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http://www.nonprofits.org/misc/981027em.html

 

The Internet Nonprofit Center - Nonprofit FAQ

How Can We Use the Internet for Fundraising?

by Eric Mercer (October 27, 1998)


 


I. Introduction

There are many mechanisms available today for tax-exempt, nonprofit charities to solicit donations online, and most publicly-supported organizations have probably considered how they can tap this potential revenue stream. Most of the existing mechanisms have closely analogous counterparts outside the online realm, but all have unique aspects and raise new issues associated with the dramatic speed, relatively low cost, and naturally national and international scope that is characteristic of online communications. This document briefly describes the mechanisms that the author has encountered for soliciting donations online and presents some considerations for organizations interested in using them.

(Note: A long list of websites offering services or support for fund-raising online can also be found at the Internet Nonprofit Center.  See http://www.nonprofits.org/npofaq/misc/990804olfr.html.)

This document is significantly longer than most NPO-FAQ texts. Nevertheless, it is not a complete listing of all mechanisms and permutations of mechanisms possible for online fundraising, or even currently available. Nor does it present all possible uses of the Internet for fundraising (e.g. how to research grants online), although a moderate introduction to the broader universe of online resources is given in the references. My goal is to provide an introduction and a classification scheme to help readers learn to effectively evaluate alternative methods of online fundraising. Unfortunately, very little is simple on the frontier of the Internet, primarily because it's so new, the supporting technology changes rapidly, and the social and legal issues that it raises can't be addressed quickly . Fundraising on the Internet is therefore not for the timid. However, you don't need to be a computer expert or "bleeding edge" thrill-seeker to integrate Internet-based mechanisms into your organization's overall fundraising plan. Reasonable expectations, an open mind, and a fondness for the new are your most useful characteristics.

My assumptions about the reader are:

  1. You are seeking to solicit monetary donations online for a U.S. tax-exempt nonprofit organization, for which such contributions are a deductible expense for purposes of the donor's income tax determination, generally a 501(c)(3) publicly-supported charity. This text is not a summary of all possible uses of Internet for nonprofit organizations (e.g. researching or applying for grants, offering online surveys, sharing experiences with others on mail-lists dedicated to charity issues).
  2. You already are familiar, preferably through personal use, with the World Wide Web, personal email, Usenet discussion groups, email lists, and making online purchases using a credit card. These are the minimum skills for gaining sufficient understanding of the Internet medium to apply it effectively. This text is not an introduction to the Internet.
  3. You enjoy stretching the boundaries of the familiar, and are willing to invest considerable time and take some risks to do so. The Internet is a new medium for soliciting charitable donations, and we're all still learning how to use it effectively while it continues to evolve right under us. Don't believe anyone who claims to have all the answers.

Links to real-world examples are given below for most or all of the fundraising mechanisms described, but these will invariably go stale with time. Hopefully, this text will be updated periodically to restore a set of working links. Please don't take their inclusion here as an endorsement, or even as a suggestion that the particular examples has been very successful in soliciting charitable donations. I have not done extensive investigation into the organizations, but simply have chosen the examples to illustrate the various mechanisms of online fundraising that I describe. The examples and other references are collected at the end of this text.

The author isn't a professional solicitor or an authority on fundraising or the Internet, nor is he a professional lawyer or accountant, but is simply someone who works full-time for a nonprofit charity, has some Internet expertise, and has done a great deal of research into mechanisms of soliciting donations online. Accordingly, I can't guarantee you a successful online campaign. I do hope that reading this text will significantly shorten the time it takes for you to gain a firm understanding of what possibilities are available for online solicitation campaigns, and help you develop some ideas about how to choose among them. By no means should this text be construed as legal or financial advice.

This text couldn't have been prepared without the generous support of Putnam Barber, who sent me dozens of examples of online solicitation programs, as well as highly appreciated encouragement. My gratitude also goes out to the many other individuals who have sent me suggestions and comments. This text was prepared specially for the NPO-FAQ <http://www.nonprofit-info.org/npofaq/>.

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II. Advantages and disadvantages of using the Internet for fundraising

The Internet's appeal as a new mechanism for soliciting charitable donations stems from many sources, including:

  1. The ability to access more people than most organizations have historically been able to reach.
  2. The relatively low expense required to hang up your shingle in this particular public place.
  3. The (perhaps) higher disposable income demographic reached in comparison with most marketing methods.
  4. As a demonstration of your organization's progressiveness.

