traumatized by the event? It took a court-approved committee months to arrive at their recommendations.
And Saskatchewan, as it happens, is the only province with legislation dealing with these types of fundraisers setting out how they should be treated.
GoFundMe, one of many for-profit fundraising platforms, states on its site: "Starting is easy." That's true. But before anyone decides, in fact, to start a campaign, they need to know they will become, by doing so, a trustee - with all the responsibilities of a trustee under the law.
In the past, this kind of fundraising would have involved the passing of an envelope at the office, a door-to-door canvas in a neighbourhood, or an announcement on the local news that an in-trust account had been opened at a particular bank.
Now it is much more likely that news of the campaign will be spread through social media. As a result, the number of people responding will be much higher. This, in turn, can put the fundraiser in a position of responsibility for a sum of money beyond their expectations, without a clear plan.
Just as happened in Humboldt.
What are the legal implications of a crowdfunding campaign?
In most cases, and at its most basic level, a crowdfunding campaign will result in the creation of a trust. The person who starts the campaign is responsible for the funds donated through the crowdfunding platform. Thus, by launching the campaign, that person has become a trustee and is now laden with a number of duties and obligations that come with that role.
While a full discussion of the duties and obligations of a trustee is beyond the scope of this discussion, I’ve provided some tips for anyone thinking of starting a crowdfunding campaign that may help avoid some of the legal conundrums that can result.
What should I do if I want to start a crowdfunding campaign?
If you are thinking of setting up a crowdfunding campaign, it is important to be as specific as possible about who the funds raised are intended to benefit, what they are intended to be used for and what will happen if the funds raised are not enough or more than is needed to fulfill the purpose of the fundraiser. To this end, you should consider including the following statements in your fundraiser on the crowdfunding platform:
- a description or list of the reasons for the creation of the fundraiser on the crowdfunding platform, including particular facts and events that led to a need for the fundraiser;
- that you will hold the funds in trust for the person or people who will benefit from the fundraiser, or alternatively, if the entity that will benefit is a charity, that you will pay the funds to the charity;
- that you have opened a trust account for the purpose of the appeal (if that is the case);
- the purposes for which you will make payments from the funds donated. These purposes should be in keeping with the terms of the appeal for donations (i.e. if the fundraiser was for the benefit of a person who became disabled in an accident, a “purpose” could be to purchase a prosthetic arm for John Doe or to assist the parents of John Doe to equip their home to accommodate his special needs);
- that if the funds collected are insufficient or are no longer needed for the purpose, they will be paid to a named charity or other person/people, unless the person making the donation has stated in writing that they want the donation to be returned to them; and
- that if more funds are collected than are needed, the surplus will be paid to a named charity or other person/people, unless the person making the donation has stated in writing that they want the donation to be returned to them.
The above are just a few basic tips that may help address the legal issues that arise when a fundraiser is not well-conceived or is set up in haste.
If you will be holding the funds in trust for the person or people who will benefit from the fundraiser, you may want to consider seeking the assistance of a lawyer in drafting a declaration of trust. A declaration of trust is a document that indicates that property is being held for the benefit of another person or individuals. It may also set out several terms that govern how the property will be managed by the person holding it.
If you are planning to or have set up a fundraiser on a crowdfunding platform, it is important that you understand your obligations, and potential liability, for those funds. Taking a moment to consider the information that you should set out in describing your fundraiser before you click “Post” may save you headaches once donations start rolling in.
The Uniform Law Conference of Canada, Civil Law Section, is visiting the topic of a "Uniform Informal Public Appeals and Crowdfunding Act." The consultation paper from the working group can be found here: http://unilaw.ca/data/