PayPal Is Overhauling Its Controls Around Crowdfunding

PayPal, following a highly publicized clash with a crowdfunded company, is putting crowdfunding under a microscope to avoid compliance and security risk.

"We are now in the midst of overhauling our policies in this space," said Tomer Barel, vice president of PayPal, in a blog post on PayPal's site. "We're talking to the major crowdfunding players that we work with to put in place a permanent solution that avoids unnecessary account limitations. But making this work for all stakeholders—contributors, entrepreneurs, crowdfunding sites and us—is pretty complicated."

Barel, who did not return a request for comment by deadline, referenced press scrutiny around PayPal's decision to limit the accounts of companies that raise money through crowdfunding campaigns. Crowdfunding is the practice of a company seeking investment from its product's potential end users, typically through a website such as Kickstarter or Indiegogo.

Barel did not mention specific campaigns, though PayPal was recently in a dispute with GlassUp, a startup that was using Indiegogo to raise money for a line of augmented reality glasses. PayPal reportedly withheld donations to GlassUp, totaling about $35,000, then reversed course and released the funds. GlassUp and Indiegogo did not return requests for comment by deadline.

There are unique regulatory and risk aspects inherent to this new way to raise money from supporters around the world, Barel wrote in his blog post.

"We sometimes hear from campaign contributors that they are confused about what exactly their money is going towards, and assume that they'll get it back if the venture is not successful," Barel wrote. "Because the model is so new, it is potentially open to abuse."

"When done right, crowdfunding is a powerful catalyst for innovation. However, it's clear that our existing policies and processes aren't working quite right for this particular fundraising model," Barel wrote.

Crowdfunding, while growing and increasingly popular, remains largely unregulated, says Zil Bareisis, a senior analyst at Celent. "To complicate matters further, it's inherently cross-border, which means either coordination of regulatory efforts across countries, or the need to operate across many different frameworks."

There are also many different risks in crowdfunding, Bareisis says. "In addition to risks related to individual projects, such as 'what if the company disappeared with the funds?' You also have platform risks, such as 'what if the crowdfunding platform funds 'strange' projects?" he says.

The model also demands unique functionality from processors, Bareisis says.

"For example, many platforms require projects to achieve their funding requirements completely," he says. "If the project doesn't raise all the funds it asked for, the pledges have to be refunded…while no one likes their funds frozen, it's understandable that payment providers be cautious as they tread these uncharted waters."