There are some common pitfalls as well, including:

  1. It's hard to be noticed among all the others seeking attention on the Internet.
  2. There is the possibility of failure due to unfamiliar technical breakdowns or through misunderstanding how to use the mechanism effectively.
  3. There are significant legal complexities at this time associated with some aspects of online fundraising.
  4. There are no "get rich quick" schemes that aren't booby-trapped. If someone tells you their method guaranties stupendous results for little work, you can be pretty sure that either, a) it's a scam, b) they aren't telling you everything you need to know for successful application, or c) they don't actually understand why it worked the first time, and may not be able to replicate it. Reliable success always requires understanding and effort. As a general rule, the more exclamation points and capitalization used in the marketing material, the more you should be wary.

Successful use of the Internet for charitable solicitation and other fundraising depends, of course, on leveraging the strengths while avoiding or minimizing the pitfalls. Although there have been a few fairly spectacular success stories, most charities will find at this time that Internet fundraising will be only a minor part of their total sources of revenue. Most potential donors are not as familiar or comfortable with the technology as they could be, and will be in a few years. However, there is no reason not to start using the Internet in at least some way right now. Although you should probably be leery of large investments in technology just for fundraising, you should be making a reasonable effort to use your online resources for fundraising if you already want to use the Internet for providing information to your community (of donors or of service recipients). A reasonable goal is to have your Web site pay for its development and maintenance through donations or pledges themselves made online. As the donor universe becomes more accustomed to online giving, your revenue will grow.

Probably the most common reason for disappointing results is the lack of awareness among donors of your charity and/or its Web site. Almost noone is going to wander across your Web site and charitable appeal by accident. They will typically find you because either:

  1. They already know about your existence, AND SEE YOUR WEB ADDRESS ON ALL YOUR MARKETING OR OTHER MATERIAL.
  2. They find a link to your Web site on a page created by some related organization, or one that otherwise supports your activities.
  3. They receive an intriguing email message from you that describes your mission and asks them to visit your site.
  4. They read about your organization in some online or off-line newsletter or other informational article created by a third-party, and it includes your organization's Web site address.
  5. They are using an Internet search engine to find Web sites addressing some topic or issue, and your page has the right keywords to match their search.
  6. They see a banner advertisement you have placed on another organization's Web page.

If your organization doesn't use at least one and preferably several of these methods to attract visitors to your Web site, you will get few or no donations there. At the very least, every one of your marketing and solicitation texts should include a reference to your Web site's address (i.e. URL). Anything less will strongly suggest an incomplete effort, which will lead to weak results.

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III. Using the World Wide Web

A. For Soliciting Donations and Accepting Memberships

The process of accepting online donations or memberships includes a set of individual services, which may all be provided by one source or can often be obtained individually from separate providers. Costs can vary tremendously, so it is worth considering several different permutations of services when developing your plan. To aid this, and to provide a framework for the rest of this section, here is a summary of the services needed, roughly ordered from the initial donor contact to the final receipt by the charity. Not all of these services may be wanted by every organization, nor are they all necessarily required

  • A web site describing your organization.
  • A web page accepting pledges.
  • A web page accepting a donor's credit card information.
  • A service to process credit card information automatically and/or manually.
  • A merchant services account with a bank or third-party provider.
  • A business checking account at a bank.

1. Serving or marketing your mission

One of the most important reasons for establishing a presence for your charity on the Internet is to help market your mission. Providing information about your mission and services can help those who you serve to find you, can attract volunteers, and can even serve your mission directly if providing information is part of it (and that's the case for most charities). Even without an overt appeal for donations, a Web site can help support your fundraising activities indirectly.

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2. Legal Issues

NOTE: The following, like this entire document, is not legal advice. The author is not a lawyer. You need to talk to a lawyer familiar with out-of-state fundraising issues if you are going to solicit donations online.

A more detailed discussion, of certain aspects of interstate fundraising and determining if your service provider is a professional solicitor, is presented elsewhere. Please see the references at the end of this document.

a. Nation-Wide Fundraising (i.e. any Internet-based fundraising)

First, be warned that the current regulatory environment supposedly governing interstate online solicitations is basically untenable. At this time, even the smallest municipalities can (and some do) impose regulations on charitable solicitations, and then can argue (in court) that if anyone residing in their jurisdiction visits your Web page and makes a donation then that municipality has the right to regulate your activities. Furthermore, some even require that a representative from your charity visits their office in person to register you for soliciting within their jurisdiction. They can even sue you and force the case to be tried within their (obviously sympathetic) jurisdiction. Clearly this is all ridiculous, since although any charity can afford a Web site, few can afford to fly people around the country visiting offices for registration purposes. It is unreasonable to expect them to do so, and requiring it would seriously damage to the ability of charities to conduct legitimate fundraising. According to several experienced sources, completely satisfying all potentially applicable legal regulations associated with nationwide fundraising campaigns, down to county and municipality registrations, can be expected to cost a charity $10,000-$25,000 annually, including payments for registration fees and staff time.

