LEGAL ASPECTS OF CROWDFUNDING FOR SPORTS INITIATIVES

This article is written by Satirtha Basak of Faculty of Law, Delhi University, an intern under Legal Vidhiya

Abstract

Sports crowdfunding is a growing trend. It helps athletes, teams, and organizations. Fans give money directly. This method provides financial help. It builds a strong community. People share a purpose. Many models exist. Donation-based crowdfunding is common. Reward-based options work. Equity-based methods carry risks. Debt-based models offer choices. Funds are managed differently. Rules differ across cases. This method is promising. Legal frameworks differ worldwide. The U.S. and EU have clear rules. India enforces stricter guidelines. Equity models face tough scrutiny. Compliance with securities laws is necessary. Intellectual property rights must be respected. Consumer protection rules remain vital. Transparency is essential in campaigns. Mismanagement causes serious problems. Clear guidelines prevent issues. Laws vary by region. This area demands careful attention indeed. Case studies show a complex landscape. Successful campaigns raise significant funds. Many campaigns overcome legal hurdles. Some struggle with compliance issues. Platforms must follow all rules. Transparency builds trust with backers. Athletes lead their own campaigns. Technology aids campaign management. Legal reforms are underway. The future is full of possibilities. Each case teaches lessons. These stories inspire innovation and change. Stakeholders must follow legal standards. Strong regulations build trust. Ethical practices increase credibility. Transparency is a core value. Compliance is essential for success. Crowdfunding in sports needs clear guidelines. Legal and ethical rules protect everyone. Financial and community support depend on these practices. As crowdfunding grows, rules will evolve. Future campaigns must remain honest. These standards support sports initiatives globally.

Keywords

Sports crowdfunding, legal regulations, compliance, transparency, equity-based crowdfunding, consumer protection.

Introduction

Crowdfunding is a way to gather money from a large group of people, often using online platforms. In the sports world, it allows athletes, teams, and organizations to receive financial support directly from their fans. This makes the funding process more inclusive. Besides providing the needed funds, crowdfunding also creates a sense of community and shared investment in the success of sports projects.[1] Crowdfunding plays a crucial role in sports by filling funding gaps that traditional methods often miss. It can finance projects like renovating facilities, buying new equipment, or covering event expenses. Additionally, crowdfunding campaigns boost the visibility of sports initiatives. They attract new fans and help build long-term relationships with sponsors, fostering a strong support community.[2] This article seeks to examine the legal aspects of crowdfunding in the sports industry. It will explore different crowdfunding models used for sports projects. The article will also analyse the regulations that govern these models. Additionally, it will discuss the legal issues that stakeholders need to address to ensure they comply with laws and protect everyone’s interests.

Overview of Crowdfunding

Crowdfunding is a way to raise money by getting small contributions from many people, usually through online platforms. This method has made funding more accessible, allowing individuals, startups, and organizations to receive financial support directly from the public. There are different types of crowdfunding, each with its own methods and legal considerations.

Types of Crowdfunding Models

1. Donation-Based Crowdfunding: Donation-based crowdfunding is when people donate money to support a cause or project. It does not require any return. It is often used for charitable causes or community projects. It may also help individuals with personal needs such as medical expenses. For example, a local sports team may raise funds to buy new equipment through community donations. Supporting real hope.
2. Reward-Based Crowdfunding: Reward-based crowdfunding involves giving funds in exchange for a reward. Contributors usually receive a product or service from the project. This method is common among start-ups and creative projects. It allows early supporters to pre-purchase products. For instance, a sports apparel company might offer a limited-edition jersey to thank backers. This method builds engagement and excitement. Encouraging loyal supporter communities.
3. Equity-Based Crowdfunding: Equity-based crowdfunding is when investors provide funds in return for ownership shares. In this model, companies offer equity to raise significant capital. This approach is ideal for businesses seeking growth while sharing profits with investors. An example is a sports technology start-up offering equity for the development of a new fitness tracking device. It creates shared risk and reward universally.
4. Debt-Based Crowdfunding (Peer-to-Peer Lending): Debt-based crowdfunding, or peer-to-peer lending, involves individuals lending money with interest. Borrowers agree to repay the funds over time. This method is often used by small businesses or individuals who prefer loans instead of selling equity. For example, a gym owner might borrow money to renovate facilities, promising repayment with interest. It fosters financial support and accountability. Building trust globally.
5. General Legal Frameworks Governing Crowdfunding: Legal rules for crowdfunding differ from country to country and aim to safeguard both those raising funds and those contributing. In the United States, the Securities and Exchange Commission (SEC) oversees crowdfunding activities, especially those related to investments. The Jumpstart Our Business Start-ups (JOBS) Act of 2012 introduced measures to make crowdfunding easier while protecting investors. Under the JOBS Act, Regulation Crowdfunding was established, allowing qualified companies to offer and sell securities on crowdfunding platforms. These offerings must meet specific rules and limitations to ensure compliance and protection for all parties involved.[3] In the European Union, the European Crowdfunding Service Providers Regulation (ECSPR) creates a unified set of rules for crowdfunding platforms. This regulation aims to boost funding across borders and ensure investors are well-protected. It covers both loan-based and equity crowdfunding. Additionally, the ECSPR outlines standards for platforms regarding transparency, management, and risk handling.[4]

