Crowdfunding Application Guidelines

Crowdfunding describes a business model where project owners raise funds by holding events that solicit contributions from large numbers of stakeholders. Online crowdfunding events are an increasingly popular way to raise funds, due in part to the surge in social media broadcasting.

PayPal is a proven and trusted name in transaction processing, and customers who contribute through crowdfunding events understand PayPal to be a secure payment method. This document describes how to design and implement a compliant crowdfunding application that you can submit to PayPal for review.

Application Design

Adaptive Payments is the only PayPal product that supports crowdfunding models, and your crowdfunding application must be based on the Adaptive platform (PayPal Website Payments Pro and Virtual Terminal, or PayPal Advanced cannot be used for crowdfunding applications).

The following crowdfunding models are supported by PayPal:

  • Fundraising with or without small incentives (such as T-shirts or mugs)
  • Nonprofit organization fundraising
  • Fundraising in exchange for compatible value of products/services

Fundraising Guidelines and Restrictions

The owner of the PayPal account that owns the crowdfunding application must provide a legally registered Business Entity when they submit their crowdfunding application to PayPal for review.

PayPal does not typically support personal fundraising, micro lending, disaster relief, or equity-based funding models with Adaptive Payments. If you are submitting an application that implements any of these funding models, please contact compliance@paypal.com to acquire approval before submitting your application for review.

If your application raises funds for a nonprofit organization (NPO) or political campaign, you might be required to provide supporting documentation, including but not limited to an Article of Incorporation, proof of 501(c) registration, or other associated documents.

If you are offering rewards or incentives for contribution, you may have a nominal reward value of no more than $100.00 USD. Rewards or incentives must not include gift cards, equity shares, raffles, or sweepstakes.

Crowdfunding Integration Structure

The application model used in this document implements a crowdfunding platform that lets project owners register and manage individual crowdfunding events. Event customers are those who contribute to the fundraiser. In this application model, the platform owner stands as a business entity that is separate from the project owners who conduct the crowdfunding events.

A crowdfunding application must use preapproved payments with defined terms for the event contributions. Preapprovals provide the ideal funding flow for all-or-nothing crowdfunding models; no money exchanges hands until the fundraising target is reached. By providing defined terms, you minimize fraud risk by providing a controlled environment where the payment receiver, the maximum fundraising duration, and the maximum contribution amount and frequency are determined before the event begins.

Depending on the specifics of your fundraising model, you must use preapproved payments coupled with either parallel payments or chained payments to distribute funds to the different recipients. These models allow for each PayPal account involved in a crowdfunding transaction to receive different shares of the transaction amount.

Both payment flows avoid the issue of aggregation, which occurs when funds are allowed to accumulate in an intermediate account before being passed to the end recipient. PayPal's chained and parallel payment flows provide visibility to all parties in a transaction, and the end recipient (the project owner) must be named in each of these payment methods.

Using Parallel Payments

The most straight-forward way to integrate a crowdfunding model into your application is to use parallel payments coupled with preapproved payments. With parallel payments, all parties get the allotted their funds at the same the same time; when the event triggers and payments are made.

Integrate parallel payments using the following call structure:

Preapproval payments with defined terms + parallel payments

Using Chained Payments

The chained payment method offers a more robust model, where the funds are first paid to the project owner, after which payments are distributed to any interested parties.

Integrate chained payments using the following call structure:

Preapproval payments with defined terms + chained payments with {
   {primary receiver = fee payer} + {secondary receiver = app account }
}

The primary receiver in a chained payment is the merchant of record and is responsible for any potential risk of chargebacks or refunds, up to the full transaction amount. You can reduce the application account's financial responsibility for the fundraising event by making the project owner the primary receiver. Here, as the secondary receiver, the application account retains control of the payment flow. If the primary receiver also pays for transaction fees, the application account can receive their percentage of the transaction without incurring fee deductions.