However, most people familiar with the issue believe that it should (in a more reasonable world) be sufficient to register as a charity in each state that requires it from charities who solicit (but talk to a lawyer!!). The current estimated cost of such registrations is approximately $1500-$3000 annually. Under this arrangement, you register within your home state (e.g. state of incorporation) as a charity, and then in every other state as a "foreign" charity. Even this is no minor requirement, given the registration fees and staff time required to complete forms. You can help minimize the effort by using the Uniform Registration Statement (URS) for Charitable Organizations, which is accepted by many states in lieu of their own registration form. The developers of the URS aim to eventually have the form be accepted by every state. (The Uniform Registration Statement project is explained more fully at http://www.nonprofits.org/library/gov/urs/.) You can find the best summary of state requirements for charitable solicitors, and contact information for the office that regulates charitable solicitation in each state, in the AAAFRC Trust for Philanthropy publication, "Annual Survey of State Laws Regulating Charitable Solicitations."

If even the effort of registering in each state as a charity that solicits donations is too much for your small organization, then you can take comfort in the fact that many people believe that states have no right to regulate what is essentially a form of interstate commerce, which is what they argue happens when you solicit a donation from someone outside your home state. However, federal courts have thus far confirmed the rights of states to regulate charitable solicitations in general. Stay tuned for some significant testing of the state regulatory position as more charities solicit online without bothering to register outside their own state. Just be aware that you might not want your organization to serve as the test case for the eventual Supreme Court decision, unless your legal services are donated.

b. Service provider vs. professional solicitor

If you have registered your charity in every state (and maybe every county and municipality too), are you now in the clear? Unfortunately, no. Almost every charity except the largest will use some kind of third-party service provider for some part of their online fundraising program. At the very least, you will use an Internet Service Provider (ISP) of some sort. Be aware that states define the term "professional solicitor" very broadly, and any service provider that specializes in serving charities, or even provides special programs or assistance to charities, may find itself subject to state professional solicitor regulation. Given the nature of the Internet, that's a lot of state's worth of regulation, as well as many thousands of dollars in registration costs for the service provider that is subject to regulation

If you use a service provider that any state requires to register as a professional solicitor, your organization itself might be subject to legal action and fines by that state. A more detailed discussion of the "service provider vs. professional solicitor" issue is provided elsewhere (see the references at the end of this text). For purposes of this text, at least be aware that providers of services as charity auctions, online donation pages, or any other service specifically for charities, may be subject to professional solicitor regulation and get you in trouble if they aren't registered properly in every state that requires it. Ask them if they are registered as a professional solicitor, and if they say no then ask the reason (which you can pass on to your lawyer for evaluation).

For a quick test of whether or not a service provider is likely to be viewed by regulators as a professional solicitor, review the service provider's online material and some Web sites for charities that they serve. Try to determine,

  1. if the appeal for donations is coming from the charity or from the service provider for the charity (the latter usually indicates a professional solicitor), and
  2. how much control over the fundraising process is exerted by the service provider.

If the charity's involvement is just to provide its name and then give the service provider permission to skim off some percentage of the revenue, there's a good chance you are looking at a professional solicitor. If you have any doubt, be sure to discuss this with a lawyer.

c. Factoring

Credit card laundering, or "factoring," can occur when an agent that is not authorized as a service reseller by a credit card company uses its own merchant account (i.e. credit card services account) to offer credit card services to others. A general example is given by the Council of Better Business Bureaus:

"A company that does not have a credit card merchant account with a bank or credit card company recruits another company to process its credit card transactions through its own merchant account. When the processing merchant receives payment for the credit card charges, it turns the money over to the company without an account, but it keeps a previously agreed to percentage or other fee."

If a service provider offers to process your credit card transactions without any requirement for you to obtain a merchant account with a bank or third-party provider (and undergo the associated credit checks), you should be concerned about factoring. Charities that participate in factoring schemes are at risk from being denied any future credit card services, and at least in one jurisdiction (Florida) may be breaking the law. If you have any concerns that your service provider may be offering a factoring scheme, you should consult a qualified lawyer before engaging its services.

