The Ethics of Professional Crowdfunding
Starting up a successful professional practice requires ingenuity, business acumen, and a passion for the profession, but it also requires cash. In order to overcome financial barriers, some entrepreneurial professionals have looked to crowdfunding as an alternative method for raising capital. By utilizing social media and dedicated crowdfunding websites, professionals are now in a stronger position than ever to pitch their brand and solicit donations from large numbers of individuals in the general public. Crowdfunding offers the promise of a quick source of revenue, but may also implicate possible ethics concerns that could prove costly to professionals in the long-term.
Recently, the New York State Bar Association issued an opinion regarding the ethics of crowdfunding in response to an inquiry from recent law school graduates who planned to start a small firm. The attorneys needed to raise capital to fund the start-up expenses of the new firm for the first few months of operation, which included website development, professional liability insurance, and office supplies. In order to avoid additional debt from borrowing, the attorneys inquired whether they may ethically raise the start-up funds via internet crowdfunding websites.
The ethics committee noted that there are several different approaches to crowdfunding. For instance, in some cases, crowdfunding is based purely on donations, but others involve a reward that must be paid back, loan, or a royalty. With regard to the donation model, the committee determined that this would not be likely to raise any ethical concern as long as the lawyers make clear that the donors will not receiving anything in return and that the law firm is established as a for-profit business.
The committee continued, however, that crowdfunding based on royalties or equity in the practice would clearly violate the rules of professional conduct, which prohibit a lawyer from sharing legal fees with a non-lawyer or practicing in a for-profit entity if a non-lawyer owns any interest in the entity. Finally, with regard to a reward model of crowdfunding, the committee determined that certain rewards, such as progress reports to donors or informational pamphlets, may be permissible so long as they do not fall within the definition of advertising materials or legal advice. However, the committed cautioned that other rewards, such as offering pro bono services, could raise ethics concerns if the firm is not qualified to handle the particular matter or if it would lead to a conflict of interest with another client.
Professionals are continuously investigating new and innovative ways to increase revenue and keep their businesses profitable. In certain circumstances, crowdfunding may be a viable and ethically permissible option for achieving this goal. However, firms must be cognizant of the specific crowdfunding methods used to solicit donations.