Can Nonprofits Have Investors?: How to Fund for Your Future

As a nonprofit leader, you know that to keep your organization afloat, you need to diversify your streams, including earning grants, executing capital campaigns, and securing major gifts. In your process of brainstorming revenue streams, you may not have considered one idea: investing.

In this article, we’ll explore whether nonprofits can legally have investors and whether they can choose to invest in stocks themselves. Then, we’ll provide our own take on this matter. Our stance is simple: We believe you already have investors—you just haven’t realized it yet. 

Can a 501(c)(3) Organization Legally Have Investors?

The short answer is yes, 501(c)(3) organizations can legally have investors. But under IRS regulations, they can’t issue equity or ownership shares because technically, nonprofits have no owners.

Instead of stocks, nonprofit investors provide capital through alternative financial structures, such as:

• Debt Financing (Loans): Investors lend money to the nonprofit, which repays them at a fixed, reasonable interest rate.
• Tax-Exempt Bonds: Nonprofits can sometimes issue tax-exempt bonds that investors can purchase to fund large projects, such as building hospitals or schools. Just as with debt financing, bonds are repaid at low interest rates, and nonprofits typically use bank letters of credit or other forms of “credit enhancement” to secure the lowest possible interest rate. 
• Program-Related Investments (PRIs): PRIs are a type of investment that private foundations bestow on other charitable organizations for the purpose of furthering a charitable mission. A few examples of PRIs include low-interest or interest-free loans to students in need and high-risk investments in housing projects for low-income households.

Another workaround nonprofits use is a “hybrid” structure, which involves starting a sister for-profit subsidiary (usually a Limited Liability Company). With this hybrid approach, investors can put their money into the for-profit arm in exchange for equity, while the nonprofit maintains control over the mission-driven operations. 

Can Nonprofits Invest? 

While nonprofits can’t legally give equity to outside investors, they can actually be investors themselves. Most organizations prefer to invest in stocks, but some also invest in other types of assets, such as bonds, money market mutual funds, and Treasury Bills.  

Nonprofit leaders and other industry professionals consider nonprofit investing a wise move, as it helps grow reserve funds and build long-term assets, effectively supporting the organization’s financial sustainability.

There’s only one caveat when it comes to nonprofit investing: the investments should not be used to benefit your nonprofit’s employees or board members. 

How Does a Nonprofit Invest?

To start investing for your nonprofit, you generally have to take the following steps:

1. Select an investing partner. Not a lot of nonprofits have access to investment resources, so instead of handling investments yourself, it’s much better to have an outside partner who can help manage your portfolio. Big banks are the safest bet, but wealth advisors and brokers are great choices too. 
2. Establish an Investment Policy Statement (IPS). An IPS outlines your organization's investment plans, helping you foster financial transparency among your supporters and protecting your board and finances. When developing an IPS, you need to include the investment committee's roles, investment objectives, spending policies, performance measurements, and reporting standards.
3. Open an investment account. To do this, you’ll need to submit an account application with essential information about your nonprofit (e.g., EIN and contact details), a copy of your Articles of Incorporation, a copy of your 501(c)(3) IRS Determination Letter, and a copy of your organization’s bylaws.

Once you have an open account, map out your investment strategies. Options like treasury bills and money markets are popular among nonprofits because they are low-risk, highly liquid investments, providing greater stability. Each type of asset has its own pros and cons, and your investing partner can educate you about them. 

Reframing the Nonprofit Investor: The Convergent Stance

Getting started with nonprofit investing can be beneficial. But investing can also be tricky to navigate due to its complex processes. For that reason, we prefer to reframe the concept of a nonprofit investor.

At Convergent, we believe that you don’t have to look for angel investors, institutional investors, or venture capitalists to support your organization financially. You already have a base of passionate donors—they are your nonprofit investors!

In my book Asking Rights, I argued the following definitions to differentiate between “donor” and “investor”:

 

Donor: An individual or organization that typically provides low-level (definition varies by nonprofit size, budget, funding model, etc.), often sporadic financial support that is not necessarily connected to the mission of the nonprofit. 

Investor: A type of nonprofit funder who is looking for a return on their investment (often incorrectly referred to as a gift or donation). Although the term is more indicative of the mindset rather than the amount of money involved, an investor typically makes larger financial commitments that span several years. An investor is most concerned with the nonprofit's long-term success. 

Another way to differentiate these two groups is in the questions they ask. When addressing the need for funding, donors will ask, “Have you demonstrated the need for your service?” while investors will ask, “How will funding your organization improve the situation?” Donors are motivated by emotional appeals, whereas investors focus on the transformational nature of charitable organizations.

Shifting to the Investor Mindset: The Key to a Sustainable Future

At Convergent, we believe that for your nonprofit to thrive and secure a sustainable future, you must shift to an investor mindset or, as we like to call it, the Investment-Driven ModelTM (IDM). The IDM highlights the importance of strategic alignment among fundraising objectives, delivered outcomes, and the nonprofit's overall mission.

To shift to the Investment-Driven ModelTM, you must: 

• Focus on outcomes: Show your investors the impact you will have on the lives of those you serve. Provide an Organizational Value Proposition® that your investors can’t resist. 
• Position your nonprofit as a community asset: By emphasizing the good work you do in the community, you’re proving that you’re an organization that’s worthy of investment. 
• Go beyond emotional appeals: Appealing to your investors’ emotions can help, but employing the often-overlooked rational component of decision-making takes this a step further. When you show the ROI of their investment to your organization, you’re making your case for support all the stronger.

How investors approach fundraising can be summed up by the following:

If you can’t demonstrate results (outcomes) or can’t make your outcomes meaningful to me, then you do not have the right to ask for my money. 

Start Securing Investments With the Help of Convergent 

For nearly twenty years, Convergent has helped organizations across the nation attract long-term investors. We achieve this by offering a wide array of industry-leading services, such as capital campaign consulting, resource development consulting, and development audits.

If you’d like to learn more about what we can do for you, schedule a consultation with our professionals right now.