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3. Soliciting pledges

Although many people believe that Internet fundraising must include a method of accepting money online, this is not the case. There are some simple tools available that will enable you to present a form within a Web page for a potential donor to complete, that will allow a pledge and contact information to be entered, all of which is sent to you automatically by email when the form is submitted. Your ISP probably already provides the required tools to its clients (e.g. "formmail" software). Using this method obviates the requirement for the donor to provide any financial information (e.g. credit card numbers), which not everyone is comfortable with providing online. Even if you are going to establish a complete system in which donations are made entirely online, you should consider establishing a page just for people who wish to make a pledge.

Similarly, you can allow people to submit membership registration materials online and then bill them for the membership fee by regular postal mail.

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4. Accepting online donations and membership fees

If you are going to accept donations online by credit card, you generally must obtain a "merchant services" account from a bank or third-party service provider. All commercial banks will provide this service to their business checking account customers, but you may find a third-party service provider does so at a lower cost. You can save significantly by shopping around. In some cases, the provider of the online financial services associated with accepting the donation might also offer to serve as the credit card merchant services provider. Keep in mind that these are really separate services, though, and that you might be better off shopping for the lowest rate for each service.

a. Collecting credit card information for later manual processing

Not all online donations must be processed immediately and automatically. This additional service always involves extra costs, which some charities may wish to forgo by having the donations be manually processed later by their staff. For instance, an online form can be provided to allow donors to enter all the information required to process a credit card transaction. When submitted, this information may either be transmitted to you by email, else reside online until you access it with your Web browser through a secure administrative mechanism the service provider's Web-site software presents. Note that if the financial information is transmitted by email, a secure method (e.g. PGP-mail encryption) should always be used. Email clients that support encrypted messaging are inexpensively available (e.g. Eudora Pro). All major Web browsers support secure transactions, although some services may require that donors be using a "128-bit" browser rather than the "40-bit" one allowed under U.S. export rules. Since many people use Web browsers with 40-bit security, make sure to ask your service provider if it allows donations from 40-bit Web browsers.

Regardless of how you retrieve the donation information, you will need to process the credit card transaction using whatever card processing software software or hardware (i.e. credit card terminal) you have obtained for operating your merchant services account, unless the provider of your donation Web page system also offers this service.

b. Fully automated processing

Establishing a Web site that can process credit card transactions automatically is complicated and expensive if you choose to establish the site completely on your own, and therefore is generally only suitable for larger organizations that have their own technical experts on staff. Fortunately, there are increasing numbers of service providers that will help you establish a Web "storefront," and the provider that hosts your Web site may already offer this service. Although commonly used to sell material goods, the same storefront system can often also be used to "sell" donations. Other items, such as memberships or goods sold as fundraising items, fit more obviously into the storefront model. There are also an increasing number of service providers that specialize in charities, and can provide storefront services that are suitably customized.

Some technical aspects of how fully automated processing systems work, including details of what to look for in a service, are presented elsewhere. Please see the references at the end of this document.

Unless you work for a large charity with access to suitable technical staff, you will probably want to use some kind of storefront provider. As described above, be wary of providers that specialize in charitable fundraising but claim not to be professional solicitors. The validity of such claims remains untested by state regulators, but that won't remain the case for long.

Conversely, service provides that don't particularly cater to charities doing fundraising may, 1) be leery of entering into an area in which they aren't familiar with the legal issues, 2) have a storefront system that is completely oriented toward physical merchandise and doesn't adapt well to paying for service or donations. One good approach is to contact the service provider and ask if any of its customers are charities using their service to collect donations. Check out those charities' storefronts.

Storefront providers will usually either charge you a flat monthly fee (often scaled stepwise to the number of different items you "sell", i.e. 1-50, 50-500, etc.) or keep a percentage of each transaction. Generally, the former is preferable unless your online fundraising program is fairly small. A flat monthly fee plus a smaller percentage of each transaction is another permutation. Make an estimate of the number and size of your expected online donations, and then shop around. Note that since storefront providers not specializing in charities have a far larger customer base, their fees given the same pricing structure are likely to be much lower, unless the charity service specialist is itself a charity and is subsidized.

c. Non-credit card collection mechanisms

Although billing through a credit card is most familiar, there is at least one service that links a Web page sales/donation form to the donor's phone bill. Instead of the charge appearing on a credit card statement, it appears on their long distance telephone statement. As in the case of credit card billing, the burden of collection is shifted off the charity, and this mechanism also has the advantage of being usable by people without credit cards. However, it has the disadvantage of being a very unfamiliar way for people to make payments, and doesn't allow the donor to spread their own payments over several months as a credit card charge does. However, if your charity can get a good bargain by accepting payments this way instead of through a credit card account, it might be worth considering.

It is also possible to use electronic funds transfer or automatic withdrawal systems to process donations and pledges.  Banks offer this service to some customers, and there are third-party processing firms who handle the setup and transactions for a fee.  Such systems work particularly well for long-term monthly pledges.  

