Nonprofit Radio: Crowdfunding


I’ll be on Nonprofit Radio speaking with host Tony Martignetti this Friday at 10:30 am PT / 1:30 pm ET about charitable crowdfunding. You can tune in to the live feed on Talking Alternative or catch up later on iTunes.

We’ll be talking about:

  • The difference between an individual and a charity crowdfunding for a charitable purpose
  • Whether a crowdfunding site operator is subject to charity regulations, like those for commercial fundraisers
  • The risks involved with crowdfunding from the charity’s and the donor’s perspective

10 Takeaways:

  1. An individual who is not acting as an authorized agent of a charity may need to register with a state charity official (typically, the Attorney General) before soliciting for charitable purposes, particularly if the individual compensates herself or himself with part of the proceeds for such activities.
  2. A donor to a crowdfunding solicitation by an individual (as opposed to a charity) for charitable purposes will generally not be eligible to take a charitable contribution deduction for the donation; accordingly, most donors would be well-advised to make charitable contributions to a recognized charity.
  3. A donor to a crowdfunding solicitation by an individual for charitable purposes may never be able to check whether the individual is actually using the donations as represented; accordingly, most donors would be well-advised to make charitable contributions to a recognized charity.
  4. State consumer protection laws may to some extent protect against fraud perpetrated by an individual raising funds for charitable purposes on a crowdfunding site, including by misusing the funds for personal gain.
  5. Crowdfunding site operators may or may not be regulated as commercial or professional fundraisers, fundraising counsel, or commercial co-venturers (if they are, they may need to register with a state charity official).
  6. Charities raising funds on a crowdfunding site, including through an authorized representative, have a responsibility to ensure that the site and any authorized representatives are not misrepresenting the charity or the nature of the solicitation in any way.
  7. Charities raising funds on a crowdfunding site must be careful to abide by any representation made on the site that may cause such funds to be restricted for the specified uses (e.g., to fund a particular project).
  8. Charities raising funds on a crowdfunding site should be careful of issuing appropriate donation receipts required by their donors to take a charitable contribution deduction, including written disclosure statements for quid pro quo contributions where the donors received something of value in partial return for their payments.
  9. Charities raising funds on a crowdfunding site cannot provide that the donor’s contributions are eligible for a charitable contribution deduction if the charity acts merely as a conduit for funds to go to a specific individual or to a taxable or foreign entity.
  10. Charities raising funds on a crowdfunding site that uses a donor advised fund to accept and regrant contributions to the charity should recognize that the funds are legally being raised for the sponsoring organization that operates the donor advised fund and that the sponsoring organization may choose not to regrant such funds to the charity if, for example, the charity has violated the requirements of IRC Section 501(c)(3) or other applicable laws.


Nonprofit Crowdfunding Risks

A Moving Target: The regulation of online fundraising platforms | The Nonprofit Times

Every Little Bit Counts: Crowdfunding for Nonprofits | The Law Project

Internet and Social Media Solicitations: Wise Giving Tips | NASCO


Social Impact Bonds: National Summit on Quality in Home-Visiting Programs

Risk and reward balance

I’ll be at the Fifth National Summit on Quality in Home Visiting Programs in Washington DC on May 7, 2015 participating on a panel discussing social impact bonds and pay-for-success financing. I’ll be joined on the panel, moderated by Lauren Schumer, The Pew Charitable Trusts, by:

David Juppe, Department of Legislative Services/Maryland General Assembly
Elizabeth Lower-Basch, Center for Law and Social Policy
Rhett Mabry, The Duke Endowment

Risk and Reward

Social impact bonds (SIBs) represent a form of pay-for-success financing.

In the Pay for Success model, governments partner with private sector investors who provide up-front funding to promising service providers. Investors only receive a repayment from the government if the service provider’s work is measurably successful. Because governments pay only if the programs work, the PFS model has the potential to more effectively allocate taxpayer dollars while increasing funding for programs that deliver improved social outcomes. – The Social Impact Bond Technical Assistance Lab (SIB Lab) at the Harvard Kennedy School

While SIBs provide for a mechanism in which governments can shift the risks of “unsuccessful” programs to the investors, they generally do so at the cost of paying more for “successful” programs. Typical profit-motivated investors will presumably develop strategies to mitigate the risks to maximize their opportunity for profits. Accordingly, SIBs must be seen as not merely a form of public-private partnership in which the interests of the government and investors are aligned to produce a favorable social outcome, but also one in which their respective interests are competing at selecting appropriate programs, metrics, parties, and payments.

For example, it would make little sense for governments to pay more for low-risk, high-social return programs that they should have simply funded directly. In contrast, it would make more sense for governments to pay more for high-risk, high-social return programs. Typical investors, on the other hand, will look for low-risk opportunities and/or mitigate the investment risks by negotiating metrics, terms, and conditions that favor their interests over the public interest. What will be required initially for the overall success of SIBs as a social financing strategy are true social investors who are willing to take on more risk for a less-than-market-rate return relative to such risk in exchange for advancing a social good.


What You Should Know About Social Impact Bonds, Gene Takagi

Social Impact Bonds: Overview and Considerations, Elizabeth Lower-Basch

Testimony of Dr. David B. Juppe, U.S. House Committee on Ways and Means, Subcommittee on Human Resources Hearing on Social Impact Bonds, September 9, 2014

Transcript for Pay for Success Social Impact Finance: South Carolina Home Visiting to Improve Health and Early Childhood Outcomes, March 11, 2013 (including comments from Rhett Mabry)

Quotes from Additional Resources

Social Impact Bonds: Lessons Learned So Far, Federal Reserve Bank of San Francisco

PFS contracts introduce several potentially valuable components: performance measurement, performance-based pay, an intermediary with management talent, financial resources for successful nonprofits to expand, and new program models. A subset of these components may be sufficient for, or may explain a large portion of, an intervention’s successful outcome. If the model is successful, we may not be able to tell the relative contributions of each.

