PayPal Ends Purchase Protection for Crowdfunding Sites

PayPal next month is cutting off purchase protection for payments to crowdfunding sites, as the model for raising seed money for projects online begins to mature. The new policy goes into effect June 25, the company noted in an update to its user agreement.

The move follows a series of incidents during the last few years underscoring the complexities of resolving disputes for payments to crowdfunding sites. At such sites, entrepreneurs request funding in exchange for a product that hasn't completed development; if the product never materializes, the project's backers don't typically get refunds.

PayPal in 2013 said it was reviewing its policies around crowdfunding, after an Italy-based startup, GlassUp, complained that PayPal had withheld donations from some of its funders on the crowdfunding site Indiegogo, temporarily hobbling GlassUp’s access to cash. GlassUp eventually raised more than $127,000 toward its $150,000 goal.

Crowdfunding is unregulated, but the Securities and Exchange Commission recently opened a door to the emerging channel. In a rule that went into effect this year, the SEC now provides the option for business owners to register with the agency when raising up to $1 million per year through crowdfunding sites. Companies using the sites may register with the SEC and disclose their financial statements and describe how they plan to use funds.