Crowdfunding and the Non-Profit

Crowd funding is receiving a lot of attention these days, as social media provides new avenues for raising money. More than 450 crowd funding platforms have sprung up in the last few years such as Kickstarter, the platform that enabled funding of the Oscar-winning documentary ‘Inocente”. Donation campaigns are the top performers with 49% of the monies raised going to philanthropic causes. It’s no surprise then that social cause-focused sites have emerged.

New twist on an old idea

While a new opportunity for many businesses, crowd funding has been one of the more traditional ways non-profits and charitable organizations have raised funding for decades. Crowd funding is defined as “the collective effort of individuals who network and pool their resources… to support other people or organizations” You see aspects of crowd-funding in disaster relief projects, national pledge-drive telethons, school fund raising drives and charity auctions.

Social Causes and Crowd funding

Via crowd funding sites such as Razoo, CauseVox and 33Needs the NPO can deliver its fundraising campaign to more individuals with relative ease and modest expense. The platform itself allows NPOs to touch broader audiences as well as deeper into existing sponsor pools. I learned that one client has used the concept of crowd funding to enhance their existing programs with their large corporate sponsors. They created a number of individual corporate sites where employees can purchase a gift for a child with their donation. The specificity of where their money goes helps to entice individuals to donate and reaches them at their desk with regular corporate updates.

One big difference between crowd funding and traditional donation platforms is the framing of the campaign on the site as a specific objective and not just a generalized fundraising goal that generally supports the mission of the NPO. From an accounting perspective, the reporting for this effort is referred to as restricted giving. There are specific rules and requirements that must be followed to properly account for and report on such efforts.

Restricted Giving in Fundraising

An appealing characteristic of restricted giving campaigns is that they are often more successful than unrestricted giving. Non-profits may be tempted to develop crowd funding campaigns that are built around a restricted giving objective to increase response. By tugging at the heartstrings of donors to fund a specific need like a new center, the thinking is that the overflow of the proceeds could simply flow to the general funds of the NPO. While it may seem harmless since it’s all going to the same charity, the ask that NPOs make needs to be clear to assure accurate reporting and compliance with donor expectations.

For example, a non-profit literacy group may decide to open a center in a new area to support an unserved population. The opening of the center can be seen as a specific goal and the money raised considered as restricted giving. With a crowd funding site, they can solicit donations from the existing donor pool, as well as send out requests and promote the campaign on the site itself, attracting visitors and promoting the cause through social media more easily than with a traditional donation platform..
The challenge to accurately report and use the funds arises from the results. Let’s say they’ve determined that they need $250K to open the new center, but what happens if they were to only raise $100K? What can they do to redirect that money to the general mission of the NPO? Do they have to give it back? If they keep it, can they use it for others purposes?

It’s the wild west and there are few if any best practices or guidance to help govern behavior. Until there are, non-profits need to operate with caution.

Recommendations

Craft the message of your campaign carefully. Indicate that if sufficient funds are not raised to achieve the campaign objective that the funds raised may be redirected into the general funds of the NPO in support of its mission.

  1. Err on the side of restricted giving in your accounting. The nonprofit world is even more vulnerable to reputational damage than the corporate Just the hint of fraud or bait and switch tactics can tank a non-profit. State what you’re going to do and do what you’ve said and communicate extensively with your constituents and the donors.
  2. Be prudent with your rewards: Don’t offer an incentive that is likely to be viewed under even the most restrictive rules as a security. Shopping bags are ok. A brand new car clearly is not. While I’m exaggerating for effect, the lines can easily be blurred and so engaging an expert to double-check your thinking is important.
  3. Document everything — Accumulate sufficiently granular information so that when rules are promulgated, that you can conform to them with relative ease.

Crowd funding provides great opportunities to both fund raise as well as build a stronger and more engaged constituency in your community. Until there are established rules, all actions must be thought through carefully and planned for various contingencies. Applying the recommendations given gives you the ability to provide transparency to all stakeholders – donors, administrators as well as the government – that result in a view of the organization as one that made the very best effort to conform to best practices and to emerging regulatory frameworks.


Jess Gutierrez LR

Jess leads the Non-Profit practice group and his work over the past twenty five years includes supporting foundations, research institutions, land trusts, and children’s support agencies. He works with management teams and Boards on the development of financial reporting systems, policies and procedures, strategic planning, forecasts and budgets, and recruiting and training accounting personnel.

If you would like to speak with Jess, please use the Comments section to make a request.

 

 

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