Consider investments in prenatal health care. Such investments may produce short-term benefits such as improved infant and maternal health and lower health care costs, but they may also produce longer-term benefits such as reduced special education spending, reduced crime during teenage years, and increased adult earnings. While it would not make sense for a SIB contract to pay out over two decades as results become apparent—the feedback loop between management practices and results would be too long to be useful—it might be possible to design a SIB that paid out based upon short-term results that are predictive of longer-term benefits. It will be interesting to see whether any governments are willing to make payments based on these potential longer-term benefits.

How Will Governments Scale Pay for Success Contracts That Work?
In designing initial PFS contracts, it is important to have a vision for what will happen at the end of the contract if the project is successful. Clearly, it would be a bad idea to have the contract conclude, have services shut down, and then start the process of figuring out what comes next. But it is also not remotely possible to specify a plan for scaling up a successful intervention several years ahead of time since what is learned along the way will be critical to designing any follow-on plan. In practice, a sensible approach may be to write explicit deci- sion dates about contract extensions and scaling into the original contract with sufficient lead time to allow for effective expansion. For example, if the initial contract is for six years, then by the end of the fourth year a decision would be made about years seven and eight. Another question is whether follow-on contracts should assume the same PFS model or whether the government could simply contract directly for the now-proven program model. Ideally, the government will maintain capacity to measure impacts rigorously during successor contracts regardless of their setup.

Fact Sheet: Social Impact Bonds in the United States, Center for American Progress

At this early stage, SIBs are most appropriate for areas in which:

* Outcomes can be clearly defined and historical data are available

* Preventive interventions exist that cost less to administer than remedial services

* Some interventions with high levels of evidence already exist

* Political will for traditional direct funding can be difficult to sustain

 Building Networks Is Essential to Investment in Social Impact Bonds, Center for American Progress

The foundation staff also pointed out that potential collaborators should not assume foundations are exclusively interested in using any one type of capital: They have the ability to make grants, which require no payback; program-related investments, or PRIs, which are investments that focus on a charitable mission and range from 0 percent to below-market rate returns; and mission-related investments, or MRIs, which intend to achieve a market-rate return while advancing the foundation’s mission. Internally, most foundations split investment and grant-making functions into separate departments, which might mean different decision-making processes and priorities.

As conversations about social impact bonds continue, it is helpful to understand what drives potential collaboration among investors. Since each institution has multiple ways in which it could participate, it is not useful to make assumptions about whether or how any one organization would want to collaborate. Taking time to get to know an organi- zation’s mission, staff talent, available capital, appetite for risk, relationship with gov- ernment, and sustainability goals can help bridge the perception gap among potential investors. Participants at our discussions highlighted the role of networks in identifying expertise and understanding the bigger picture beyond the individual SIB transaction. Beyond access to financial capital, investors have intellectual and often community capi- tal that can be helpful in assessing whether to enter a deal.

Social Impact Bonds: Inside a Social Impact Bond Agreement, Center for American Progress

These challenges mean that the agreement itself—the contract signed by the government agency and the external organization—is critically important to the success or failure of a Social Impact Bond. Among other things, the contract will define the relationships and responsibilities of all the parties in this unusual arrangement, will set out the circumstances under which the external organization can expect to earn their payment, and will determine when either the government or the external organization can terminate the agreement. Writing the agreement well will help guarantee transparency and cooperation between the government and the external organization, help protect the vulnerable populations that the agreement serves, and make better outcomes possible.

Defining Terms in a Social Impact Bond Agreement, Center for American Progress

The contract should also place some restrictions on the government. In most SIB agreements this will include clauses prohibiting the government from exerting control over the external organization’s strategy or day-to-day operations. The contract should also prevent the government from intervening in the external organization’s selection of subcontractors and investors, though subcontractors will be held to the same standards as the external organization itself.

The Bottom Line: Investing for Impact on Economic Mobility in the U.S., Ascend | The Aspen Institute

Pay-for-success contracts are not appropriate for bleeding-edge innovation; they typically work best to scale up proven, battle-tested interventions.

For social service providers, social impact bonds represent a sea change not only in the amount, but in the kind of available capital. Payment in advance eliminates the challenge of meeting expenses while waiting for government reimbursement. Since investors are repaid based on outcomes, not inputs, unrestricted funding is not tied to specific program components and can be spent on what works best. With costs covered in full, providers can focus on services, not fundraising. All of that is intended to help high-performing nonprofits with proven interventions thrive, not merely survive.

