Draft crowdfunding regulation misses a few targets

  • January 28, 2020

Since its first recorded use in 2006, the word “crowdfunding” has become a familiar part of the lexicon, sure to appear during times of crisis and tragedy, as well as during planning for weddings and any other time people need to get their hands on a substantial sum for a worthy cause.

But while the word – and the activity – may have grown in step with the culture, they have left the regulatory system lagging. That’s why the Uniform Law Conference of Canada is conducting consultations on its draft Uniform Informal Public Appeals and Crowdfunding Act.

The CBA’s Charities and Not-for-Profit Section’s response to that draft points out that it is largely unchanged from the 2011 Uniform Informal Public Appeals Act – but the changes that exist are significant and not entirely positive.

For example, since qualified donees area already highly regulated under the Income Tax Act, they were exempted from the 2011 UIPAA. The draft Act would extend that exemption to intermediaries who are not subject to the same levels of regulation. An internet platform that assists in organizing a public appeal would be included in the definition of an intermediary.

“From our experience in advising qualified donees, crowdfunding platforms can be used by third parties to raise monies for a qualified done without the qualified donee necessarily consenting,” the Section writes. “This results in an intermediary raising funds on behalf of a qualified done, using the qualified donee’s name and brand, receiving donations and taking a percentage off the top – all without obtaining the permission of the qualified donee.”

Moreover, the Section points out that many crowdfunding sites are more interested in data mining than in raising money and passing it along. “Although the UIPAA does not currently delve into privacy issues related to informal public appeals, consideration should be given to these issues because unregulated data harvesting of donor information is a serious and significant issue for crowdfunding appeals.”

The Section recommends intermediaries only be exempt if their terms of use explicitly require that appeal organizers have a direct agreement with the qualified donee; that donors have the right to have their personal information deleted; and that where an internet platform organizes public appeals itself it no longer be considered exempt from the legislation.

The Section notes that the modified section 4(2) of the UIPACA would effectively give internet platforms and similar intermediaries the protection of a bank, even though they are not subject to anywhere near the same level of regulation when dealing with financial transactions. “(I)t is unclear why the UIPACA would not impose obligations on these crowdfunding entities that have no other regulations as to how they do business,” the Section writes. “We suggest that this aspect of the proposed Act be reconsidered and crowdfunding intermediaries that are not financial institutions otherwise regulated not be exempted from a fiduciary relationship.”