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The Law and Crowdfunding: What You Need to Know Before You Click ‘Post’

“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 as he approved the distribution of money donated in Canada’s largest ever crowdfunding campaign - a prime example of what happens when good intentions have legal repercussions no one anticipated.

On April 6, 2018 sixteen people died and thirteen more were horribly injured when their bus was hit by a semi-trailer on a Saskatchewan highway. The driver of the semi had ignored a flashing stop sign. The dead and injured were mostly players from the Humboldt Broncos, a junior hockey team.

Upon learning the news, a Humboldt resident named Sylvie Kellington began a campaign to raise funds on the crowdfunding platform, GoFundMe. The campaign was a simple one. It said: “Please help us raise money for the players and families affected. Money will go directly to help with the expenses incurred.” In twelve days, donations totalled over $15 million dollars.

And the legal complications had just begun.

The Humboldt case is only one example of the plethora of crowdfunding campaigns all of us come across every day. These campaigns raise money for any number of worthy causes: funeral expenses for a family who lost a loved one unexpectedly; medical treatment for a child suffering from a rare disease; or funds to help families who’ve lost their homes in a natural disaster.

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 the fundraiser will use a crowdfunding platform and 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.

What are the legal implications of a crowdfunding campaign?

Crowdfunding campaigns commonly emerge after a tragic event. As a result, the well-intentioned individuals who start these campaigns often haven’t considered the legal implications of what they’re doing. In Ontario, this is complicated by the fact that there is currently no legislation that deals with these types of fundraisers and sets out how they should be treated.

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:

  1. 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;
  2. that you have opened a trust account for the purpose of the appeal (if that is the case);
  3. 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
  4. 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.