India has established regulations for different types of crowdfunding. Donation-based and reward-based crowdfunding are allowed under the Securities and Exchange Board of India (SEBI). These models are often used for charitable causes, creative projects, or start-ups. Debt-based crowdfunding is managed by the Reserve Bank of India (RBI). It links borrowers with lenders but must follow strict rules, such as not allowing platforms to take on credit risk or provide guarantees. On the other hand, equity-based crowdfunding is not allowed. This is because it may breach the Securities Contracts (Regulation) Act of 1956 and the Companies Act of 2013. These laws limit public advertisements and restrict private placements to a maximum of 200 investors each year.[5]

Application of Crowdfunding in Sports

Crowdfunding is now an essential way for athletes, teams, and sports organizations to obtain needed funds. Platforms such as MAKEACHAMP have helped people in 52 countries and across 94 different sports raise millions since 2014. This showcases how widespread and effective crowdfunding is in the global sports industry. Crowdfunding offers numerous advantages for the sports world. It provides financial resources that traditional sponsorships or grants might not supply. This money can be used to buy equipment, cover travel costs, or upgrade facilities. Besides funding, crowdfunding campaigns boost visibility. They help attract new fans and establish long-term relationships with sponsors.[6] However, crowdfunding in sports comes with its own set of challenges. Limited exposure and resources can make it difficult for campaigns to succeed, especially for lesser-known athletes or teams without a strong online presence. Additionally, short fundraising periods and a lack of experience in raising funds can slow down their efforts. This means that organizers need to develop effective strategies and use available tools to boost their campaigns.[7]

Legal Considerations for Sports Crowdfunding

Participating in sports crowdfunding requires following different legal rules to ensure everything is done correctly and to protect everyone involved. In the United States, the Securities and Exchange Commission (SEC) oversees crowdfunding activities, especially those related to investments. The JOBS Act introduced Regulation Crowdfunding, which lets qualified companies offer and sell securities on crowdfunding platforms. However, there are specific rules and limits they must follow. These regulations require all crowdfunding transactions to go through SEC-registered intermediaries and set caps on how much money can be raised and invested.[8] Intellectual property rights are crucial for sports crowdfunding efforts. Protecting trademarks, logos, and branding helps keep the sports organization’s integrity and value intact. Additionally, using athletes’ images and endorsements must be handled carefully to avoid violating their personal rights or existing deals. Unauthorized use can lead to legal problems and harm the organization’s reputation.[9] Having clear agreements between campaign creators and backers is essential. Detailed terms of service help outline the relationship and what each side expects. Creators must deliver the rewards they promise. Failing to do so can lead to legal problems and loss of trust. Open communication about deadlines, product details, and any possible delays is key to maintaining backer confidence.[10] Consumer protection laws mandate that crowdfunding campaigns remain transparent and truthful. Providing misleading information or engaging in false advertising can result in legal consequences and damage public trust. It is essential to implement strategies that prevent fraud and accurately represent the campaign’s goals and progress. Additionally, regularly updating backers and maintaining open communication channels helps address concerns and fosters a supportive community[11].

Jurisdictional Variations

Crowdfunding rules differ greatly between countries because of various legal systems and market conditions. In the United States, the Securities and Exchange Commission (SEC) oversees crowdfunding through the Jumpstart Our Business Start-ups (JOBS) Act. This law allows companies to raise money on registered online platforms, following specific disclosure and reporting rules. In contrast, the European Union introduced the European Crowdfunding Service Providers Regulation (ECSPR). This regulation standardizes crowdfunding rules across all EU member states, making it easier to offer services across borders within the EU. The ECSPR creates a unified set of rules for crowdfunding platforms, aiming to improve investor protection and increase market efficiency.[12] International crowdfunding campaigns bring about complex legal challenges across different countries. Platforms that operate in multiple regions must deal with diverse rules related to securities, consumer protection, and data privacy. For example, a crowdfunding provider licensed in one EU member country can use a passporting system to offer services throughout the EU. However, they must follow notification procedures and comply with the specific laws of each country they target.[13]

Case Studies

Examining legal disputes in sports crowdfunding provides valuable insights into the complexities and challenges inherent in this funding model. Below are detailed analyses of Two notable Indian cases and one international case.