 The Finalization of Urban Policy in the Age of Obama, Journal of Urban Affairs

The record on SIBs reveals several implications of the financialization of urban policy, that is, of aligning urban policy with the requirements of the funding mechanism. First is the pitfall of program selectivity. The tendency to fund programs that correspond to the underlying logic of SIBs is evident in the emphasis to date on programs designed to stem juvenile and adult recidivism and reduce use of healthcare and homelessness services. The aim of these programs is to reduce “subprime” behaviors that increase costs to governments and to use the cost savings to repay private investors and program needs that do not correspond to this logic are unlikely to be funded. A second and related problem is the monetization of outcomes. Because the aim is to reduce the cost of government programs rather than to address social issues per se, program success is defined in terms of cost reduction rather than the substantive effect on the underlying problem. As a consequence, programs that address a pressing social need but can’t directly be linked to cost reduction won’t be funded through SIBs. Third is the measurement problem arising from the assumption that changes in outcomes (e.g., reduced recidivism, lower healthcare costs) can be directly and causally attributed to the program intervention—a confidence in social science methodology that may be seriously misplaced. Ironically, given the logic of program evaluation, a positive outcome in the target population must exceed outcomes in the comparison population, so an improvement in the comparison population that could reasonably be considered a success for society as a whole would be deemed undesirable for investors. Fourth, SIBs’ reliance on independent evaluators to certify program success is likely to engender the same market-based pressures that bedeviled the bond rating agencies that certified the credit-worthiness of mortgage-backed securities prior to the economic collapse of 2007.

Social Impact Bonds: Phantom of the Nonprofit Sector, The Nonprofit Quarterly

It’s a public policy bet that has legislators of both parties and at the national, state, and local levels hopeful that private capital will somehow discover and fund public policy solutions that wouldn’t come to the fore without SIBs. It is a bipartisan dream built on a belief in the efficacy of the free market system that hasn’t borne much social progress fruit in recent years and rooted in a disparaging view of public servants, who have accomplished more than most free market true believers might ever guess.

Social Impact Investment, Building the Evidence Base, OECD

Social impact investment can potentially provide new ways to more efficiently and effectively allocate public and private capital to address social and economic challenges at the global, national and local levels. While these innovative new approaches will not replace the core role of the public sector or the need for philanthropy, they can provide models for leveraging existing capital using market-based approaches with potential to have greater impact. However, given that social impact investment is a nascent field, concrete evidence is needed in terms of its impact to date. In particular, further work is needed to demonstrate the gains from the social impact investment approach compared to existing social service delivery models.

While the social impact investment market has been growing significantly and has drawn increasing interest and attention, it is still in the early stages of development (Kohler et al, 2011) and is only a small share of the global capital markets today (Saltuk et al, 2014). While difficult to measure for a variety of reasons including the lack of clear definitions and the diversity of sectors and approaches across geographies, the social impact investment market potential has been estimated to be significant. This is due to growing interest among foundations and mainstream investors as well as an intergenerational transfer of wealth, estimated at USD 41 trillion that is expected to take place over the next 50 years with nearly USD 6 trillion of that expected to be directed towards social issues (Rangan et al, 2011).

Social impact investors, as well as targeted policies, can play a role in improving the effectiveness of social ventures (Jackson and Associates, 2012). Social impact investors can help social delivery organisations by providing not only financing but perhaps more importantly, support on strategy, management and growth (Bannick and Goldman, 2012). [Ed. Query the problems this can pose as well.] Helping social entrepreneurs grow their ventures to scale is the key to maximizing impact (Koh et al., 2012). The success of social impact investment is reliant on the long term sustainability and performance, both social and financial, of the impact organizations, for-profit and not-for-profit, in which the investments are made (Bannik and Goldman, 2012).

Despite the increased interest among institutional investors, securing commitment from traditional investors continues to be a challenge. The approach to institutional investors needs to be structured in way that works for them and in a language they can understand. Initiatives, such as GIIN, ANDE and SOCAP, which build links between mainstream and social impact investors, can help to create awareness and increase interest. Institutional investors also have certain legal requirements which can create barriers to social investing (Wood et al, 2012).

The lack of efficient intermediation in the social impact investment market translates into higher transaction costs caused by fragmented demand and supply as well as complex deal structuring (Freireich and Fulton, 2009). The early stage of ecosystem infrastructure development impedes the dialogue between investors and social ventures, which makes it difficult to break down historical barriers between philanthropy and investment (Freireich and Fulton, 2009). Platforms are needed to provide accessible distribution systems and offer comparable product performance (Jackson and Associates, 2012). This will also allow better matching of investor and investee risk/return profiles.


Opinion: Can Social-Impact Bonds Really Have Big Impact, The Chronicle of Philanthropy

I fear that even skilled nonprofits and intermediaries will have trouble translating great ideas into contracts that really provide the right incentives. When you look at how the parties do the accounting, how they measure “savings,” how they decide what the return should be and to whom at various break points, it gets inelegant, to say the least. – Clara Miller, President, F.B. Heron Foundation

Opinion: Social-Impact Bonds Need to Focus on Results, The Chronicle of Philanthropy

But financial savings are not our primary motivation, nor are they what brings our government, nonprofit, and investing partners to the table. Rather, progress toward social outcomes is the key motivator — supporting people in their efforts to get and keep jobs, build healthy families, improve educational opportunities; in short, finding ways to help our society’s most vulnerable reach their potential. Yes, the potential cost savings for government in the long term are compelling, but only because it offers a path to meaningfully solve or reduce problems that have stubbornly persisted even in the face of decades of effort. – Tracy Palandjian, CEO, Social Finance


Giving Tuesday: Legal Tips

Giving Tuesday philanthropy day message.

