Can democracy criteria for public funding shrink democratic space? In this article, qualitative survey responses from 156 Swedish organizations are examined to trace how civil society actors in Sweden perceive negative labeling as reshaping the boundaries of legitimate participation, following recent democracy criteria for public funding. Respondents describe a recurring mechanism in which labels circulate across multiple arenas, often originating or becoming normalized in peripheral and anonymous forums, and gain force when taken up by institutional actors such as mainstream media, politicians, and government agencies. These dynamics are described as mutually reinforcing.

Negative labeling is perceived to cause or legitimize disciplining effects at multiple levels; self-censorship and withdrawal at the micro level, strategic adaptation, including avoiding funding applications and active non-cooperation at the meso level and defunding, cancellation and policy disadvantages at the macro level.

Respondents describe how powerful labels such as "extremist" or "Islamist," signaling non-democratic stances, are applied both to organizations based on who they are perceived to represent and based on what oppositional positions they take publicly, affecting organizations that challenge dominant frameworks or take visible stands on contentious issues. This points to two interrelated patterns of systematic targeting that often intersect, with organizations rooted in minority positions (particularly Muslim) experiencing compounded vulnerability when they also take public stands. Overall, respondents describe how negative labeling redraws the boundaries of legitimate participation through patterned and selective processes. Organizations rooted in Muslim communities, working with racialized minorities, or engaged in areas such as climate action, gender equality, and peace work are described as disproportionately exposed, indicating that democracy criteria operate not only within a discursive context but also as mechanisms that amplify and institutionalize claims of non-democratic status, rendering such claims actionable through funding withdrawal, exclusion, and policy disadvantage.