From exciting new products and services to financial help for individuals and families in need, crowdfunding claims to be a fast and easy means for backing the people, things, and causes you most want to support. But there is a dark side of crowdfunding, a side that doesn't get talked about but is nonetheless important. When you put down your hard-earned money to help a person or a business, you're doing a kind and generous thing. Unfortunately, the objectives of others may not be as well-intentioned, and a lack of cohesive crowdfunding rules and hidden downsides to the practice can combine to make this a less-than-ideal option. In recent years, crowdfunding has skyrocketed in popularity, demonstrating the good hearts and good intentions of so many. But the system needs improvement; indeed, the downside of crowdfunding should be enough to give anyone pause. Below, let's explore the negative aspects of crowdfunding sites and how they often don't deliver on the promises they make.
Sometimes Crowdfunders Don't Get To Hear The Whole Story
Crowdfunding allows any person, situation, or idea to be presented in whatever way the campaign organizer wants to present them. In other words, funders are sometimes being denied the full story. In December of 2017, a boy named Keaton Jones went viral after his mother filmed him in tears as he tried to understand why he was being bullied. It tugged on the heartstrings of millions, including celebrities, and a GoFundMe was set up for Keaton which eventually raised more than $56,000.
But after the initial onslaught of publicity and donations, disturbing details started to emerge. Keaton's mother had previously posted images on social media of her family members proudly displaying the confederate flag, and her corresponding comments were thinly-veiled racist attacks on those opposed to the confederate flag (she later denied this).
Shortly thereafter, there were suggestions that Keaton himself was actually doing the bullying and that he used racial epithets in his interactions with classmates. Then it was discovered that Keaton's biological father, from whom he is estranged, is a white supremacist currently in jail. The moral of this lesson? Crowdfunding is a quick way to generate a lot of money, but that convenience and speed--and the speed with which news travels in the internet age--can prevent us from getting a full picture of the people and causes were supporting.
The Money Promised Is Not Always The Money Received
When you donate money to a crowdfunding campaign, you assume the target of the campaign will receive all funds in full. Unfortunately, the money crowdfunding promises is not always the money recipients eventually receive. Crowdfunding sites are taking a substantial chunk of the money that's intended to go to recipients. Different sites take different percentages of a campaign's total funds, and the amount is sometimes even higher if the funding goal was not met. Which, in essence, is saying, "You made less money? Well then, we'll take more of it!" There are processing fees involved as well, also a percentage of the total raised. In the end, far less than you really think is going to those you want to support.
There Aren't Consequences For Campaigns That Mislead Backers
Tow truck removes BMW from the Bordentown, NJ property of Katie McClure & Mark D’Amico, where @BurlcoPros is serving a search warrant. The couple is being investigated over funds missing from a $400,000 GoFundMe account they started for homeless veteran Johnny Bobbitt @CBSPhilly pic.twitter.com/cxPcFBrw9P— Trang Do (@TrangDoCBS3) September 6, 2018
Crowdfunding sites abound, and prospective campaigners have a lot of comparison shopping to do. This can be a challenge considering there are few, if any, across-the-board rules or standards for crowdfunding. One of the most glaring issues is the lack of any real consequences for campaigns that mislead backers, either purposefully or unintentionally.
In September 2018, authorities investigated New Jersey couple Mark D'Amico and Katelyn McClure who raised $400,000 for a homeless man who helped McClure when her gasless car was stranded back in 2017. The recipient, Johnny Bobbitt, sued the couple, claiming he did not get all the promised funds. In court, Bobbitt's lawyer said he only received $75,000, a camper, and a 1999 Ford Ranger. The two denied any misconduct concerning the funds.
The federal government has tried to crack down on this problem, but the absence of any universal standards remains. And without rules in place, there is nothing preventing others from pulling the exact same stunts.
There Can Be Unexpected Audits From The IRS
Is a donation received on a crowdfunding site considered a gift or earned income on the part of the recipient? This is the dilemma in which many crowdfunders find themselves come tax-paying time. A fund must be set up in a specific way if the recipient is to accept the money as a gift or donation, neither of which will really generate any red-flags for the IRS. But if a funding page is not set up in just the right way, or the recipient claims the money as income on a tax return, warning bells start going off at the IRS. The agency could start looking closely at the sudden spike in income, which in turn leads to an audit. So, in the end, crowdfunding could be adding a lot more stress and pressure onto the shoulders of people who are already facing significant hardship.