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B. For Other Fundraising

1. Selling Web space for advertising

a. Mission-supportive vs. UBI advertising

Commercial advertisers may pay for banner ads on or sponsorships of your Web pages, but usually they won't pay much unless you either have a very heavily trafficked site or your community is closely matched to the commercial products or services the advertiser offers. If you have an active community online of at least a couple thousand, though, you might want to consider this approach. The main risk here is that you'll irritate and alienate your donors and potential donors by pushing commercial advertisements on them. You can minimize this by insuring the products and services being advertised are of interest to your community.

If you do allow advertising on your Web site, keep in mind that the IRS is likely to conclude that income is unrelated to your charitable purpose, so you'll have to pay taxes on it (UBIT, unrelated business income tax). This may even be true if the goods or services advertised are of particular interest to your community. You should talk to a lawyer or accountant familiar with UBIT issues if you will be receiving income from advertising.

b. Mechanisms

There are several mechanisms currently in use by Web page owners for selling "advertising" space on those pages. The advantages and disadvantages to each, besides the obvious ones, are not all that clear at this early date. Please note that there is a significant legal distinction between "advertising" and just acknowledging a sponsor. There is also a fine line between the two, but an important one since advertising revenue is generally subject to UBIT while sponsorships may not be. Talk to a lawyer about this distinction particularly if you are going to be accepting sponsorships. The arrangements currently used for online advertising are:

i. Flat-rate charges

These can be associated with the common Web banner ad or with a limited-time sponsorship. With a banner ad, the advertiser pays the organization a specific amount of money in advance in exchange for placing a graphic on the charity's Web site page or pages. Visitors can "click-through" the banner ad to reach the advertising client's Web site. Sponsorships (as opposed to advertising) generally are evidenced only with a statement somewhere on the page, such as "This month, our Web page is sponsored by `Bat Earmuffs Inc.' Please visit their excellent site." The statement might be accompanied by a small graphic, and the graphic and some words of the statement will be links to the sponsor's site. Most people find the sponsorship format to be less irritatingly intrusive than banner advertisements, particularly if there are several different sponsors presented. Also, a banner is probably more likely to be classified as an advertisement (and trigger UBIT) than an unobtrusive statement of sponsorship.

ii. Pay-per-view charges

In contrast to the flat-rate ad, a pay-per-view banner ad results in the accumulation of a small credit to your organization every time someone views the ad. What usually happens is that the banner ad graphic is located on the advertiser's site and a count is kept of the number of times it is downloaded from that site by visitors to your page. Since graphics are stored by visitors' computers for at least a few days, this generally means that you get paid for each new visitor to your page, plus some fraction of the repeat visitors.

Unless you get a LOT of visitors, this mechanisms generally pays very poorly. However, advertisers find it more attractive than sponsorships since they only pay for results, i.e. people actually seeing the (generally obtrusive) ad. This also means that it can be very easy to arrange such advertising, since there is minimal risk to the advertiser. Instead, the risk is on the nonprofit organization, which may irritate and alienate its community with commercial intrusions while in fact obtaining very little revenue. Be careful.

One interesting variation, that currently uses the pay-per-view (and click-through) ad as a fundraising mechanism, involves what could be called "selling your donors' home page settings." In this arrangement, you ask your community members to use the advertiser or sponsor's Web page as their "home page," i.e. the page displayed when they first launch their Web browser software, or to visit the advertiser's page often in such a way that your charity is credited. In this way, your supports rack up "views" of the advertisements, which leads to income for your charity. Keep in mind that you don't need any special agent to make this sort of arrangement if you already have a Web page and are selling pay-per-view ad space on it. In such a case, you should definitely ask your community to consider making your Web page their home page. However, a third-party agent can serve as a useful intermediary for finding advertising clients, and may be able to negotiate higher payment rates from advertising clients by pooling many organization's viewers. Third-party agents may also provide other services, such as affinity programs under which your organization gets a portion of any sales that originate from links on your Web page.

iii. Click-through charges

This method is related to the pay-per-view mechanism, but instead of paying for the number of viewings, the advertiser only pays for the number of people who "click-through" the add, i.e. select it and visit the advertiser's own site. This method is even more attractive to advertisers for obvious reasons. If you are considering this kind of arrangement, plan to change the advertised company relatively often so that people are seeing new ads. They'll usually only click-through once for a new add, if at all. In hardly any cases will this mechanism provide more than trivial revenue for a charity.

c. Advertising agents and organizers

Both finding a organization interested in advertising on your site, and finding Web sites to advertise your charity on, are a lot of work. In addition, the pay-per-view and click-through mechanisms require some form of trustworthy counting system, which can get technically complex. Not surprisingly, several intermediary agents and organizations have sprung up to match advertisers or advertising clients and Web site owners. These agents are therefore particularly useful if you are interested in pay-per-view or click-through mechanisms.

