Rewards crowdfunding
Raise money online from many backers who get a reward, often the product itself, instead of a share of the business. No repayment or dilution, but you must deliver what you promised, and the money is usually taxable income.
- No security
How it works
You run a campaign on a crowdfunding platform, set a target and offer rewards at different pledge levels: an early version of your product, a thank-you, a credit or an experience. The SBA describes crowdfunders as expecting a "gift" from your company as thanks, not ownership or a financial return, which makes it popular for creative works and new physical products.
Platforms set their own rules, including whether you keep the money if you miss your target, and charge platform and payment processing fees. Read the fine print for your financial and legal obligations.
Delivering what you promise: the Federal Trade Commission's first crowdfunding case, in 2015, was against a creator who raised more than $122,000 from 1,246 backers for a board game, then spent most of it on himself and neither delivered the rewards nor refunded backers. The settlement banned him from misrepresenting any crowdfunding campaign and from failing to honor stated refund policies. Describe your project honestly, use the money as you said, and keep backers informed if you cannot deliver.
Tax: the IRS says money given out of generosity, with nothing expected in return, is a gift. When backers receive goods or services for their contributions, the money is generally not a gift; treat it as business income and keep records of the campaign and how the money was used. The platform or its payment processor may send you a Form 1099-K. Ask your state's tax agency whether sales tax applies to rewards.
Not an investment: if you offer backers a share of the business, its profits or interest instead of rewards, you are selling securities, and the securities laws apply (see Regulation Crowdfunding).
Upsides and downsides
Upsides
- No repayment, no interest and no shares given up
- Shows real demand before you make the product
- Builds a community of early customers and supporters
Downsides
- Needs an audience and a lot of promotion to succeed
- Platform and payment fees, plus the cost of rewards, reduce what you keep
- The money is usually taxable income
Risks
- Failing to deliver can bring refund demands, complaints and FTC action
- Rewards that cost more to make or ship than planned can wipe out the money raised
- A failed campaign is public
What it costs
- How it is priced
- Platform and payment processing fees, plus the cost of making and shipping rewards
- Costs that are easy to miss
- The cost of making, packing and shipping rewards, which can be higher than planned
- Time spent preparing, promoting and running the campaign
- Income tax on the money raised, and possibly sales tax on rewards
Depends on your campaign, your audience and what backers will pay for the rewards.
Planning a campaign? What a crowdfunding campaign leaves you: see what is left after fees and rewards
Does it fit?
Could fit when
- You are launching a product that people can pre-order as a reward
- You have loyal customers or supporters who would back a project
Unlikely to fit when
- You need the money within weeks
- You need a large sum for running costs rather than a product or project
- You cannot produce and ship the rewards within your budget
Who can use it
- Business types: Sole proprietorship, Partnership, LLC, S corporation, C corporation, Benefit corporation, Cooperative, Nonprofit
- Open to businesses with no sales yet
- A product, project or cause that backers will pay to support
- Each platform's own rules on what can be funded
Am I ready?
What a provider is likely to ask for. Tick what you have. Your ticks stay in this browser and nothing is stored. Checklist for all crowdfunding and community finance
0%
0 of 4 ticked
- Campaign plan
- Audience ready
- Delivery costs worked out
Regulation and protections
Regulators: Federal Trade Commission (FTC); Internal Revenue Service (IRS).
Who runs it: Private providers, nationwide.
Not a financial product. The FTC Act bans deceptive and unfair practices, which covers misleading campaigns and unkept refund promises. Platforms set their own rules for creators.
Types of provider: Rewards crowdfunding platforms.
Also consider
What has changed
No changes since this page was published. It was last checked against its sources on October 17, 2026.
Sources
- SBA: Plan your business (fund your business: crowdfunding) · checked October 17, 2026
- FTC: Crowdfunding project creator settles FTC charges of deception (June 11, 2015) · checked October 17, 2026
- IRS Tax Tip 2022-120: Some things to know about crowdfunding and taxes · checked October 17, 2026
- SEC: Common startup securities · checked October 17, 2026
Something wrong or out of date?
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