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PayPal crowdfunding campaigns must be 'explicit' that rewards are not guaranteed

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PayPal is now working with crowdfunding creators to identify if campaigns are pre-selling merchandise or acting strictly for fundraising, chief risk officer Tomer Barel announced via PayPal's site.

Under the site's new rules, crowdfunding campaigns may proceed without payment interruption as long as the owner is "explicit and transparent" that backers are not guaranteed reward delivery for their contribution.

In September 2013, Barel announced that PayPal would change its policies after receiving criticism for freezing crowdfunding collections. According to Barel, the core of the issue lies with how crowdfunding is "fundamentally different" from regular e-commerce.

"There is a distinction between crowdfunding and 'preselling,'" Barel wrote. "In crowdfunding, the process involves speculatively supporting a new concept that may, despite the best of intentions, not make it to market. In 'preselling,' there is an expectation that you will get something tangible for your money ... even if it takes months for delivery."

According to Barel, several crowdfunding sites will allow campaign owners to access that money before the final goal is reached. This process usually begins "while the crowdfunding process using PayPal is continuing."

"If it is not made clear that there is no guarantee of product delivery, this can cause regulatory and risk issues (and upset customers) when the final goal isn't reached," Barel wrote.

Barel added that the changes made have already helped campaigns pursue fundraising without interruption. More details on the overhaul are available through the site's help page.

"Currently, PayPal is the only payment company that has customized its policy and processes to specifically support crowdfunding and we have done it without changes to our price structure," Barel wrote. "Providing a lower price point than our competitors is also important to us because PayPal's very essence is in connecting people. The last thing we want to do is get in the way of the innovative new products coming from entrepreneurs raising money via crowdfunding."