When evaluating an agent or organizer, take special note of what kinds of companies they tend to advertise. For instance, there are very few nonprofit organizations that would enhance their operation by selling advertising space to pornographers (although that might pay well). Find out what kind of screening is done, and in particular ask about targeting (e.g. only ads for companies of interest to educators will be presented). At the time of this writing, there even exists an agent that specializes in serving nonprofit tax-exempt organizations, which should provide some assurance that unsuitable ads won't be used, given some sensitivity to how important a charity's reputation is to its long-term viability.

If you prefer a flat-rate method, then you are probably already familiar with what sorts of organizations might be particularly likely sponsors because of their interest in your community and your community's interest in their products and services. There is little reason to employ an intermediary when flat-rate pricing is used. Instead, you should directly contact the potential sponsor's marketing people.

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2. Buying or trading Web space or links on third-party Web pages

Since attracting people to your online site is one of the main obstacles to successful online fundraising, consider establishing a presence on Web pages sponsored by organizations that are supported by people likely to also support your mission. Two methods of achieving this are by paying for space on a third-party's Web page (e.g. inserting a banner ad that links to your site), or getting onto an organization's list of recommended sites. Many organization's Web sites include a page of links to related, recommended, or affiliated organizations and by linking to and from the sites of mutually supportive organizations you can increase the name awareness of your organization in a very refined manner. This can, however, carry the risk of siphoning off limited donor funds to other organizations that are similar to yours. You should at least make sure your Web site is comparable in quality and professional appearance to the sites to which you provide links.

Another interesting advertising mechanism is the "banner exchange" or "link exchange." Under this mechanism, a group of related organizations advertise on each other's Web pages as a means of sharing each other's communities, using a mechanism that displays a different banner randomly selected from the related set each time someone views your Web page. The effectiveness of this mechanism depends of course on your ability to find an exchange that is suitably related to your mission. If the exchange isn't run as a free co-op, some commercial banners may be included among those for related charities as a mechanism to pay for the service, in which case you should check to see just how often a commercial banner will come up. Note that the same warning as above, about potentially siphoning off members and donors to other charities, applies to banner exchanges.

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3. Online auctions

One of the most intriguing new applications of the Internet for charitable fundraising has been the online auction. This mechanism takes excellent advantage of the primary advantage of Internet communication for fundraising: the ability to reach a large audience inexpensively. However, none of the disadvantages of charity auctions are obviated, particularly the need to obtain attractive merchandise to auction, and the necessity of marketing your event so that sufficient numbers of people participate. Organizations that ignore these two key necessities are almost guaranteed failure.

Generally, the software needed to operate an online auction must be provided by a third party. Although such software might be available for the charity to install on its own computer, many organizations will prefer to work with third-party service providers who will operate the auction itself. Such service providers will generally not perform the tasks of marketing nor obtaining worthwhile merchandise. At this time, such service providers typically take the form of those who provide online auction services for many organizations or individuals, and those that showcase specific charities in their periodic events. The former will almost always charge for their services, while the latter often will not, instead providing the service as part of their community support activities. Also, an organization seeking to showcase a specific charity will typically provide a significant level of marketing. A service provider that does charge (the seller or buyer) for its online auction services, and also specializes in charities, may be subject to state registration requirements for professional solicitors, depending on the specific facts and circumstances of the arrangement. The more the service provider for-hire does to help promote your event, the more likely they will be seen as a professional solicitor, so be careful about accepting their help in this.

One case where the service provider does typically provide some of the marketing is if it doesn't segregate the charity's merchandise from the other items being auctions (i.e. those not for charitable fundraising). If the fundraising is not performed as part of a distinctively charitable fundraising event, then the IRS may be more likely to conclude that the revenue is not from charitable fundraising at all, but simply sales unrelated to your charitable mission, and require that UBIT be paid. If the charity auctions items can be presented all as part of a unified Web page associated with the auction, and only spans a limited time, it will certainly be taking more of the form of an "event" and less as a variation on classified ads. Even if the event will be distinctly for fundraising, a qualified lawyer and/or accountant should be consulted, since charity auctions of any sort have somewhat complex legal regulation. Also, since auction service providers typically charge the buyer a premium and don't charge the seller at all, there is an accounting issue regarding whether your organization should record that charge as a fundraising cost (which must be reported as such to the IRS on your annual tax return). Talk to your accountant about this.