1. LegalPay’s Sports Dispute Resolution Fund: In May 2023, LegalPay, a start-up from New Delhi specializing in litigation financing, introduced a $3 million fund to resolve sports-related disputes in India. The fund is designed to protect athletes’ rights and help with conflicts over broadcasting rights, endorsements, and advertising. By offering financial support for legal representation, the fund helps overcome the financial challenges athletes often encounter when taking legal action. This initiative demonstrates the importance of litigation financing in the sports industry and highlights the need for accessible legal resources for athletes.[14]
2. Saket Gokhale’s Crowdfunding Misuse Case: In 2023, Saket Gokhale, a spokesperson for the Trinamool Congress, was taken to court for allegedly misusing money raised through crowdfunding. He had collected funds claiming they were for public causes, but later accusations arose that the money was used for personal expenses. The Gujarat High Court refused to grant him bail, prompting him to appeal to the Supreme Court. In April 2023, the Supreme Court approved his bail. This case highlights the need for transparency and accountability in crowdfunding campaigns and shows the legal consequences of mismanaging funds.[15]
3. Matthew Petgrave’s Legal Defense Fund: In October 2023, a tragic event took place during an ice hockey game in Sheffield, UK. Matthew Petgrave was involved in a severe collision on the ice that sadly resulted in the death of his opponent, Adam Johnson. Following the incident, Petgrave had to face legal proceedings related to the accident. To help pay for his legal fees, he started a crowdfunding campaign with the goal of raising £300,000. This situation highlights the serious legal risks that athletes can face. It also shows how crowdfunding can be an important way to handle unexpected legal costs when unforeseen events occur.[16]

Future Trends and Legal Developments

The world of sports crowdfunding is changing rapidly, driven by new technologies and shifting consumer habits. One significant trend is the use of gamification and interactive features in fundraising campaigns. By adding game-like elements, organizations aim to boost fan engagement and participation, making their crowdfunding efforts more successful.[17] Another growing trend is the rise of athlete-led crowdfunding initiatives. Athletes are increasingly using their personal brands to start campaigns that not only support their activities but also provide fans with unique investment opportunities. This strategy deepens the connection between athletes and their supporters, creating a shared interest in the athlete’s success.[18] On the legal front, there is a growing need to update existing regulations to better address the specifics of sports crowdfunding. For example, there are ongoing discussions to amend the Sports Act to offer clearer guidelines and support for crowdfunding activities in the sports sector. These changes aim to improve transparency, protect stakeholders, and ensure fair access to funding opportunities.[19] Additionally, the increasing involvement of private equity in sports investments is leading to a reassessment of current legal frameworks. As private equity firms become more active in funding sports initiatives, it is essential to ensure that regulations keep up with these changes. This helps maintain fair competition and protects the interests of all parties involved.[20]

Conclusion

Crowdfunding has become a significant tool in the sports industry. It offers athletes, teams, and organizations new ways to raise money and boosts fan involvement. There are different types of crowdfunding, including donation-based, reward-based, debt-based, and equity-based. Each type has its own benefits and challenges and is governed by specific regulations. Countries like the U.S. and the EU have well-developed legal systems for crowdfunding. In contrast, India is more cautious, especially with equity crowdfunding. Legal factors such as securities laws, intellectual property rights, contracts, and consumer protection are vital for ensuring transparency and compliance. Case studies show both the achievements and legal issues in sports crowdfunding. They highlight the importance of clear governance and accountability. Emerging trends like gamification, athlete-led campaigns, and ongoing legal reforms indicate that sports crowdfunding will continue to grow. Stakeholders need to stay informed about legal changes to make the most of crowdfunding while maintaining ethical and legal standards. This vigilance will help maximize the benefits of crowdfunding and ensure it is used responsibly in the sports sector.

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[1] Vodolazhska, A. (2023) Crowdfunding for sports: Is that a thing?, lenderkit.com. Available at: https://lenderkit.com/blog/crowdfunding-for-sports-is-that-a-thing/ (Accessed: 28 January 2025).

