Instructor teaches fundraising rules

Your heart is in the right place, but you still run the risk of incurring liability for your nonprofit or for yourself if you don’t know the fundraising rules. Attorney Kathryn Thomas is the Executive Director and Corporate Counsel at the Colorado Nonprofit Legal Center, a nonprofit dedicated to providing steeply discounted legal services to other nonprofits operating in Colorado. She is an adjunct professor at the University of Denver Sturm College of Law and the Daniels College of Business. She shares pointers for nonprofit as they advertise their fundraising campaigns.

False Advertising:  Is your Nonprofit Unwittingly Misleading Donors?

Most nonprofits approach fundraising with good intentions.  You write catchy slogans and create sleek fundraising materials with the goal of raising more money to fund your key programs.  I don’t know anyone who would say raising additional funds to assist those in need is a bad objective.  However, many nonprofits unwittingly cross the line into false advertising by not understanding the law and fundraising rules.

False advertising may lead to steep penalties for your nonprofit.  Here are three areas where I frequently see nonprofits make mistakes:

Since we are a nonprofit, false advertising laws do not apply.

A common misperception is that nonprofits, by virtue of being nonprofit, do not have legal issues.  However, most laws that apply to other business entities also apply to nonprofits.  False advertising is one of those laws. 

This means that communications to the public must not include false or misleading statements.  For example, stating that 100% of a donation is going to a program is false in most circumstances.  This occurs because nonprofits have overhead costs.  If a donor pays by credit card, the nonprofit pays a percentage of the donation in fees to the credit card company.  Therefore, 100% of the donation did not in fact go towards funding a program.

Commercial co-venture agreements where a for-profit donates a percentage per sale of a product to your nonprofit.

Many for-profit organizations wish to work with nonprofits in order to boost sales.  A common practice is to donate a specific amount per sale of a product to the nonprofit.  This incentivizes consumers to buy that brand in order to help those in need. Again, know the fundraising rules to avoid liability for nonprofits.

Most states, including Colorado, require specific disclosures to the public when running this type of campaign (legally coined commercial co-venture).  I frequently see campaigns that say, “a portion of the proceeds will go to XYZ Nonprofit”.  This is considered misleading because it does not indicate the exact amount donated.  In order to avoid this, nonprofits and the companies they work with must be sure to include the specific amount donated.  For instance, “5% of the net profit will go to XYZ Nonprofit”.

Matching gift campaigns where the nonprofit has already received the funds from the donor providing the match.

A nonprofit cannot receive the funds from the initial donor prior to the start of a matching gift campaign.  Otherwise, the communication to prospective donors is false.  This occurs because a new donation cannot be “matched” if the matching funds are already in the nonprofit’s bank account.  Instead, the original donor is the one getting his/her funds matched. To avoid false advertising in match campaigns, the nonprofit must have the original donor hold onto the money until other donors send funds.  Alternatively, a third-party may hold the funds in escrow.

Kathryn Thomas

Kathryn is no longer teaching this class. But you can find our current course on legal and ethical responsibilities for nonprofits here.

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