Does Crowdfunding Establish a Trust?

March 30, 2016 Suzana Popovic-Montag Estate & Trust, Trustees Tags: , , , , , , , , , , , 0 Comments

In 2014, a Toronto-based company successfully raised $1,235,389 (USD) of its $48,000 goal on Indiegogo for its wireless speaker system promising better-than-stereo sound. More recently, the website Gofundme provided the platform which allowed the parents to a 4 year old girl to raise $2,026,470 (USD) to help their child receive a potentially life-saving therapy trial.

Hardly a week goes by without a story on the success of yet another crowdfunding campaign. In what began as an alternative financing model, modern crowdfunding as it exists today has grown to become an extremely successful and potentially lucrative fundraising source. As a result, the legal question that has been raised is whether funds raised by means of crowdfunding constitute a trust, with all of the rights and obligations that this may entail.

The definition of a trust according to Black’s Law Dictionary is, “An equitable or beneficial right or title to land or other property, held for the beneficiary by another person, in whom resides the legal title or ownership.” At first glance, this is precisely what many crowdfunding campaigns seek to do. The funds raised are often held by a third party for the benefit of another. However, determining who occupies which role within the trust relationship can be difficult to navigate.

There are four parties in most crowdfunding campaigns: the donors, the website provider, the campaign creator, and the beneficiaries. As a result, it is not entirely clear whether it is the website provider or campaign creator that acts as trustee and, if it is the website provider, whether they hold these funds in trust for the campaign creator or the purported beneficiary of the campaign. As each crowdfunding campaign can vary significantly with respect to its set-up and intended purpose, determining whether a trust relationship is present is an exercise to be undertaken on a case by case basis.

For instance, some crowdfunding campaigns offer rewards in exchange for meeting a minimum donation level. In this sense, it could be argued that these rewards constitute consideration and the relationship becomes contractual in nature. In other campaigns, the funds are raised for a charitable purpose and as such, may be qualified as charitable trusts. On the other hand, campaigns established by friends and family that purport to raise funds for their loved ones, seek to provide a benefit to a private individual, as opposed to a general purpose. It is often these cases that lead to questions surrounding whether a trust has been established, or, in the alternative, whether a gift has been made.

According to this paper by Professor Oosterhoff, the law has generally provided that funds raised for a specified object give rise to a trust. Accordingly, Oosterhoff’s answer is that it depends on what the intentions of the donor were. He suggests that we need to look specifically at whether the donors intended to establish a trust or whether their relationship to the other parties can be characterized as one of contract or agency.

If a trust is established, the person(s) receiving the initial funds (whether it is the campaign creator or website provider) may find themselves in a fiduciary relationship. Trust law creates a higher standard of care and imposes and bestows rights and obligations upon both the trustee and beneficiaries. As a result, those engaged with crowdfunding campaigns, in any capacity, should be alert to this possibility and act accordingly.

Thank you for reading.

Suzana Popovic-Montag

 

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