[2] Club management, spized / F.| (2023) Crowdfunding in sport – how it works, spized. Available at: https://www.spized.com/en/magazin/crowdfunding-in-sports (Accessed: 28 January 2025).

[3] Securities and Exchange Commission, U.S. (2024) Regulation crowdfunding, U.S. Securities and Exchange Commission. Available at: https://www.sec.gov/resources-small-businesses/exempt-offerings/regulation-crowdfunding (Accessed: 28 January 2025).

[4] European, commission (no date) Crowdfunding explained, Internal Market, Industry, Entrepreneurship, and SMEs. Available at: https://single-market-economy.ec.europa.eu/access-finance/guide-crowdfunding/what-crowdfunding/crowdfunding-explained_en (Accessed: 28 January 2025).

[5] (No date) India cenbank tightens rules for peer-to-peer lending platforms | Reuters. Available at: https://www.reuters.com/world/india/india-cenbank-tightens-rules-peer-to-peer-lending-platforms-2024-08-16/ (Accessed: 28 January 2025).

[6] | Club management, spized / F. (2023) Crowdfunding in sport – how it works, spized. Available at: https://www.spized.com/en/magazin/crowdfunding-in-sports (Accessed: 28 January 2025).

[7] 4 sports fundraising challenges + how software can help (2024) Nonprofits Source. Available at: https://nonprofitssource.com/sports-fundraising-challenges/ (Accessed: 28 January 2025).

[8] Securities and Exchange Commission, U.S. (2024) Regulation crowdfunding, U.S. Securities and Exchange Commission. Available at: https://www.sec.gov/resources-small-businesses/exempt-offerings/regulation-crowdfunding (Accessed: 28 January 2025).

[9] Alekseev, S.V., Kamenkov, V.S. and Kamenskaya, S.V. (2024) (PDF) Crowdfunding in financing sport activities – ResearchGate, www.researchgate.net. Available at: https://www.researchgate.net/publication/350467629_Crowdfunding_in_financing_sport_activities (Accessed: 28 January 2025).

[10] Weberman, D.H. (2024) The legal side of crowdfunding: What entrepreneurs need to know, Daniel H. Weberman, Attorney at Law. Available at: https://www.dhweberman.com/post/the-legal-side-of-crowdfunding-what-entrepreneurs-need-to-know (Accessed: 28 January 2025).

[11] Harton, Esq., O. (2024) Consumer protections for crowdfunding | lawinfo, www.lawinfo.com. Available at: https://www.lawinfo.com/resources/consumer-protection/consumer-protections-for-crowdfunding.html (Accessed: 28 January 2025).

[12] BRAND, M. (no date) Crowdfunding in Europe Legal Framework, elvingerhoss.lu. Available at: https://elvingerhoss.lu/sites/default/files/upload/media/document/2024-05/Brochure_European_Crowdfunding_Regulation.pdf (Accessed: 29 January 2025).

[13] Wirtz, J. (2023) Cross-border provision of crowdfunding – what do I need to know?, Bird & Bird. Available at: https://www.twobirds.com/en/insights/2023/global/cross-border-provision-of-crowdfunding—what-do-i-need-to-know (Accessed: 29 January 2025).

[14] Vyas, M. (2023) LegalPay launches dedicated Sports Dispute Resolution Fund to support athletes, The Economic Times. Available at: https://economictimes.indiatimes.com/tech/startups/legalpay-launches-dedicated-sports-dispute-resolution-fund-to-support-athletes/articleshow/100428486.cms (Accessed: 29 January 2025).

[15] Standard, B. (2023) Crowdfunding misuse case: SC Grants bail to TMC spokesperson Saket Gokhale, Business Standard. Available at: https://www.business-standard.com/india-news/crowdfunding-misuse-case-sc-grants-bail-to-tmc-spokesperson-saket-gokhale-123041700601_1.html (Accessed: 29 January 2025).

[16] Perrie, R. (2024) Ice hockey pro arrested over opponent’s death launches appeal to pay legal costs, The Irish Sun. Available at: https://www.thesun.ie/news/14387435/matthew-petgrave-adam-johnson-crowdfunding-costs/ (Accessed: 29 January 2025).

[17] https://www.bizbash.com/industry-insiders/article/22929455/6-sports-marketing-mustknow-trends-for-2025

[18] https://www.petcashpost.com/p/crowdfunding-the-future-of-sports

[19] https://projectplay.org/news/olympic-reform-commission-report-analysis-next-steps

[20] https://rsmus.com/insights/industries/media-entertainment/the-top-7-sports-industry-trends-to-watch.html

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