Here is a selection of questions to ask when reviewing an online auction service provider:

  1. Does our charity get its own page, displaying a message we write (to describe our organization and the event), as well as listing all of our the items up for auction?
  2. Can we set a minimum bid?
  3. If the service provider doesn't specialize in charities and its main site shows available items by category, is there a category for "Charity Auctions" (useful for promotion)?
  4. If the service provider doesn't specialize in charities, has it handled auctions for charities before?
  5. If the service provider does specialize in charities, is it registered as a professional solicitor? In which states?
  6. If our merchandise will be scattered among that from other organizations or individuals, can we create our own Web page, apart from the auction site, with links leading to our items?

In the past, there have been significant problems with buyers at online auctions using fraudulent credit card numbers. Ask your service provider what screening and verifications mechanisms it uses to address this potential problem. Also, ask if the service provider or you are responsible in the case of such fraud (generally, it will be you), and how such occasions are handled. Finally, find out what procedure is followed when participants return the merchandise they successfully bid for, and demand a refund.

From the discussion above, it should be clear that a charity auction probably shouldn't be entered into without getting appropriate profession legal and accounting advice. Auctions are a bit complicated in every way.

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4. Commercial (and Noncommercial) Co-Ventures and Related Programs

Commercial co-ventures (sometimes called "affinity" programs) and other joint ventures, both online and off, are becoming more popular as businesses seek to focus their charitable efforts and charities seek new sources of revenue. There is nothing particularly different about commercial co-ventures online versus off-line. In its most common form, the sale of a product by the business is linked to a "donation" of some fraction of the gross revenue from that sale. However, more complicated arrangements and extensions of the most common forms are certainly possible. Commercial co-ventures may require the charity to pay UBIT on the associated revenue, and may also have other serious implications for an organization's tax-exempt status. It is probably wise to never enter into a commercial co-venture without a review of the arrangement by your lawyer or accountant. Nevertheless, online commercial co-ventures are certainly a viable mechanism for fundraising.

You may also find examples of what could be called "noncommercial co-ventures." For instance, if the intermediary is a tax-exempt nonprofit organization that itself obtains and sells donations of merchandise, and then gives part of the proceeds to selected charities, UBIT may not apply. The intermediary might provide either sales or auctions of merchandise under this method, and may also accept straight donations for the charities it serves.

Finally, there is a variation on the commercial co-venture in which you promote some commercial firm's merchandise through your site, and if people click-through to buy those items from your site then you get a "referral fee." Although this may not fit the original definition or examples of a commercial co-venture, it probably has the same financial implications since people will realize that by purchasing items via your Web site they are providing revenue for your charitable organization. Whether this revenue constitutes donation, related business, or unrelated business income will depend on the specific facts and circumstances of the case.

One simple example for your charity to consider is registration with an online bookstore's associate/affiliate program. You would then present on one of your Web pages a list of recommended books (selected specifically as ones that support your mission, for instance), with hyperlinks from those books to the bookstore. When someone buys a book by going through your hyperlink, your organization both obtains revenue and helps achieve its mission. Note that if you also offer books unrelated to your mission you will probably have to segregate income from the two sources and pay UBIT on the unrelated income, much like museums are required to segregate their gift shop income into merchandise that is related to their mission (not taxed) versus unrelated (and subject to UBIT).

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5. Selling Merchandise

Any organization that sells merchandise as a means of fundraising should also consider establishing an online storefront. Typically, this is done either as a "thrift shop" selling donated merchandise, by selling material that directly promotes the charity's mission, with minor promotional items that bear the organization's name and logo, or a combination of these methods. Merchandise sales pages generally take one or a combination of three formats, either 1) a merchandise display along with a phone number to call for orders, 2) order forms that may be printed or saved and then either faxed or sent in by postal mail or as an email attachment, or 3) Web-based forms that are completed with financial information (e.g. credit card numbers) and submitted online. The first two formats can be used even by charities that don't have any support for online financial transactions. The third usually takes some form of storefront software, often similar to that used for accepting online donations with automatic processing, and therefore the discussion in the above section, "Accepting online donations," applies directly. However, UBIT or state sales tax may be due on any merchandise sold, online or otherwise. Storefront software developed specifically for commercial use will usually work perfectly well for charities selling fundraising merchandise online. However, software specifically developed to permit online donations will rarely be useful for selling online merchandise, since it will not usually support the addition of state sales tax.

