What Nonprofits Need to Know About Crowdfunding

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Crowdfunding is any effort to raise money with donations from a large number of people. At its inception, crowdfunding was primarily used by young entrepreneurs as a way to capitalize new for-profit ventures. Now, crowdfunding is projected to become a 90-96 billion dollar industry by 2025, and is being touted as a valuable new tool for fundraising for charitable nonprofits. (No data exists yet that can tell us how many dollars are raised for charitable causes through crowdfunding.)

Crowdfunding happens through either (1) online websites tailored to showcase specific projects or causes, or (2) in-person, arranged around high-energy, community-building events. Here’s a primer:

- Online crowdfunding happens via websites (you may have heard of “Kickstarter” or “Indiegogo”) that allow sponsors of the event to post descriptions, videos, and pictures of their fundraising projects, along with a dollar amount goal. Online crowdfunding has the benefit of expanding far beyond a project’s typical audience, since anyone with internet access has the potential to learn about your project or fundraising cause. A crowdfunded project’s online presence can be shared easily via Facebook, Twitter, or any other social media platform. Additionally, most crowdfunding platforms allow the sponsor of the event fundraiser to reward donors for various levels of donations, which builds excitement that can motivate even more donors to support the cause.

- Live crowdfunding, on the other hand, features exciting live events hosted by those raising funds or by third-party organizations that specialize in creating crowdfunding events, such as The Funding Network (itself a nonprofit). The Funding Network (TFN), which recently founded a chapter in New York, is a London-based organization that is expanding its crowdfunding services globally. Nonprofits wishing to use crowdfunding to fundraise may apply for one of three spots at each live-crowdfunding event hosted by TFN. Nonprofits have the opportunity to give a six minute pitch and answer questions from the audience; audience members then pledge donations in an auction-like setting. “Live crowdfunding,” says Dana Williams, Program Director at TFN’s New York chapter, “brings people together who want to make a bigger impact.” Though TFN specializes in live event crowdfunding, Williams notes that all types of crowdfunding are “democratizing philanthropy.”

How Are Nonprofits Using Crowdfunding?

Nonprofits are using crowdfunding across the globe to expand their reach and raise funds as well as awareness for the causes that matter most to them. This past January, the Utah Nonprofits Association hosted crowdfunding specialist Devin Thorpe to speak about how nonprofits can benefit from online crowdfunding. Thorpe, author of Crowdfunding for Social Good (available as a free download), sums up the influence of crowdfunding: “While crowdfunding does not constitute a complete development plan, no development plan is complete without crowdfunding.”

Any nonprofit can take advantage of the benefits of either live or online crowdfunding. Both models allow donors to ask questions and offer feedback, facilitating discussion and building relationships between donors and organizations. Additionally, both can attract and inspire new donors who might not have contributed to your cause otherwise.

What Should Nonprofits Know About Online Crowdfunding?

There are important nuances in online platforms that nonprofits should be aware of. Some platforms are tailored for creative projects, while others cater specifically to nonprofits interested in using crowdfunding to fundraise. Additionally, different platforms charge different fees: some charge more if a project doesn’t reach its goal, while others don’t charge a fee at all, but also don’t allow the sponsoring nonprofit to collect donations unless they reach the target amount. In that case, donations are never actually collected/debited from the donor’s credit card, so donors’ contributions are not made, and neither the crowdfunding platform nor the nonprofit receive revenue. Something to be alert to: All crowdfunding platforms charge a baseline processing fee, and fees vary.

Pros and Cons of Crowdfunding for Nonprofit Fundraising

Some commentators suggest crowdfunding is pushing charitable nonprofits to be more transparent, since crowdfunding platforms encourage nonprofits to showcase specific projects and indicate how and where a donation of ten, twenty, or fifty dollars will be used. Others point out that online crowdfunding could open up new avenues for fraud, since donors often have not had person-to-person contact with the organization they contribute to. Still others warn that potential donors—who could be anyone from your neighbor to a sympathetic donor thousands of miles away – are less likely to be repeat donors, and that the time, energy, and effort required to host a successful crowdfunding event is draining, with very little promise for a long-term financial return.

Before Your Nonprofit Crowdfunds….Caution!

As with any fundraising activity, nonprofits need to know the laws that regulate fundraising. In the majority of states there are laws that require charitable nonprofits to register with the state BEFORE soliciting residents of that state. This means that an online crowdfunding event for a California charitable event, hosted through a platform based in New York, sending messages to potential donors known to be in Illinois, has to wonder, “Which combination of these three states should our nonprofit be registered in?” Good question; one that savvy board members and staff members of charitable nonprofits are increasingly realizing they have to answer in order to responsibly raise funds using the internet or mobile technology, including crowdfunding.

Charitable solicitation laws in most states remain murky when it comes to solicitations via the internet or mobile technology, and such laws don't address crowdfunding - yet. While the Attorney General of Michigan recently issued a statement specifically about crowdfunding, it focuses less on the obligations of charitable nonprofits, and more on the obligation of donors to keep their eyes open for fraud. The National Association of State Charity Officials published Social Media and Internet Solicitation Wise Giving Tips that offers guidance to nonprofits, donors, and web-based fundraising platforms, warning the latter about their need to be aware of legal requirements pertaining to fundraising, and instructing them to alert the nonprofits they work with about state-specific charitable registration requirements. But don’t rely on the fundraising platforms – know what your nonprofit’s legal responsibilities are.

Ready for more? Join your state association of nonprofits to connect with useful information and stay up-to-date with trends, like crowdfunding, and review our resources on fundraisingcharitable registration, and crowdfunding

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