crowdfunding

As hospital and healthcare staff fronted up to care for the first wave of COVID-19 patients, Sydney’s Kaylie Smith had one thing on her mind — keeping them caffeinated. Her Buy Them a Coffee crowdfunding campaign was one of many initiatives, such as Feed the Frontline and Masks for Medics, set up by members of the public who wanted to contribute to their communities.

Crowdfunding, thanks to the power of social media, allows anyone to raise money for pretty much anything, anytime, anywhere. Even the World Health Organization launched its first appeal for public and private donors, the COVID-19 Solidarity Response Fund, managed by the United Nations Foundation and the Swiss Philanthropy Foundation. The fund raised US$71m from 170,000 individuals and organisations in 10 days following its 13 March launch, according to medical journal The Lancet.

Australians have not cut back on charity crowdfunding so far due to the crisis, but there are new trends in the campaigns, says GoFundMe regional manager Nicola Britton. Since 1 March, one-third of all fundraising on the crowdfunding platform has related to COVID-19. “We’ve seen a lot of creativity with the ways people are fundraising on GoFundMe for charities during COVID-19. There are a lot of challenges ranging from running a kilometre per donation to shaving their heads or donating their birthdays... or running 1000km in a month.”

According to GoFundMe data, last year Australians were the third most generous country globally, behind Ireland and the US, says Britton.

GoFundMe, which eliminated platform fees in 2018, is the country’s biggest platform for charity crowdfunding, raising $38m for the bushfires over two months, across 7500 campaigns. Last year, GoFundMe processed one million donations.

Many different campaigns on GoFundMe have raised COVID-19-related funds. These include Queensland’s Performing Arts Professionals Crisis Fund ($78,680), the Undocumented Migrants COVID-19 Fund ($63,843), Buy Them A Coffee ($100,000) and the Victorian-based Alex Makes Meals ($73,070).

How to crowdfund

  1. Donation Contributors make payments to a project or venture without receiving anything in return. Donations are tax-deductible if made to organisations with Deductible Gift Recipients (DGR) status. Clifton Street Children's Centre raised $12,360 for health and safety playground improvements and repairs during COVID-19 on mycause.com.au
  2. Reward Contributors get merchandise/discount/other reward. Requires budgeting and planning for costs to mitigate risk that rewards may cost more than monies received. Amounts received count as assessable income if running a business. Flow Hive has so far raised $21.5m from backers by offering tiered rewards on indiegogo.com
  3. Equity Contributors get a share/equity interest in the business. Under Australian legislation, retail investors can invest up to $10,000. Seabin Project raised $1.82m via birchal.com
  4. Debt Contributor lends money to the promoter/pool of promoters who agree to pay interest and repay principal on the loan. Lenders must obtain an Australian Financial Services licence and an Australian Credit Licence. Peer-to-peer lender SocietyOne claims to have matched borrowers to investors to facilitate more than $600m in loans.

Niche communities are also starting campaigns. “More charities are realising the benefits for rapid response raising,” says Britton. “They’re using the platform themselves as well as benefiting from campaigns launched on their behalf. So they’re reaching a lot of new donors they wouldn’t usually be able to tap into. We’re seeing donations come from close-knit communities and networks.”

Migrant communities in Australia, such as Brazilians, Nepalese and Italians, have used crowdfunding to raise funds during both the bushfires and the pandemic.

Jill Storey, CEO of ReadyFundGo, says the practice has grown at a “phenomenal rate” over the past decade, helping fund everything from medical innovations to climate change initiatives, animal rescue and drought relief. Sites such as GoFundMe, Chuffed.org, Kickstarter, Mightycause and Kiva have burgeoned. Crowdfunding has also enabled many entrepreneurs to get businesses off the ground. “It enables startups to test their minimum viable product, build early adopters, get early feedback and fund their initial production,” says Storey.

Research by Valuates Reports suggests that the global crowdfunding market was valued at $10.2b in 2018 and is expected to reach $28.8b by 2025.

