First, I'm so sorry about your nephew! I hope his treatments will go well, and as little side effects as possible.
You are so kind to organize a fundraiser!
I've seen fundraisers done both ways. If he has started or will be starting chemo, there is a very valid reason--one germ or cold can cause a quick and severe infection. Often, the infections can be very dangerous to say the least.
One option is for them to write a thank you letter for you or another volunteer to hand out to those that attend. They could film a thank you via video, or a personal blog. Thanking people in person usually means lots of hugs, handshakes, etc...a breeding ground for germs. There are many ways to express their appreciation, without the risk of bringing back a virus to their son.
Your sister and her family could be too overwhelmed to think about going to such an event, though I'm sure they would appreciate every penny raised.
Bottom line--not knowing the age and stage of the cancer, they should check with their son's doctor about potential risks, and go from there.
Best of luck to you with your fundraiser-I'm sure it will be much appreciated and a huge success!