Commercial Co-Ventures and Cause Marketing

By Jeremy Chen

Commercial co-ventures (i.e. sale-based donation programs), also known as “cause marketing,” are fast becoming the model of choice for collaborations between nonprofit organizations and for-profit companies. Such collaborations usually work like so: a for-profit company markets to the public that it will donate a portion of its sales to a specific nonprofit organization or charitable cause. In return, the nonprofit allows the for-profit company to market the product or service with its name, but without its involvement.

Collaborating with a nonprofit can provide a number of benefits to a company, such as boosts in sales, public goodwill, and word-of-mouth sharing of the company’s story. More importantly, a company or social enterprise can operate a co-venture to support a cause that it believes in, and in the process, share its values with its customers. Nonprofits can also benefit from increased revenue and public exposure while saving the time and expense that it would have had to expend to raise the same amount of revenue from conducting its own marketing and fundraising campaigns.

Regulation of Commercial Co-Ventures

In California, commercial co-ventures are regulated by the California Attorney General. The reason for regulation is to curtail companies from misleading the public by overstating the amount actually donated and to ensure that the company follows through with its promised contributions in full. The Attorney General only imposes regulations on the company and not on the nonprofit. The company is required to either:

1. Have a written contract with the charitable corporation before it advertises the commercial co-venture, fulfill its donation promises every 90 days beginning from when the co-venture was first advertised to the public, and provide a written accounting to the nonprofit with each periodic donation; or
2. Register and file periodic reports with the Attorney General and pay an annual fee.

Terms to Consider Including in a Commercial Co-Venturer Agreement

Regardless of which one of the methods is chosen it is recommend that the company enter into a written agreement with the nonprofit because it can help avoid future disputes and misunderstandings regarding the terms of the co-venture. A commercial co-venture agreement should include terms that address the following:

• Names of the nonprofit organization and for-profit company taking part in the commercial co-venture,
• Identification of the charitable purposes that will be benefited by the contributions generated from the co-venture,
• Description of the activities of the co-venture,
• Estimated number of units to be sold or used,
• Term of the co-venture (start and end dates),
• Geographic location where the co-venture will take place,
• Description of how the nonprofit’s name and mark will be used,
• Representation that the nonprofit provides permission for the for-profit company to use the nonprofit’s name and other marks,
• Description of the method of calculating the amount of the company’s contribution to the nonprofit (e.g. a percentage of profits, all profits, a fixed dollar amount per sale),
• Description of how and when the company will send the contribution to the nonprofit,
• Requirement that the company will provide an accounting report that complies with California law to the nonprofit with each periodic payment, and
• Requirement that the company will disclose in its advertising the dollar amount or percent per unit, or maximum donation amount (if any) that will benefit the nonprofit.

In negotiating a commercial co-venture agreement, a company should also be aware of the concerns of the nonprofit. A nonprofit may propose to include terms that limit its liability from consumers and protect its tax-exempt status, name, and reputation. Such terms may include giving the nonprofit advance approval rights of use of its name and other marks, separating activities with differing tax treatments, indemnifying and insuring the nonprofit by the company, and having the company warrant that it will comply with the law in operating the co-venture.

Lastly, while a nonprofit is obligated to have certain participation in the co-venture, a nonprofit’s involvement should be as passive as possible. The reason for the limited participation is to avoid having the funds generated considered taxable unrelated business income. If the nonprofit is too active in the co-venture, it may be considered an active partner in a for-profit venture.

Best Practices in Cause Marketing

In conducting a co-venture, California imposes specific disclosure requirements and also prohibits a number of practices to protect consumers. Aside from the specific California regulations, the following are five best practices recommended by the New York Attorney General. These general guidelines are equally relevant in California, and will help a company promote transparency and safeguard its reputation.

1. Clearly Describe the Promotion – Advertisements, product packaging, and other marketing materials should prominently state key details such as: the name and mission of the nonprofit receiving the contribution, the start and end dates of the promotion, how the contribution will be calculated, whether there is a cap or maximum amount on the contribution, and whether any action is required by the consumer in order for the contribution to be made.
2. Allow Consumers to Easily Determine Donation Amount – Promotional materials should not use vague language such as “a portion of the proceeds” because there is no way for a consumer to figure out the actual amount to be contributed. Instead, use language that states a fixed dollar amount or percentage for each item or purchase.
3. Be Transparent About What is Not Apparent – A company should disclose what might not be apparent. For example, the company should state whether there is a cap on the maximum amount of the contribution and should distribute a number of units that is reasonably expected to produce the maximum contribution, and not flood the market with products.
4. Ensure Transparency in Social Media – Where the promotion involves contributions in exchange for “likes” on Facebook or “follows” on Twitter, the company should be just as transparent and follow the same recommended best practices as if it were implementing a traditional product-based promotion.
5. Tell the Public How Much Was Raised – At the end of a promotion, the company should disclose the total amount of the contribution generated and given to the nonprofit on its website.

Disclaimer. The information in this article is not legal advice, and is provided only for informational purposes. This article is only a general discussion, and does not include all relevant information regarding the topics and issues addressed within it.

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