Here are a few quick legal tips for Giving Tuesday:

  1. If you intend to take a charitable contribution deduction, make sure you are giving to a qualified 501(c)(3) organization. You can check out the organization on the IRS Exempt Organizations Select Check. Limit search to organizations that are eligible to receive tax-deductible charitable contributions.
  2. If you want to learn more about the organization before making a contribution, consider reviewing its website along with its Form 990 annual information returns on Guidestar. You may also find the following resource helpful – Evaluating Charities Not Currently Rated by Charity Navigator – but we hope you’ll prioritize impact over overhead ratios (see Overhead Myth: Thoughts from a Nonprofit Attorney).
  3. If you are solicited by a commercial fundraiser, make sure the commercial fundraiser is properly registered where registration is required (e.g., California) and find out what percentage of your contribution will go to the charity vs. the fundraiser.
  4. If you want to restrict your contribution to a specific program or region, make sure you communicate that restriction in writing at the same time as making the contribution.
  5. If you want your contribution to go to a foreign charitable organization (NGO), note that if you make a contribution directly to the NGO, the contribution will not qualify for a charitable contribution deduction. However, if you make a contribution to a U.S. charity that exercises its own discretion and control to regrant your contribution to the NGO, the contribution may qualify for the deduction so long as you don’t explicitly direct that the contribution be regranted to the NGO. It may be appropriate to restrict the contribution to advancing the purposes of the NGO in that particular foreign country. See What is an American “Friends of” Organization? by Ellis Carter on the Charity Lawyer Blog.
  6. If you make a charitable contribution, make sure you have sufficient documentation to support taking a charitable contribution deduction. For contributions of $250 or more, it’s the donor’s legal obligation to obtain a written acknowledgement (not the charity’s legal obligation to provide one) with the required information.

Nonprofit Crowdfunding Risks

crowd funding word cloud

The popularity of nonprofit crowdfunding is undeniable. Last year alone, it is estimated that $5 billion was raised through global crowdfunding with about 30 percent of that total going to social causes. While that figure pales in comparison to the approximately $300 billion raised by charities in the US over the same time period, the number of donation and reward-based crowdfunding has increased by more than 85 percent worldwide in 2012 over the previous year. And it is expected to continue to grow.

With all of the excitement around nonprofit crowdfunding, it is easy to overlook some of the potential risks to this fundraising model.

Charitable Solicitation Registration

Fundraising on popular crowdfunding platforms, such as Indiegogo and GoFundMe, allows nonprofits to broaden their support base. An organization can be operating in San Francisco, and receive funds from an individual in New York City as a result of its crowdfunding campaign. This type of fundraising allows an organization to gain national exposure with very little upfront capital. However, it also potentially exposes the organization to the jurisdiction of every state where it is deemed to engage in charitable solicitation based on its crowdfunding efforts.

Currently, thirty-nine states and the District of Columbia have laws governing charitable solicitation. Each state has its own unique laws and regulations regarding what qualifies as solicitation as well as the when registration is required. For example, California law defines “solicitation for charitable purposes,” as any request, plea, entreaty, demand or invitation to give money or property in connection with an appeal for charitable purposes or in which the name of the nonprofit is used as an inducement for making a gift or in which any statement is made that the gift will be used for charitable purposes. Under New York law, “solicit” includes a direct or indirect request for a contribution, whether expressed or implied, through any medium. A strict reading of most state laws regarding charitable solicitations within a particular jurisdiction would likely require a nonprofit to register.

Most states require registration by an organization before making any charitable solicitation within the state. California, however, does not require registration until an organization receives funds or property for charitable purposes and then, it must register within 30 days of receiving the qualifying charitable assets.

The failure to register can result in both civil and criminal penalties and vary among the states. Potential penalties include state fines, requiring the nonprofit to return all solicited funds or ordering the nonprofit to cease soliciting donations within the state until registration is completed.

As you can see, there are distinctions to each state’s charitable solicitation laws. It could be quite burdensome for a small nonprofit to comply with the charitable solicitation laws of all of the applicable jurisdictions, but the penalties for failing to comply can be costly. In addition, the IRS now requires nonprofits to provide information about their state registrations on their Form 990, the annual reporting return that certain federally tax-exempt organizations must file with the IRS. If a nonprofit files an incomplete or inaccurate Form 990, the IRS can impose harsh financial penalties.

There has been some debate as to whether internet activity, such as fundraising on crowdfunding platforms, triggers state solicitation registration requirements. Some guidance is provided under the Charleston Principles, nonbinding principles drafted by the National Association of State Charity Officials (NASCO) in 2001.

Under the Charleston Principles, a nonprofit would be required to register for online charitable solicitations if the nonprofit solicits donations through an “interactive website”; and the nonprofit either: (i) “specifically targets persons” located in the subject state for solicitation; or (ii) receives contributions from the state on a “repeated and ongoing basis or a substantial basis” through its website.

Even if a nonprofit could argue that it did not solicit charitable funds within a state through its crowdfunding campaign, the follow up communication from the nonprofit to the donor, whether it be by email or letter (including the letter verifying the tax deductible donation) would be considered to target a resident of that state and would trigger the registration requirement.

Commercial Fundraisers

Under California law, a commercial fundraiser is a person or corporation paid by a nonprofit to raise money on the nonprofit’s behalf. The nonprofit pays the for-profit business either a flat fee or a percentage of the donations collected in the nonprofit’s name. A commercial fundraiser must register with the Attorney General’s Registry of Charitable Trust before soliciting charitable funds.

In my previous post, Crowdfunding Platforms & Commercial Fundraisers, I wrote that many of the well-known crowdfunding sites, such as Indiegogo and GoFundMe, do not appear to meet the California definition of a commercial fundraiser as they do not actively solicit funds on behalf of nonprofits, nor do they on their own, or through a compensated person, actually receive or controls the funds solicited by individuals or organizations for charitable purposes. However, with the large number of crowdfunding platforms in existence, a nonprofit may unwittingly campaign on a platform that falls within the definition of a regulated commercial fundraiser because it receives or controls the funds raised.