If your payment flow uses chained payments, you might be legally required to license your crowdfunding platform as a financial services business. Furthermore, aggregation is forbidden by card scheme rules because they can expose both PayPal and the crowdfunding platform owner to the risk of fines from card association networks.

The Crowdfunding Business Flow

While there are many ways to integrate crowdfunding into an application, the following business flow is supported by PayPal:

Vetting and Posting an Event

  1. The process begins when a project owner submits an event to the crowdfunding platform. Included in the submission is a detailed description of the event, the target goal amount, and a specific fundraising duration.
  2. Your platform reviews the project.
  3. If the platform approves the project, it collects the project owner's PayPal account information through their Log In with PayPal (formerly PayPal Access) account.
  4. If the flow is through a chained payment, the primary receiver is set to the project owner. This makes the main fund the receiving account when the preapproval transactions are collected upon the successful completion of an event.

  5. After the PayPal accounts are set, the platform can launch the project by posing to their website the details, time period, and target amount of the crowdfunding event.

Preapproving Pledge Amounts

  1. An event customer chooses a project and clicks the Pledge or Contribute button.
  2. The customer is directed to PayPal where they agree to a one-time preapproved payment.
  3. After agreeing to the payment, the customer is redirected back to the platform and their preapproved amount is added to a running subtotal of the pledge amounts.

Successfully completing a project and Collecting the pledged Funds

At the end of an event, the platform checks to see if the target amount has been met (or exceeded).

If the goal is not met, all preapproved transactions must be cancelled and no event customer's account should be debited for the event.

If the target is met, the platform triggers the preapproved payments from the PayPal accounts of the event customers. In a chained payment model, the funds are moved to the project owner's PayPal account first, after which a pre-determined portion of fees and commissions are sent to the platform (the secondary account) from the project owner's account. In parallel payment model, funds are instantly transferred to both primary and secondary PayPal accounts upon the success of the event.

Important: PayPal's preapproval payment billing agreement does not guarantee the availability of funds. This can result in the total collected amount to be less than total of the pledged amounts.

Crowdfunding Platform Best Practices

Pay attention to the following when integrating a crowdfunding model into your application:

  • Create processes to pre screen events that are submitted to your platform. You should also have processes that monitor the ongoing user activities during the course of the crowdfunding events.
  • Vet and know your project owners. You should know their country of origin and you should encourage events where there are no cross-border payments. Your application should carefully monitor all cross-border payments.
  • Set limits on the maximum amount per contribution, per fundraising campaign, as well as the amount that a single person can contribute.
  • Limit the number of fundraising campaigns an organization can host in any given year.
  • Set reasonable time limits for fundraising campaigns. For example, 90 days or less.
  • Implement an all-or-nothing fundraising structure that collects funds only when the predetermined target of an event is reached during the allotted fundraising time period.
  • Ensure all activities are in compliance with local laws, the PayPal Acceptable Use Policy, and the PayPal Developer Agreement.

Considerations for Global Applications

If you plan to implement a platform that processes transactions across country borders, consider the following tips:

  • Limiting the countries or regions from where event contributions originate can help with your platform's compliance requirements.
  • Each country has different financial regulations and specifications pertaining to crowdfunding activities. Know the regulations for the countries in which you do business.
  • Certain Asian countries support crowdfunding only with the promise of a compatible value of products or services in the transaction(s).
  • Certain regions, including certain Asian Pacific countries, may require additional fundraising licenses. Before submitting your application to PayPal for review, check the requirements in the region(s) you want to service to ensure you comply with local laws.

If you have any concerns or questions, please contact the PayPal compliance department in your region before submitting your application.

Submitting your Crowdfunding Application for Review

Fundraising inherently brings with it a high risk of fraudulent activities, including money laundering and other scams and trickery. To ensure PayPal remains the high water-mark for trusted business transactions, PayPal reviews each crowdfunding application to ensure it complies with our best practices and guidelines.

Once you've fully coded and tested your application, obtain a live AppID from PayPal by submitting it for review (see Going Live with Your Application for details on how to submit your application).