There are four main different forms of crowdfunding, all tweaked to fill a gap in the market and fulfil a particular purpose (see breakout). Yet new players should beware of the pitfalls.

Jessica Bowman, founder and CEO of The Good Cause Co, says risks associated with crowdfunding were potentially present in any fundraising activity. “Fundraising itself in Australia faces many challenges, one of which is extremely complicated and outdated fundraising laws,” she explains. “There are different laws in each state and different layers of regulation — state and national.”

Importantly, she says, the laws don’t account for modern forms of fundraising such as crowdfunding, but still focus on door-to-door fundraising, raffles or lotteries. But Bowman does not support tighter regulation. “The harder it is for people to engage in fundraising, the less they will do it — and this will represent a huge loss to our society.

Questions for charities

For NFPs, charities, individuals and businesses, crowdfunding has provided an easy and increasingly popular method of online fundraising. With more people at home with more time on their hands, the barrage of requests is expected to increase. However, problems can emerge when public passion and a governance model based on trust and transparency clashes with the complex rules governing traditional charitable donations.

Why campaigns fail

ReadyFundGo says the reasons crowdfunding campaigns fail are:

  1. Premature launch Campaign creators fail to build support among backer community in advance. Engage “day one” supporters before you launch.
  2. There is no team Campaigns run by teams are more successful. Ensure a mix of skills/reach to boost the size of your crowd.
  3. There is no video Keep it short. Fifty per cent of audiences switch off after 60 seconds.
  4. Goal is too high People want to back successful projects. Keep your campaign goal as low as possible.
  5. Insufficient reward People want to get a great deal. Create a special deal even if you reduce the number of special deals you offer.

Resources

Tax No special tax rules apply. If used to meet business expenses, funds must be declared as assessable income.

Scams The ACCC warns against donating via platforms that do not verify the legitimacy of the fundraiser Check T&Cs and the ACNC national charities register.

A high-profile example of this was the Facebook Fundraiser campaign set up in January by Australian comedian Celeste Barber to benefit the NSW Rural Fire Service (RFS). Her intention was to raise $30,000 for firefighters and bushfire victims. However, after receiving $51.2m in donations, it emerged that the RFS, bound by its own trust deed, could only spend the money on equipment, facilities, training, resources and administration. On 24 May, the NSW Supreme Court ruled that the money raised cannot be given to other charities or fire services, but can be used to set up a fund for RFS firefighters who are injured or killed.

Too much money (or too many donated items) rolling in poses risks for other fundraising initiatives, as well. Moved by media images of injured native animals against a backdrop of flames, donors all over the world sent $60m flowing into the coffers of Australia’s largest wildlife rescue organisation, WIRES, over two weeks in January. By February, WIRES was copping criticism for distributing only $7m of those funds.

According to Dr Gary Johns, commissioner of the Australian Charities and Not-for-profits Commission (ACNC), the incident highlighted how donor expectations could clash with operational realities, such as the need to ensure new workers were appropriately trained. He says the organisation got many things right. “They set up a separate fund immediately and got another board, to look at the management of funds. But they still faced the practicalities of ensuring anyone operating in their name to save animals would have to be accredited.”

Two years ago, several drought relief charities found themselves forced to defend their spending after observers noted money flowing in, but not out again. The ACNC, which has developed a set of guidelines to help charities navigate the crowdfunding space, stepped in. Johns says one of those cases involved two individuals who were well-intentioned but “overwhelmed”. Being in receipt of a sudden, substantial influx of funds meant charities inevitably faced pressure to make quick decisions. Johns recommends they resist this, taking time to develop contacts on the ground, hire new staff, conduct proper assessments of need, and develop systems for determining distribution. “You might have to cop a bit of pressure and heat over the immediacy of getting things out, but it’s better to get it right than throw money out the door,” he says.