A commercial fundraiser typically has several of its own registration and reporting requirements. In addition, it may be required to enter into a written contract for each solicitation campaign, event, or service. A nonprofit may not be permitted to contract with any unregistered commercial fundraiser to solicit for charitable purposes and will be required to exercise oversight over the campaigns operated on its behalf. The Attorney General has the discretion to impose fines and other penalties, including civil and criminal actions, on nonprofits and unregistered commercial fundraisers who do not comply with the law.

Fraud and Misrepresentation

Nonprofits and commercial fundraisers are prohibited from misrepresenting the purpose of the charitable organization or the nature or purpose or beneficiary of a solicitation. Misrepresentation may be established by word, by conduct, or by failure to disclose a material fact. They are also prohibited from engaging in fraud or using any deceptive practice that creates a likelihood of confusion or misunderstanding.

The attorney general can file a lawsuit against a nonprofit or a commercial fundraiser who engage in misrepresentations or fraud while soliciting for charitable purposes. Earlier this year, Washington State Attorney General Bob Ferguson filed the first consumer action lawsuit over a project by an individual who failed to deliver a promised horror-themed decks of cards to individuals who crowdfunded his project on Kickstarter. Although this lawsuit was not against a nonprofit or commercial fundraiser, it does show that state lawmakers are paying attention to crowdfunding activities and are willing to bring suit against defrauders.

Nonprofits also should be aware that unscrupulous individuals may engage in unauthorized or fraudulent crowdfunding campaigns using the nonprofit’s name. To avoid fraud and misrepresentations, organizations should provide clear guidelines for crowdfunding as part of their overall gift acceptance policy. They should also provide individual supporters with clear messaging guidelines and ensure that these guidelines are followed. Many of these sites, including Indiegogo, allow for a “Verified Nonprofit Campaign,” badge to be placed on the campaign page to certify to contributors that funds will go directly to a verified nonprofit. Again, not all crowdfunding platforms will offer such a service, and therefore, it is important for organizations to provide individual supporters with clear guidance for campaigning on their behalf.

Crowdfunding can be a wonderful tool and resource for nonprofits to raise funds, but nonprofit leaders should be aware of potential associated legal risks and be prepared to comply with the laws of several jurisdictions.

Resources [UPDATED 4/11/15]

Regulation of Charities by the California Attorney General

Solicitation and Collection of Funds for Charitable Purposes (State of New York)

State Charitable Solicitation Registration Requirements (Asiatico & Associates, PLLC)

Fundraising Registration – Does Your Nonprofit Need to Register? (Nolo)

A Moving Target: The regulation of online fundraising platforms – The Nonprofit Times (3/13/15)

Every Little Bit Counts: Crowdfunding for Nonprofits – The Law Project (1/21/15)


Michelle Baker is is a San Francisco-based attorney interested in social impact.


Crowdfunding Platforms & Commercial Fundraisers

Blue Donate online

What keeps certain crowdfunding platforms like Indiegogo from falling within the commercial fundraiser regulations?

Crowdfunding for charities is not a new concept, but the use of third-party crowdfunding platforms, such as Indiegogo and GoFundMe have become extremely popular in the past few years. These crowdfunding platforms not only provide a venue to host charitable campaigns, but they also manage donations and track the progress toward the fundraising goals. In exchange for these services, the crowdfunding platforms charge a fee. For example, Indiegogo charges a fee of 4% for projects that meet their funding goal, and 9% for projects that partially meet their funding goal.

In 2013, it is estimated that $5 billion was raised through global crowdfunding with about 30 percent of that total going to social causes. With so much money being raised for charities through crowdfunding platforms, why aren’t these platforms regulated as commercial fundraisers?

A commercial fundraiser for charitable purposes is defined under California law as any individual, corporation, or other legal entity that for compensation does any of the following:

  • Solicits funds, assets, or property in California for charitable purposes.
  • As a result of a solicitation of funds, assets, or property in California for charitable purposes, receives or controls the funds, assets, or property solicited for charitable purposes.
  • Employs, procures, or engages any compensated person to solicit, receive, or controls funds, assets, or property for charitable purposes.

While crowdfunding sites, such as Indiegogo, do receive compensation for hosting campaigns on their websites, Indiegogo does not appear to actually solicit funds (request gift or money) on behalf on the charity. Instead, the actual content of the campaign is controlled by the campaign creator and it is up to the campaign creator to provide a compelling enough story to raise funds. Indiegogo does not actively solicit individuals to donate to campaigns on its website, but instead it provides an online platform where potential contributors (or donors) can review and select from hundreds of different campaigns for both charities and for-profit entities.

In addition, crowdfunding platforms generally do not themselves, and do not through compensated persons, actually receive or control the funds solicited by individuals or organizations for charitable purposes. The funds raised on Indiegogo are processed through PayPal and are disbursed to campaign owners once the campaign is completed.

Many crowdfunding sites are apparently aware of the potential confusion as to whether they fall under states charitable solicitation laws, including the California commercial fundraiser statute. On its website, GoFundMe posted a special note to regulatory agencies:

We do not engage in any solicitation activities; such activities are carried out by our users on their own initiative. Additionally, our “Charity Donations” are processed through a separate business entity, FirstGiving.

There has also been some discussion as whether the Charleston Principles, a set of nonbinding guidelines in response to the proliferation of web site solicitations developed by the National Association of State Charity Officials (“NASCO”), could provide any guidance on the potential regulation of charitable fundraising through crowdfunding platforms.

