Crowdfunding rife with unintended consequences, says Baker Institute expert

NEWS RELEASE

Jeff Falk
713-348-6775
jfalk@rice.edu

Avery Ruxer Franklin
713-348-6327
averyrf@rice.edu

Crowdfunding rife with unintended consequences, says Baker Institute expert

HOUSTON – (March 12, 2020) – Successful entrepreneurial fundraising through crowdfunding can bring surprising tax consequences and failed projects can generate other unpleasant legal concerns, according to a new issue brief from Rice University’s Baker Institute for Public Policy.

The author, Joyce Beebe, a fellow at the Baker Institute’s Center for Public Finance, is available to discuss the topic with the news media.

Crowdfunding, the process of raising money from a large number of people through the internet, has grown over the last decade. This includes donation-based crowdfunding, reward-based crowdfunding and equity-based crowdfunding. How crowdfunding affects both donors and recipients tax-wise is still evolving, according to Beebe.

The tax treatment of crowd-sourced funds depends on the type of crowdfunding and what backers or donors receive in return. For instance, proceeds from reward-based crowdfunding campaigns are considered taxable business income instead of gifts like in donation-based crowdfunding.

Unsuccessful projects can generate unintended consequences. Inexperienced initiators or recipients who fail to meet capital goals and fail to deliver promised products can face legal ramifications.

“The widely decentralized nature of funds implies highly dispersed control by funders, which generates legal concerns from a consumer or investor protection perspective,” Beebe said. “Multiple federal and state government agencies have started to prosecute cases involving fraud and are offering investor education resources, providing due diligence considerations and evaluating ways to improve legislation. For now, the best practice is to understand the risks and rewards of devoting funds to crowdfunding projects, including tax considerations.”

For more information or to schedule an interview with Beebe, contact Avery Franklin, media relations specialist at Rice, at averyrf@rice.edu or 713-348-6327. The Baker Institute has a television and radio interview studio available.

-30-

Follow the Baker Institute via Twitter @BakerInstitute.

Follow the Baker Institute’s Center for Public Finance via Twitter @Baker_CPF.

Follow Rice News and Media Relations via Twitter @RiceUNews.

Related materials:

Beebe biography: www.bakerinstitute.org/experts/joyce-beebe

Baker Institute Center for Public Finance: www.bakerinstitute.org/center-for-public-finance.