Crowdfunding contributions and state sales and use taxes.

• Author: Gruba, Justin

More than 8 million people have funded more than 80,000 projects with pledges of approximately $1.6 billion through the popular crowdfunding website Kickstarter (kickstarter.com) since its launch in April 2009. Millions of dollars have been contributed to fund thousands of projects through other crowdfunding sites that are attempting to create their own niches.

Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically through the internet. Generally, three parties are involved in crowdfunding: a project initiator that is seeking project funding, contributors that fund the projects, and a moderator, usually a website, that brings the initiator and contributors together. Besides Kickstarter, crowdfunding moderators include Indiegogo (indiegogo.com) and other sites that host forums for project initiators to present their projects or ventures and for contributors to make pledges to the initiators' causes.

Crowdfunding campaigns fund a broad range of projects, from producing a movie, game, product, or new technology to supporting a charitable cause. Among projects raising the highest pledge totals have been an affordable 3-D printer, a card game called Exploding Kittens, and a campaign to bring the educational television series Reading Rainbow back to over 10,000 classrooms.

Crowdfunding generally operates, or will operate, under one of two models to entice contributors to support a project: rewards-based funding and equity-based funding. Rewards-based campaigns provide incentives to contributors determined by the level of their contributions. Rewards include simple thank-you notes, a T-shirt or other product upon which the campaign is based, or access to a five event. The only limitation on what can be offered as a reward is the initiators' imagination--and the ability to follow through on the promise.

On the other hand, equity-based campaigns provide contributors with ownership stakes in the startup in return for a monetary contribution. As of this writing, the SEC had not yet issued final regulations under Tide III of the Jumpstart Our Business Startups (JOBS) Act of 2012, P.L. 112-106, which authorizes wider availability of equity crowdfunding by exempting from certain registration requirements and investor restrictions private issuances through internet "funding portals" of certain small startup companies. Despite the lack of final regulations, a number of...