These Principles attempt to address the type of online solicitation activities by charities that would trigger a state’s registration requirements. Generally, the following activities will require a charity to register for online charitable solicitations:

  • A charity is domiciled in the state and passively or actively solicits contributions over the internet.
  • A charity is domiciled in the state and its principal place of business is located in that state.
  • A charity is not domiciled in the state, but its non-internet activity in that state would require registration under existing law.
  • A charity solicits donations through an “interactive website”; and the charity either: (i) “specifically targets persons” located in the subject state for solicitation; or (ii) receives contributions from the state on a “repeated and ongoing basis or a substantial basis” through its website.

These guidelines were drafted before crowdfunding platforms such as Indiegogo and generally address actions by actual charities raising funds; however, there is language in the guidelines that give the impression that state regulators anticipated the regulation of such platforms.

The Principles provide an exemption to the registration requirements for “entities that provide solely administrative, supportive or technical services to charities without providing substantive content, or advice concerning substantive content”. However, if these service providers do more than simply provide technical services and actually solicit or promote a website, then registration may be required. Compensation for services based on the amount of funds raised may be a strong indication the entity is doing more than simply providing technical services. If these Principles were binding, one could argue that sites such as Indiegogo, who charge fees based on the amount of funds raised may be required to register with the state.

However, the reality is that the law has not caught up with technology and most state laws regarding charitable solicitations and commercial fundraisers were drafted before the popularity of charitable fundraising on crowdfunding platforms. At this point, it appears they operate in a gray area of the law. Although the Charleston Principles may have anticipated fee-based service providers such as Indiegogo and the potential need to regulate them, these principles are nonbinding. As the popularity of charitable fundraising on crowdfunding platforms continue to grow, it will be interesting to see if and how the states will regulate them.


Charitable Solicitation Regulations: Frequently Asked Questions (Adler & Colvin)
The Long Arm of Charitable Solicitation Law (Charity Lawyer Blog)
Internet and Social Media Solicitations: Wise Giving Tips (NASCO)
Indiegogo Terms of Conditions
GoFundMe Terms and Conditions
Crowdfunding For Good Now A Growing Global Movement (Forbes)


Michelle Baker is a San Francisco-based attorney interested in social impact.


NEO Law Group’s Video on Tips for Starting a Nonprofit – Fundraising Before Exemption


Yesterday, NEO Law Group posted its third YouTube video on 2 minute tips for starting a nonprofit.  This video focuses on the issue of fundraising before receiving an exemption determination letter from the IRS. We hope that you enjoy it and please stay tuned for additional 2 minute videos with tips for starting a nonprofit.


Chronicle Live Discussion: Clever Ways to Thank Donors


Thank you card
On Thursday, October 31, The Chronicle of Philanthropy is hosting a live video discussion, Clever Ways to Thank Donors, that will show attendees how to be creative in their thank you's and also mindful of legal considerations, including federal rules regarding written acknowledgments and disclosures. You can also view the recorded version on the same site.

Tony Martignetti of Tony Martignetti Nonprofit Radio and Cody Switzer, The Chronicle's Web editor, are hosting. And I'll be a guest along with Claire Axelrad, fundraiser and principal at Clairification.

Cody started us off by asking me about the legal requirements around acknowledging donors for their charitable contributions. I gave a quick rundown of some basic rules:

  • A donor needs a bank record or written communication from the charity that states the name of the donor, the amount of the contribution, and the date of the contribution in order to be able to take a charitable deduction. A charity should be especially diligent about helping the donor establish her deduction when receiving a cash donation.
  • A donor needs more information from a charity for a charitable contribution of $250 or more. Notably, the written acknowledgment from the charity must include a statement that provides either (1) that the charity did not give any goods or services to the donor in return or (2) that the charity did give goods or services to the donor in return (in which case, the acknowledgment should describe the goods or services, including a good faith estimate of their value). There are several cases in which donors could not deduct their legitimate contributions just because the charity didn't provide them with written acknowledgments without one of the two statements above in a timely manner. And the IRS always wins when taking these cases to court.
  • A charity must provide additional information to the donor if providing goods or services back to the donor in exchange for a payment of more than $75, which is part charitable contribution and part purchase price. Such transactions are called quid pro quo contributions. In such circumstances, the charity must provide the donor with a written disclosure including a good faith estimate of the value of goods or services provided to the donor and a statement that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of money (and the fair market value of property other than money) contributed by the donor over the value of goods or services provided by the organization.
  • There are exceptions, including for certain defined token items and membership benefits.

Download Some Donation Receipt Rules for Charities [PPTX]

Tony then asked Claire about creative ways to thank donors. She first emphasized that charities need to thank donors within 48 hours (great advice!). Then she shared with us some examples, including handwritten cards, video thank you's, and baked goods.

See Claire's Pinterest Board on Gratitude – Nonprofits Say Thanks

As the lawyer in the discussion, I natch had to raise some cautions even while noting the importance of expressing gratitude in a variety of clever ways:

  • Exercise reasonable care in selecting any volunteer or staff person to personally engage with your donors, especially if they will be creating food items to give as a thank you. Rule of thumb: consider whether you would trust that person to deliver those items to your kids.
  • Train your volunteers or staff persons on how to engage with your donors. Make sure they don't make any misrepresentations (including stating how the donor's money will be used if that's not really the case).
  • Be careful of the potential dangers of any thank you gift (e.g., nuts in cookies, toys that might be swallowed by small children).
  • Get simple but sufficient licenses and/or releases if filming and/or publicly displaying videos of donors, particularly if children are involved.

