60ºF

Be careful about donating through crowdfunding

Sometimes it's better to give to a traditional charity

The recent news story about a New Jersey couple who allegedly colluded with a homeless man to run a GoFundMe scam is an important reminder of the need to be cautious with crowdfunding requests.

Online crowdfunding platforms allow virtually anyone to set up their own personal fundraising initiative to benefit themselves or others. Although the instances of outright fraud are "remarkably small," according to Devin Thorpe, author of Crowdfunding for Social Good, they can still happen.

A crowdfunding campaign might say money is needed to pay medical bills or college or funeral expenses. Or it could say it will be used to help a family cope with a job layoff or recover from domestic violence. It might go to flooding or fire victims or to assist someone starting a business. It may pay for a person's vacation, a new car, or bachelor party.

A 2016 survey by the Pew Research Center found that one in five respondents have donated to a crowdfunding campaign, with about half giving from $11 to $50. Among those who have contributed, 63 percent say they have given to help a friend of a friend or an acquaintance.

During the holiday season, people are more tempted than usual to open their wallets. But be wary about giving to crowdfunding campaigns, especially if you do not know the person asking for cash. Also think about whether it's better to give money to a traditional charity, where your dollars could go further and help more people.

Giving Through Crowdfunding

Crowdfunding platforms make personal fundraising easy. You set up a campaign using a site's online tools and then promote it through Facebook or other social media. Donations can be made online using a credit card, or, in some cases, a debit card or Paypal account.  

A big reason crowdfunding has become so popular is that people can assist others directly, says Thorpe. "If my neighbor gets cancer, I can start a GoFundMe page," he says. "People love being able to give directly."

That's typically not the case with charities, which pool their contributions to assist many different people or fund efforts like disease research.

But crowdfunding has its drawbacks. For instance, gifts to individuals usually are not tax-deductible, says Bennett Weiner, who heads the charity watchdog BBB Wise Giving Alliance.  

And crowdfunding websites typically take a portion of the donations.

GoFundMe, the largest personal fundraising site, charges a processing fee equal to 2.9 percent of the total amount raised, plus 30 cents of each individual donation. So if 150 people contribute $20 each, the website would collect $132 of the $3,000 donated, or more than 4 percent.

Facebook charges 2.6 percent processing fee, plus 30 cents of each individual donation, for crowdfunding by individuals. It doesn't charge a fee for fundraising by recognized charitable organizations.

Is It a Scam?

It's often difficult to know whether a crowdfunding campaign is legitimate. Although Thorpe says bogus campaigns are unusual, there have been other reported cases of what Daniel Borochoff, head of the charity watchdog Charity Watch, terms crowd-thieving.

While some crowdfunding websites say they check out campaign organizers, the fine print says you're essentially giving at your own risk. Even if a site has a money-back guarantee, like you'll find at GoFundMe, there must be strong evidence of a crime, that donors were misled, or that money being raised on behalf of someone else was never delivered, says Borochoff.

While there are scam charities as well, nonprofits have plenty of oversight, making them relatively easy to check out.

Charities typically have to be registered with the states in which they raise money, and they must prepare documents showing how they spend their contributions, including independent audit reports and publicly accessible tax returns.

And many national nonprofits, as well as some local ones, are evaluated by charity watchdogs, the BBB Wise Giving Alliance, Charity Navigator, and Charity Watch.

Another major issue, says Thorpe, is that campaigns sometimes take in far more than their stated goal. Even if a campaign says it will donate any excess to charity, there's no guarantee they will, he says.

Some worry that crowdfunding is diverting contributions that otherwise would go to charities that help many people or entire causes, not just individuals.

"I think it can steer philanthropy in the wrong direction," says Borochoff. "What about the 70 million people in near starvation in Africa? Maybe the best way of helping is to build a road, build a school, build a sewer."

Weiner agrees that giving to individuals isn't always best.

"Would you rather give $50 to a homeless person on the street or do you want to give it to a shelter?" he asks.

What to Do

Here's what you should know if you're thinking of giving to a crowdfunding campaign.

Consider giving to people you know. Contributing to campaigns to help your family or friends increases the chances your money will be used for its intended purpose, says Borochoff.

Don't be the first to give. The people who initially give to a campaign often are relatives or friends of the person who stands to benefit, says Thorpe. They, in effect, validate the legitimacy of the campaign for everyone else. If you don't know the person and there are few or no donations, give elsewhere, he says.

Consider giving to campaigns run by third parties. Campaigns that are established on someone else's behalf instead of by the individual who will benefit have an extra layer of oversight, says Thorpe.

Avoid over-funding. If a campaign has reached its goal, assume it doesn't need more and give elsewhere, he says.

Read comments. Crowdfunding platforms often allow people to make comments on the campaign. Find out what others are saying.