The next issue of Sharpe Insights will examine the tax consequences of crowdfunding for donors, donees and charitable recipients in the article “The Future Is Here for Cryptocurrency!” A recent out-of-court settlement agreement between the state of Minnesota attorney general and an online crowdfunding organizer reminds solicitors and funders of significant non-tax risks.

A Noble Goal …

An online crowdfunding campaign was created to pay down the “lunch debts” of students in the St. Paul (MN) Public School System in honor of deceased public school food service worker Philando Castille. Mr. Castille often helped hungry school children by paying for their lunches.

Professor Pamela Fergus tasked her college students to raise funds through youcaring.com as part of an in-class service project. The original goal of $5,000 was easily surpassed. The mother of the decedent became suspicious when no accounting of the funds received was forthcoming. She filed a complaint with the Minnesota attorney general.

… Veers Off Course

Although nearly $200,000 was raised, only $80,000 could be accounted for as used for the intended purpose. In June of 2021, the Charities Division of the Minnesota Attorney General’s Office sued Professor Fergus for failure to spend all the money raised in the name of the decedent. Minnesota Attorney General Keith Ellison ultimately secured the agreement of the defendant to repay the additional $120,000 raised to the Minnesota Attorney General’s Office, which would be responsible for using the funds to retire lunch debts. The defendant did not consent to any wrongdoing in the settlement.

Lessons Learned

This dispute should also be a reminder to individuals that they could well be subject to charitable solicitation laws because of their crowdfunding campaign. Especially noteworthy was how the attorney general applied the charitable solicitation law even though neither the solicitor nor the intended recipients were charities. Minnesota law imposes on individuals duties that should not be onerous. Specifically, funds should be spent as promised with a full accounting of all funds received to anyone who requests one.

While there may well be jurisdictions where current solicitation laws do not explicitly cover crowdfunding to benefit specific individuals, individuals should consider that all it takes is a complaint submitted to the state’s attorney general to launch an investigation.

Any individual solicitor would be wise to seek legal counsel on the registration requirements of crowdfunding activities.In addition to tax and charitable solicitation rules, there are state and federal fraud laws.

Conclusion
Perhaps the mother of Mr. Castille offered the best reminder and/or warning to fundraisers:

You should put that money where it’s supposed to go. These things are not for your personal gain. It’s not right.

 By Professor Christopher P. Woehrle, JD, LLM