Technical difficulties resulted in the recorded discussion being cut off after 45 minutes, but we continued to talk among ourselves as this is a fascinating and important topic for charities. Hopefully, we'll get the chance to do it again!


Independent Sector Public Policy Action Institute 2013: Key Issues in Tax Reform



Day Two of the Independent Sector Public Policy Action Institute kicked off with a session on tax reform moderated by Kyle Caldwell, Charles Stewart Mott Foundation, and divided into five hot topics.

Charitable Deduction. Richard Schmalbeck, Duke University School of Law, discussed the availability of a charitable contribution deduction only to itemized filers and the 28 percent cap for high-income taxpayers proposed by President Obama, which he supported as a possible solution.  Sue Nelson, America Heart Association, began by stating that she did not expect major tax reform in the next five years and noted that the sector has diverse levels of interest on the issue of the charitable deduction. 

Non-cash Contributions. Victoria Bjorklund, Simpson Thacher & Bartlett LLP, discussed policy issues surrounding the general 30 percent deduction rule but startled the audience by noting that the IRS has a 100 percent win rate on the denial of deduction cases involving noncash contributions and defective substantiating paperwork (Forms 8283 and 8282). Seth Turner, Goodwill Industries International, Inc., discussed the potential adverse impact on Goodwill of policies that would diminish the incentive of noncash contributions.

UBIT/Commercial Activity. Jill Manny, National Center on Philanthropy & the Law, NYU School of Law, discussed basics of UBIT and the commerciality doctrine and noted the unlikelihood of reform hitting these areas. Exactly how much unrelated business activities are permissible to a charity remains vague, but a bright line test doesn't seem practicable. Angela Williams, YMCA of the USA, emphasized the need for nonprofits to be part of the conversations on tax reform because they are the starting point of conversations for years to come. She mentioned the Business Coalition for Fair Competition's advocacy against earned income activities of nonprofits, reminding the audience of the need for a counterpoint. 

Community and Private Foundation Issues. David Shevlin, Simpson Thacher & Bartlett LLP, discussed the equivalency determination repository; differing conflicts of interest rules for public charities, private foundations, and donor-advised funds (can they be harmonized?); the wide spectrum of investments that don't all fit into legally defined categories; and donor-advised funds (will the still-forthcoming IRS regulations treat them like private foundations?).  Sue Santa, Council on Foundations, echoed the need for strong advocacy by the sector, the importance of drawing a line in the sand to protect against a chipping away of the charitable deduction, and the work of Charitable Giving Coalition. She also noted the proposed tiering of the charitable sector, dividing charities into different classes subject to different tax treatments.

Nonprofit Advocacy and Political Activity. Nina Ozlu Tunceli, Americans for the Arts Action Fund, discussed proposals limiting 501(c)(4) political activity following the recent IRS controversy that range from 0 to 49 percent. Greg Colvin, Adler & Colvin, started by calling on foundations to remove the prohibition against lobbying from their grant agreements. He then noted the problems with the lack of guidance on political intervention (what it is and how much is permitted) and the solution proposed by the Bright Lines Project


Overhead: The Good and Bad




Last Friday, Gene was on Nonprofit Radio discussing examples of good and bad overhead following host Tony Martignetti’s interview with the three signatories to The Overhead Myth letter.  The growing rejection of the myth that overhead is a good way to measure a charitable organization’s value is a promising trend.  The overhead myth has long contributed to nonprofits under-investing in critical aspects of their organization and operation solely to appease donors and board members who bought into the popular longstanding myth.

This is not to say that overhead ratios are unimportant.  But, the numbers should be interpreted within the larger context of how the organization is functioning.

As Gene noted on the program, some types of overhead may be better than others. Good overhead expenses advance an organization’s ability to further its mission.  Higher overhead ratios, relative to comparable organizations or historic figures, may be justifiable where the organization is building structures and systems to increase its effectiveness and/or efficiency, or to resolve problems that have arisen or previously been unaddressed.  Bad overhead expenses do not advance an organization’s ability to further its mission or do so only in an inefficient, non-strategic manner.  With recognition that there may be exceptions based on an organization’s unique facts and circumstances, here are some examples:

Good Overhead: 

  • Education.  A strong organization ensures that its board and executive are empowered with the information required to do their jobs well.  It is far too common for organizational leaders to lack experience in critical areas of governance and management and to allocate insufficient resources for their development.  Generally, an organization can only go as far as its leaders take it, so it’s imperative to properly equip such leaders.
  • Policy Creation.  A strong organization is guided by sound policies that help improve its operations, prevent costly mistakes, and keep it legally compliant. Examples of important policies for a nonprofit include those covering: conflicts of interest, document retention and destruction, whistleblowers, gift acceptance, expense reimbursements, contract approval, check-signing, internal controls, investments, employment, social media, and intellectual property.
  • Risk Management.  A strong organization recognizes that “an ounce of prevention is worth a pound of cure” and places value on protecting its leaders, employees, and volunteers.  Assessing risks with the help of experts through legal, accounting, and program audits may be invaluable in mitigating risks, preventing waste, and finding new areas of efficiency.
  • Technology (including information technology).  A strong organization invests in tools that help advance its ability to further its mission.  Dated technology may be more expensive to maintain, create inefficiencies in productivity, and hinder or prevent expansion.  New technology may allow for more effective and/or efficient ways of delivering services, receiving feedback, mobilizing advocacy efforts, measuring and analyzing impact, communicating with donors and other supporters, and finding new donors.
  • Building engagement and collaboration.  A strong organization engages its staff, board, volunteers, allies, and communities.  If an organization’s most valuable asset is its people, sufficient investments to recruit and retain the best people for the job are critically important.  This relates to compensation, training, communications, workspace, job flexibility, and appreciation among other things.  External communications should reflect the values and professionalism of the organization.  In budgeting for such efforts, an organization’s leaders must consider the value it places on its public reputation, goodwill and transparency.  Such communications may be tremendously important as building blocks for future collaborative efforts, something every organization should be exploring.

