Crowdfunding websites, an exploding Internet phenomenon that allows people and organizations to raise money for a cause or idea, are butting heads with online payment systems and the financial regulations that control them.
The recent conflict between GlassUp, an augmented reality glasses startup that’s raising money on crowdfunding site Indiegogo, and payments system PayPal highlights the problems of using a new, Web-based financing method in a regulatory landscape that predates it.
PayPal last month decided to withhold all donations GlassUp had received through PayPal during its Indiegogo campaign. Italy-based GlassUp is aiming to raise $150,000 to create eyeglasses that would show in the lens incoming emails, text messages, tweets and Facebook updates. It had raised about $35,000 through PayPal when PayPal froze the account last month, then prevented GlassUp from accessing the funds.
GlassUp CEO Francesco Giartosio was not happy.
“We need the money to make the product,” he said. “That’s the basis of crowdfunding.”
So Giartosio took PayPal to task on the Indiegogo website: “What a flipping mess, thank you Paypal,” he wrote. He then began the process of reimbursing people who made PayPal donations to the GlassUp campaign. He thought the project was finished, he said. More than one-third of the total funds raised on Indiegogo came through PayPal, and now he had to give it all back.
But PayPal came around. On Thursday, the company acknowledged its mistake and released the money back to GlassUp.
“GlassUp now has access to all of the funds that they’ve raised through Indiegogo,” PayPal said in a statement. “We think they’re developing a fascinating product and don’t want to impede their innovation in any way.”
Giartosio had already reimbursed about 50 of the 150 or so donors who gave money on PayPal — about $10,000 total — but he said he’ll ask those people to donate again.
“So all’s well what ends well,” Giartosio wrote on Indiegogo. “We hope that this will be useful also for other campaigns in the future, but we don’t know what Paypal has decided to do.”
So exactly what did PayPal do, withholding tens of thousands of dollars from GlassUp and then about-facing with a show of support for the company’s fundraiser?
According to Anuj Nayar, PayPal’s senior director of global initiatives, likely the company was befuddled by complex financial regulations from foreign governments — in this case, Italy’s — that have not kept up with the speed of technology and the evolving space of crowdfunding.
Nayar declined to address the GlassUp case specifically, but said that PayPal does have triggers that will freeze an account or withhold funds from a recipient when there is suspicion of mismanagement, a violation of market regulations or risk to the customer.
“We do have to make sure we are managing risks against the merchant, risks against the consumer and the regulations,” Nayar said. “We do have responsibilities to ensure that they use PayPal properly.”
But the framework for these precautions doesn’t account for the Wild West of crowdfunding, which is just too new for most financial systems. Crowdfunding is a term not defined by law; the U.S. Securities and Exchange Commission has not yet finished crowdfunding rules. PayPal said when it took a closer look at GlassUp, it realized the startup should have its money back.
“There is someone who want to raise money or get money, and someone who wants to give them money, and our vision is to be the easiest way to make that happen, and get out of the way,” Nayar said. “For a short amount of time we had to delay it.”
Nayar said crowdfunding sites like Indiegogo and Kickstarter “are not a huge part” of PayPal’s business, but they are mulitplying.
In fact, crowdfunding nearly doubled worldwide in 2012, raising $2.7 billion from members of the public, according to data released in April.
PayPal says it is refining its policies and will announce in the coming weeks some changes to rules and restrictions that may be a bit too conservative for crowdfunding.
”We’re working to relax some of those rules,” Nayar said.
As for GlassUp, the company’s campaign has 14 days remaining on Indiegogo, and it’s still more than $45,000 shy of its goal. Had PayPal not locked up its account for a couple of weeks, that may not be the case, Giartosio said. He doesn’t expect to raise the rest of the money online, but said there are enough interested investors that he’ll have the money to put GlassUp into production by spring of next year. He plans to sell the glasses for $399 in the U.S. and said he is already speaking with some eyewear and telecommunications retailers who may sell the glasses.
Photo from slashgear.com