PayPal Tweaks Policies Towards Crowd-Funded Projects

PayPal says that it will update its policies related to crowdfunding, according to this Ars Technica report. The policy change would involve identifying crowdfunding campaigns early on and expediting payment to those that have made their obligations to campaign donors transparent. This decision comes on the heels of PayPal freezing the funds of several high profile crowd-funded projects.

Back in September 2013 when the company froze the assets or limited the accounts of three high-profile fundraisers within the span of two weeks. One of those high profile projects was an indie email client developed by Mailpile; the company froze the $45,000 in funds it raised, because of "the potential for fraud." PayPal told Mailpile that the funds would remain frozen "for a full year or until they have a verifiable 1.0 release of their product." It also offered Mailpile the option of sending PayPal "an itemized budget and your development goal dates" for the project.

PayPal did the same thing to two game development projects within two weeks; fighting game Yatagarasu Attack on Cataclysm raised $118,243 and Red Thread Games' Dreamfall Chapters: The Longest Journey raised $1.5 million. PayPal told the Yatagarasu developers that it would keep up to half of the developers' money frozen until after the game's release. Red Thread was told something along the same lines.

PayPal, facing user complaints and a mountain of bad press, reversed the account limitations very quickly.

So how is PayPal reforming its process and why did it think it needed to freeze funding raised through crowd sourcing?

PayPal is promising to work with a number of crowdfunding sites to make sure that people who are soliciting donations from the public disclose the risks to donors and explain that, if a product or service is not delivered, then the funds collected should be considered investments rather than pre-sales. Ideally, this type of disclaimer would appear on a crowdfunder's project page. This would signal to PayPal that it does not need to put any limits on that customer’s account.

PayPal Chief Risk Officer Tomer Barel tried to explain the company’s reasoning in a blog post today:

"Many crowdfunding sites allow their campaign owners to pull money out before they have reached the final goal in order to begin creating and funding the concept, a process that often begins even while the crowdfunding process using PayPal is continuing. If it is not made clear that there is no guarantee of product delivery, this can cause regulatory and risk issues (and upset customers) when the final goal isn’t reached."

In a nutshell, these freezes are about liability that PayPal is concerned it might face should some crowd-sourced project go bust and not deliver on its promises.

Anuj Nayar, PayPal's senior director of global initiatives, told Ars Technica in a phone interview today that "as crowdfunding has become a little more mainstream than the core edge cases, a couple of things have very much come to light: the early crowdfunding backers understood that crowdfunding is very different from regular e-commerce, it's very much an investment."

Nayar also told the publication that backers should know that there are risks, and that they might not get a product from the people they backed.

One thing that might help is PayPal's plan to engage crowdfunding project owners early in the process.

Barel wrote that PayPal will aim to “engage crowdfunding campaign owners early on to clearly understand their campaign goals and help them ensure their campaigns are compliant with our policies and government regulations." Barel also said that PayPal will "enable [crowdfunded] campaigns without interrupting payments under the condition that the campaign owner is explicit and transparent to their contributors that there is no guarantee of delivery regarding the rewards being offered upon contribution.”

If there are problems along way PayPal says that it will work with crowdfunding project owners to resolve them.

Hopefully this will mean that we will see less fund freezes in the future. There are plenty of other things to get upset about in any given day after all. And it should be noted that the majority of those who back crowd-funding projects understand that once you commit to a project, you are investing your money and you should not expect to get it back if the project goes awry…

Ars Technica

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