Crowdfunding for Nonprofits

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Crowdfunding is a term that refers to any effort to raise money with donations from a large number of people.

Crowdfunding was first used by entrepreneurs as a way to attract small-sized investments to for-profit ventures, primarily via the internet. Now, crowdfunding is projected to become a $90-96 billion dollar industry by 2025, and is being touted as a valuable tool for fundraising for charitable nonprofits.

In connection with nonprofits, crowdfunding happens through websites tailored to showcase specific projects or causes and accept donations, or (2) in-person, arranged around high-energy, community-building events.

What nonprofits need to know

Online crowdfunding happens via websites (such as “Kickstarter” or “Indiegogo”) that allow sponsors to post descriptions, and even pictures of their projects, to attract donations. Via the internet crowdfunding can reach a much more diverse audience than a nonprofit’s regular audience. A crowdfunded project’s online presence can be shared easily via Facebook, Twitter, or any other social media platform. Live crowdfunding, on the other hand, features live events where spokespeople for the nonprofit pitch their cause to those gathered. Audience members pledge donations in an auction-like setting. These event are hosted by those raising funds or by third-party organizations that specialize in creating crowdfunding events.

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.

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 do not specifically address solicitations via the internet or mobile technology, or crowdfunding - yet. Until they do, charitable nonprofits have the obligation to treat crowdfunding like any other fundraising activity – which means that charitable registration most likely applies.

  • The Attorney General of Michigan issued a statement specifically about crowdfunding, but 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.

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