Bad Overhead: 

  • Certain insider transactions.  Insider transactions that benefit insiders (board members, officers) more than the organization’s intended beneficiaries may be unlawful.  But even when they’re not, and even if such transactions merely give the appearance of benefiting insiders more than beneficiaries, an organization should think carefully and consider alternatives before proceeding.
  • Extravagant expenses resulting in trivial benefits.  What is extravagant?  What is trivial?  Smart organizations will consider these questions from the perspective of their donors and other stakeholders before spending.  For some organizations, a $500 daily hotel bill may be acceptable in certain circumstances; for others, it might be considered outrageous and severely harm the organization’s goodwill.
  • Expenses that further some cause other than your mission.  There are many worthy causes, but a charitable organization is legally bound to advance its own stated mission.


Co-authored with Gene Takagi.


Overhead Myth: Thoughts from a Nonprofit Attorney



On June 17, 2013, the CEOs of GuideStar, Charity Navigator, and BBB Wise Giving Alliance signed a letter to the Donors of America denouncing the “overhead ratio” as a valid indicator of nonprofit performance. Leading commentators applauded the move even while some noted that charity ratings organizations, like some of the signatories to the letter, were in no small part responsible for perpetuating the "overhead myth." Meanwhile, nonprofit executives and Dan Pallotta collectively said, "It's about time."

What is overhead?

Overhead generally refers to an organization's administrative and fundraising expenses. Overhead Ratio is the ratio of overhead expenses to total expenses. A 30% overhead ratio indicates that 30% of an organization's total expenses went to overhead; the corollary is that 70% went to program expenses.

Why do donors want to fund programs instead of overhead?

Understandably, donors have equated funding programs with impact. But investments in infrastructure and public education/support may have as much to do with impact as investments in the direct provision of goods and services. Donors want to see their dollars produce the most charitable impact possible. It is overly simplistic, and in most cases, flat out wrong, that the more dollars that go to programmatic expenses, the bigger the charitable impact. This is best explained with a simple example:

Charity A spends 10% on overhead and 90% on programmatic expenses to provide charitable services to children with cancer and their families. With a $1 million budget, Charity A helps 90 families with 8 hours/month of direct services. Charity A's programs, and donor base have remained relatively static for the past ten years, but it has suffered from frequent turnover of managers, low employee morale, outdated technology, and weak systems.

Charity B pursues the same mission as Charity A but last year spent 40% on overhead and 60% on programmatic expenses. With its $1 million budget, Charity B helps 200 families with 20 hours/month of direct services. Charity B has strong leadership, makes smart use of outside experts, and invests in infrastructure and technology to leverage continued growth. As a result, Charity B is rapidly expanding its operations with a much broader and engaged group of donors and funders, and sharing and collaborating with other organizations to create greater impact beyond the communities it directly serves.

Charity A may have a much lower overhead ratio than Charity B, but a donor's investment in Charity B will result in a much greater impact on the lives of children with cancer, their families, and the braoder community.

Does the law have anything to say about overhead?

Not explicitly. But 501(c)(3) organizations are required to be operated primarily to further one or more 501(c)(3) exempt ("charitable") purposes. Additionally, they must not be operated to benefit private interests, except incidentally in furthering the public's interest. If a 501(c)(3) organization is using a high percentage of its resources on activities that are not charitable, the IRS may charge that the organization is not using charitable assets in a manner that is commensurate with its charitable purposes and revoke its 501(c)(3) status. The underlying rationale is that such use of charitable assets is evidence that the organization is not operated primarily for charitable purposes and likely operated with the primary intent to benefit private interests (like those of a commercial fundraiser or highly paid insiders).

What are our thoughts on overhead?

The amount of overhead and the ratio of overhead to programmatic expenses are by themselves poor measures of a charity with few exceptions. As we noted above, the overhead ratio may have little to do with impact. This is not to say, however, that the overhead ratio should not be considered at all. Particularly when looked at over a period of years in relation to several other impact-related factors, the overhead ratio may indicate whether or not an organization is making good use of its funds, is well managed, and is serving primarily public rather than private interests. Consider the following example:

Charity C has spent 70% on overhead for each of the last 5 years but its overall revenues, net assets, persons served, infrastructure, programs, and public outreach have remained static and uninspired the entire time. Charity C pays its founder/CEO top dollar (to the extent permissible), engages in costly fundraising efforts that produce relatively small amounts of net revenue, and has a board that is composed solely of the founder's close friends and business associates.

Charity C may not be the ideal organization for a donor wanting his or her contribution to have the greatest impact possible. Its high overhead ratio doesn't appear to be justified by progress in its performance or impact, and its leadership doesn't inspire confidence that these factors will improve.

Other Resources

It's Time for Real Talk About Real Nonprofit Overhead Costs – HuffPost Impact

Getting Clear About Overhead – The Center for Effective Philanthropy