Contributing money to a crowd funding project can be a great way of showing your support for a creative, social or business initiative you believe has merit. However, you need to do some research to ensure your money is being used for a legitimate project.
Here are some things to consider before you decide to get involved.
How crowd funding works
Crowd funding is used by artists and entrepreneurs to find money to fund their projects. Money is usually raised through a crowd funding website. The website enables people who are not professional financiers to pool their money towards a project.
Most crowd funding websites will have information on the project’s aims and objectives, how it will work and its budget. Crowd funding websites can be based in Australia or overseas. The projects they fund are usually creative, business or social initiatives with relatively small budgets.
Crowd funding projects are usually promoted using social media and word-of-mouth. Often project sponsors are friends and family, or people easily contacted through existing networks. However, anyone can pledge money to the project via the website and some get world-wide support from complete strangers.
What will you get for your money?
There is no monetary reward for supporting a project and sponsors are often enticed with a small gift such as a signed CD, a free T-shirt or a discount on products in return for their support.
What if the target funding is not reached?
In most cases, only projects that raise enough money can go ahead. Most, but not all sites return funds if the target amount is not reached.
The crowd funding websites make money through a levy on the total funds received for the campaign. Often the levy is only deducted if the campaign goes ahead.
How to get involved
If you want to participate in crowd funding you’ll need to:
- Sign up to the crowd funding website
- Nominate the amount you would like to pledge to the project
- Provide your credit card details or make a payment via PayPal or another third party payment facility (but check its a secure site before you pay)
Once the project has reached it’s target funding, the money you’ve pledged will be deducted from your account.
Is it tax deductible?
Most crowd funding websites do not have Deductible Gift Recipient (DGR) status so you will not be able to claim a tax deduction for the money you pledge.
However, the project creator may have DGR status. If so, it is up to them to provide you with a tax deductible receipt if you request one.
You cannot claim a tax deduction if you have received a gift, reward or discount.
Check it’s a legitimate project
Raising money for a crowd funding project relies heavily on trust.
Even if there’s a small gift involved, the main motivation for sponsoring a project is usually because you have an interest in the project and a desire to see it succeed.
If you’ve heard about a crowd funding project that you’d like to support make sure you check the legitimacy of any website or social media page you’re directed to. Remember to carefully read the terms and conditions on the crowd funding site before signing up.
You should also try to find out as much information as you can about the project and its owner before you sponsor them. For example:
- Have they used crowd funding before?
- Have they been involved in successful projects in the past?
- Did they deliver the gift, if one was promised?
Don’t give your credit card details unless you’re comfortable that the crowd funding website, the project and its owners are legitimate.
Visit our credit card scams page to find out what to do if you think your credit card details have been compromised or you think you’ve been scammed.
Supporting a project you really believe in can be a rewarding experience but you need to be careful someone isn’t taking advantage of your generosity.
Reproduced with the permission of ASIC’s MoneySmart Team.
Important note: This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice
before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.