The headlines are doing what headlines do best: making an already anxious nonprofit sector even more anxious. This time, the focus is on S. 3942, the Stop Proxy Organizations Nurturing Subversive Operations and Riots Act, or the SPONSOR Act. Its core proposal is simple, and alarming. It would make 501(c)(3) fiscal sponsors bear criminal liability related to or arising from a fiscal sponsorship, and civil liability for certain covered activities tied to the sponsorship.
For nonprofits that use or offer fiscal sponsorship, this is not a technical amendment. It is a direct threat to one of the most important legal structures available to emerging charitable projects. Fiscal sponsorship allows a project without its own 501(c)(3) status to raise funds through a tax-exempt sponsor, so long as the sponsor retains discretion and control over the funds and uses them in furtherance of its own exempt purposes. That is not a loophole. It is a long-recognized nonprofit structure, and one that is both useful and legally demanding.
What the Bill Actually Says
The bill would add a new subsection to Internal Revenue Code section 501. Under it, if a 501(c)(3) expends funds for a fiscal sponsorship and donors either receive, or are told they may receive, a charitable deduction for contributions supporting that sponsorship, then the organization would bear any criminal liability related to or arising from the fiscal sponsorship and any civil liability concerning a covered activity related to or arising from the fiscal sponsorship.
That is extraordinarily broad language. The bill does not limit liability to situations where the sponsor intended wrongdoing, authorized wrongdoing, or even had actual knowledge of every downstream act. Instead, it creates a sweeping rule and then says the sponsor is presumed to be responsible for ensuring its funds are used in compliance with applicable laws, regulations, and tax obligations.
Yes, the bill includes a nod to defenses based on due diligence and reasonable oversight. But that is cold comfort. A legal defense is not the same thing as legal safety. For many nonprofits, the threat of investigation, litigation, discovery, reputational damage, and defense costs would be enough to make fiscal sponsorship far less accessible, especially for projects doing controversial, movement-based, or rapid-response work.
The Covered Activity Problem
The bill defines covered activity to include aiding and abetting acts of international terrorism by knowingly providing substantial assistance, which is serious enough on its face. But it also reaches conduct involving force, threats of force, physical obstruction, interference with constitutional rights, and blocking the movement of articles or commodities in commerce. Those categories go well beyond traditional nonprofit compliance issues and venture into highly charged territory around protests, demonstrations, and politically contentious direct-action spaces.
That matters because many fiscally sponsored projects operate in advocacy ecosystems. Some organize rallies. Some fund bail support, mutual aid, or legal observation. Some work in immigrant justice, environmental justice, abortion access, or international solidarity. Lawful advocacy is not the same thing as unlawful conduct. But when liability rules are written broadly and politically, the practical effect is often the same. Organizations become afraid to support speech, assembly, and dissent that someone in power may dislike.
Fiscal Sponsors Already Have Legal Duties
What makes this proposal especially frustrating is that fiscal sponsors are not operating in a lawless vacuum. They already have real obligations. A proper fiscal sponsorship requires the sponsor to receive the funds, maintain records, ensure the funds are used for charitable purposes, and retain legal control rather than acting as a mere pass-through. Sponsors also already face liability, fiduciary risk, and reputational exposure when they fail to screen projects carefully or fail to document expectations in writing.
In other words, the sector does not need a new law to tell sponsors they must exercise oversight. That is already the deal. What this bill appears designed to do is ratchet ordinary compliance responsibilities into a new regime of punitive exposure, one that could make sponsors think twice before partnering with projects engaged in public-facing advocacy or unpopular causes.
Who Would Feel This First?
Not the biggest institutions. They can afford lawyers, investigators, insurance reviews, and enhanced compliance systems. The groups most likely to feel this first are the smaller sponsors and newer projects that rely on fiscal sponsorship precisely because they do not yet have the administrative infrastructure to stand alone. That includes grassroots charities, mutual-aid efforts, artist collectives with charitable programming, community defense funds, local justice initiatives, and startup nonprofits testing whether there is enough support to justify seeking their own exemption.
The likely result is a chilling effect. Some sponsors would tighten their intake standards. Others would bar projects engaged in protest-related work, international work, or anything that might attract political attention. Some may exit fiscal sponsorship altogether. And when that happens, the people frozen out are rarely bad actors. More often, they are small charitable efforts without money, without lobbyists, and without the luxury of waiting years to build a standalone organization.
Bottom Line
The SPONSOR Act should concern every nonprofit lawyer, fiscal sponsor, donor advisor, and sponsored project. It is being framed as a measure about accountability, but fiscal sponsors already have accountability. What this bill adds is expansive liability, broadly defined covered conduct, and a legal environment that could make sponsors reluctant to support lawful but controversial charitable work.
Nonprofits should not panic. But they should pay attention. If your organization acts as a fiscal sponsor, now is the time to review your sponsorship agreements, diligence procedures, fund-control practices, recordkeeping, and risk tolerance. And if your project depends on a fiscal sponsor, now is also the time to understand how quickly legislative rhetoric can become compliance reality.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.Â