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IV. Using Email, Mail-lists, Usenet, and Other Messaging Mechanisms

Email, mail lists, Usenet and other message-based communication mechanisms are a valuable part of any online charity's toolkit. These mechanisms can be best divided into two classes: ones controlled by the charity and ones controlled by others. Another key characteristic to keep in mind for any message-based fundraising effort is whether the messages are written primarily to further the organization's mission, or specifically to solicit donations. Messages intended to solicit donations can be further divided into those directed toward existing members and past donors, or those mostly targeting potential new donors. Furthermore, any fundraising campaign using message-based Internet tools must be sensitive to the complicated legal environment regulating online solicitations, as described in the section above on using the World Wide Web.

A. Forums Sponsored by the Soliciting Organization and Direct Email

Although individual charities haven't pursued the creation of their own Usenet groups at this time (as far as I know), many are establishing mail-lists, or sometimes Web-based bulletin boards or a combination of the two, as part of their services. These mail-lists can provide forums for support-group discussions, disseminate news about your charity, or direct your community to resources they'll find useful. Their primary function is usually to support the mission of the organization through communication. Naturally, they also provide a mechanism to remind your community that their donations are needed.

Mail-lists are subscriber-driven software tools that can take the form of one-way broadcasts (your organization is the only generator of messages), unmoderated discussion (every posting to an address is immediately disseminated to all subscribers), or moderated discussion (everything posted to an address first is screened by your staff before distribution). Any of these are suitable for issuing donation solicitations if you own and operate the list. Direct email, where the recipient has not subscribed to any list, can be performed using your own database of members or past donors, or through email address lists purchased from third-parties.

Developing a database of email addresses will allow you to communicate to former or potential donors far less expensively than postal mail. However, beware of offending potential new donors with a profusion of mail (i.e. "spam") just because the distribution mechanism is inexpensive. Also, as with all solicitation mechanisms, long-term success depends on not burning out your donors, so periodic fundraising drives are probably better than a constant barrage.

Also, be particularly careful about soliciting new potential donors by direct email, since most people are presently far more sensitive about and annoyed by what they consider "junk email" compared with the postal mail equivalent. Offending people is rarely a good way to initiate a donor relationship. That said, direct mass emailing may be the most cost-effective way to publicize your organization and its mission. If you use mass emailing, though, be prepared to get two (or more) berating letters for every donation. Cautious charities will probably steer clear of direct email using purchased mass-mailing lists or to other than members and former donors.

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B. Forums Sponsored by Others

Some charities participate in mail-lists and Usenet group discussions sponsored by others, generally through staff members who subscribe to those forums. Many more are passive listeners at these forums, gaining useful tips and ideas. Solicitation of donations (by anyone but the forum sponsor) is pretty much universally unwelcome. In fact, anyone posting one will probably receive many very nasty letters about inappropriate use of the medium. However, if the discussion turns to areas in which your group has experience or interest, you have a great opportunity to at least mention what charitable service you provide and to give some contact information for people who wish to find out more. If nothing else, your "signature" (a sentence or paragraph appended to all your email messages and Usenet postings) should give some information about your charity. Even if you don't attract many donations this way, you might attract volunteers interested in your mission, and you'll highlight your mission.

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V. References and Examples

The references and examples below are arranged according to the same heading outline as the document above. Section headings are shown in bold italic. Items that are specific examples of individual charities using an online fundraising technique described in this document are prefixed with an asterisk (*), and were chosen because they are particularly good examples of the mechanism being illustrated, or because they show creative variations on the ordinary. Most of the other items below are either informational references or links to third-party service providers. Please be aware that a great deal of informational literature is actually created by service providers (but THIS text was not). Although this can and should be done in the spirit of better educating consumers, it is worth being on guard for biases when the site that a text is part of was established by a service provider that offers the services described in the text.

The list below, which is not comprehensive, was not provided in order to advertise services, nor to help NPOs shop for service providers, but only to illustrate the items discussed above.

None of the links below indicate endorsements of either charities or service providers, or their goals, or even suggest that they are reputable. You MUST thoroughly investigate any commercial or noncommercial provider on your own before engaging their services, and any charity before making a donation. Furthermore, the texts listed below have not been reviewed by this author for accuracy, and you must perform the appropriate research and cross-checking to insure they are sound. You and noone else is responsible for your education and actions.

(Note -- August 5, 1999: The Internet Nonprofits Center hosts a "catalog" of resources for online fundraising at http://www.nonprofits.org/npofaq/misc/990804olfr.html. It is likely to be updated more frequently than the references below.)

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(C) Copyright 1998 Eric Mercer <mercere@netcom.ca>. All rights reserved.
Last modified October 23, 1998