Becoming more transparent

Prashan Paramanathan, CEO and founder of Chuffed.org, says this highlights the limitations of the centralised “big charity” approach, particularly in relation to disaster relief. “Community organisations don’t need the same structure that a massive charity with no relationships in that community needs,” he says. “They don’t need to employ staff to check whether people are legitimate recipients of the money — they can just walk around people’s houses and see they’ve been burnt down.”

Paramanathan says monies raised during targeted campaigns were more likely to reach intended recipients because of the accountability and transparency inherent in crowdfunding. “[If you don’t follow through] people will comment on your campaign and Facebook page that you didn’t do what you said you were going to do, so it becomes a much more public issue to deal with.”

Chuffed stepped in recently when administrative confusion on another platform grounded one campaign. The Ewingar Rising Bushfire Recovery Fund raised more than $14,000 via Facebook Fundraiser — until a technical glitch abruptly cancelled the campaign and returned all funds to donors. Under media pressure, Facebook has since reversed the action, and Chuffed helped the group raise close to $16,000 more. The incident highlighted the lack of clear pathways by which individuals and organisations can resolve social media grievances.

A host of other considerations are involved in running a Facebook Fundraiser campaign. Paramanathan says charities previously kept tight control of their own community fundraising where other people raised money for them, such as World Vision’s 40 Hour Famine. But Facebook Fundraiser now allows individuals to set up their own campaign in the name of a nominated charity, removing the charity’s control over what’s done in its name. Charities also lose access to crucial data because they don’t get a donor list if they don’t use a proper crowdfunding platform.

Seabin Project

As global share markets melted down in response to the COVID-19 crisis, a Byron Bay environmental technology startup quietly closed its equity crowdfunding campaign, after raising $1.82m.

Equity crowdfunding lets companies raise money from retail investors for a fraction of what it would cost a public company raising money under a prospectus.

The Corporations Amendment (Crowd-sourced Funding) Act 2017 regime allows unlisted public companies and proprietary companies with less than $25m in consolidated assets and annual revenue to make share offers to retail investors, through a licensed intermediary platform. Eligible companies can raise up to $5m per year.

“The odds were against us because of the timing of the offer, so it was like pulling 50 rabbits out of a hat,” says Pete Ceglinski, CEO and co-founder of the Seabin Project.

Seabin aims to tackle the ocean pollution through manufacturing and distributing floating rubbish bins. When installed in waters near marinas, yacht clubs, ports and docks, these “trash skimmers” use a water pump to collect floating rubbish.

Keen to expand the concept further, Ceglinski originally approached venture capitalists and business angels, who turned him down. So it was heartening to see investors tipping in to purchase a stake in the company, which has installed seabins in 52 different countries. “We realised our business model is unintentionally community-driven,” says Ceglinski. “The feedback we were getting, particularly from first-time investors, was that they wanted to be part of a bigger solution.”

As Seabin has grown, it has gone through different iterations of crowdfunding. When it started five years ago, it built its prototype with the help of $362,000 raised through a reward-based Indiegogo crowdfunding campaign. Backers received hats, stickers and T-shirts. Seabin’s latest campaign used the Birchal Equity Crowdfunding platform.

Legislative changes in 2018 extended the CSF regime to proprietary companies. Since then, Birchal has raised $23m across 36 projects, says co-founder Matt Vitale. “The game changer is that we’re able to advertise these offers on social media,” he says. But equity crowdfunding is not without its challenges. For investors, the risks include sinking cash into a dud product or a fraud. The Australian Competition and Consumer Commission recently warned of several coronavirus-related investment scams. But the worst can be avoided through a combination of due diligence and restraint. “We capped the minimum buy-in at $250 because this was affordable and low-risk,” says Ceglinski.

Jill Storey, CEO of ReadyFundGo, says other risks include high failure rates in the startup sector and low liquidity — even if the business succeeds, it might prove difficult to sell the shares.

For companies, there are governance challenges associated with managing a large rollcall of small shareholders and meeting increased recording and reporting requirements including the production of an annual report. “It’s about optimising our business operations while keeping the back end in order,” says Ceglinski. “The more shareholders we have, the bigger the voice for lobbying decision-makers.”