Charitable organizations, fundraisers and sponsors must understand state charitable fundraising regulations and reporting requirements. Currently, 45 states and the District of Columbia have some degree of statutory regulation of charitable solicitation activity conducted within their borders. Failure to comply with state regulations can result in monetary penalties to “cease-and-desist” orders to intervention in an organization’s operations by the state attorney general. Charitable organizations and their advisors need four basic questions about state charitable fundraising regulations.
What Entities Are Subject to the Charitable Solicitation Rules?
Charitable Organizations – The definition of charitable organization not only includes 501(c)(3) organizations, which are recognized as charitable by Internal Revenue Service (IRS), but the definition also includes other Section 501(c) organizations, other not-for-profit organizations, and even for-profit organizations defined by state law. The key question is whether the organization engages in the solicitation of contributions to support a charitable purpose.
Exceptions – Some of the common state exemptions that apply to religious organizations include the following:
- Churches or their integrated auxiliaries, ecclesiastical or denominational organizations;
- Religious organizations that conduct regular worship services;
- Organizations that are not required to file Form 990 with the IRS; and
- Organizations that do not solicit outside their membership or who receive most or all of their
income from within their membership or from previous donors.
Professional Fundraisers – The IRS defines professional fundraisers as people and companies employed to raise funds on behalf of tax-exempt entities. Professional fundraisers may have custody and control of the contributions received and may have important roles in the fundraising campaigns.
Professional Fundraising Counsel – Fundraising counsel who help plan, manage, advise o, or produce and design solicitation campaigns, but do not directly solicit or have custody or control of contributions.
Commercial Co-Venturers (CCV) – A CCV is an entity that does not regularly engage in fundraising, but instead advertises that purchases or use of its goods or services will benefit a charitable organization. The t-shirt company Life is Good donates 10% of its net profit to Life is Good Kids Foundation, its not-for-profit organization to help kids in need. However, not all activities by commercial entities will fall within CCV activities. If a shopper donates a dollar in the total purchase, and the company donates that money to a charitable organization, the company is not considered as CCV. If the company makes donation out of its own profit, the company will be considered to be a CCV.
What are the Purposes of State Charitable Fundraising Regulations?
- To prevent deceptive and dishonest practices in the conduct of soliciting funds for or in the name of a charity
- To prevent improper use of contributions intended for charitable purposes.
- To improve the transparency and accountability of organizations that solicit funds from the public for charitable purposes.
- To help donors make better and informed giving decisions.
When Must Charitable Organizations Register to Solicit Charitable Donations?
- An affirmative act of direct or indirect request for contributions for charitable purposes, including oral and written statements, offers for sale, and announcements for special events.
- Do not apply to the receipt of unsolicited donations or other types of charitable activities
such as fees related to operating charitable programs.
What to File?
Charitable Organizations – Currently 41 states and the District of Columbia require charitable organizations to register before the organizations can solicit. The registration process may require:
- A state registration form
- A copy of Form 990 (if one is required)
- A copy of financial statements. The organization may need to provide audited financial statements, depending on its revenue.
- Copies of contract(s) with fundraisers and commercial co-venturers
- A filing fee
Professional Fundraisers – Many states require professional fundraisers to register prior to making request for a contribution:
- Required to register in up to 43 states.
- Post surety bonds in each state.
- File copies of fundraising contracts with not-for-profit clients.
- File annual financial reports relating to each fundraising campaign conducted in the state.
- Required to make certain extensive oral and written disclosures in connection with solicitation campaign(s).
Professional Fundraising Counsel:
- Required to register in about 32 states.
- File copies of contracts.
- Post bonds in a few states.
Commercial Co-Venturers:
- Required to register in six states.
- File contracts.
- Post bonds and/or file a campaign financial report
- Require specific contract terms and point of sale disclosure in up to 20 states. States do not
require registration or contract filing by CCV, but the charitable organization that benefits from the CCV advertising may be required to file and/or report the contract.
Special Rules – Internet Solicitations
A charitable organization’s online fundraising activity must meet the requirements of “minimum contacts” with the specific state, so the state can obtain requisite jurisdiction to impose its regulation statutes upon the activity. Minimum contacts are a nonresident defendant’s connections with the forum state that are sufficient for jurisdiction over that defendant to be proper. The National Association of State Charity Officials (NASCO) issued guidelines, The Charleston Principles (the Principles) in 2010. The Principles affirm the states’ commitment to consistently apply minimum contacts principles to the existing state charitable solicitation regulatory framework. The Principles apply to any of the regulated entities that solicit contributions via the Internet, including charitable organizations, professional fundraisers, professional fundraising counsels, and CCVs. For charitable organizations soliciting solely via the Internet, the Principles state that the application of state registration and reporting regimes should be limited to the following:
- Entities domiciled within the state.
- Out-of-state entities whose non-Internet activities would require registration in the state (direct mail or inbound telephone solicitation into the state)
- Out-of-state entities that solicit through an interactive or non-interactive website and either specifically target persons physically located in the state or receive contributions from the state on a repeated and ongoing basis, or a substantial basis, through or in response to the website solicitation.
For charitable organizations engaging in any targeted solicitation activity such as telephone, direct mail or in-person solicitations in addition to online solicitation, the organization must register in all the targeted states. Letter, fax or email may also trigger registration requirements. The Principles are solely limited to online solicitations that occur in a passive context.
What Are the Consequences for Failing to Register?
The consequences for failing to register vary among states and in theory can include both civil and criminal penalties. In every case, the state will publicize the action, and most states require disclosure of enforcement actions in their registration statements. For example, the statutes and promulgated rules for paid fundraisers are enforced by the District of Columbia Attorney General in the District of Columbia Superior Court. Any violations of the Code or the DC regulations are punishable by a fine of up to $500, sixty (60) days imprisonment or both. Prior to having a registrant’s certificate suspended or revoked or their initial application denied, a hearing must be held to afford the registrant an opportunity to present its case through documentation and/or written/verbal testimony.
Conclusion
Charitable organizations, professional fundraisers, and advisors have responsibilities with complying with state regulations and reporting requirements. The charitable organizations need to have proper Board of Directors oversight of fundraising contracts and activities, and the usage of contributions in a manner consistent with the solicitations.
By: Ivy Ann Beckham | Supervising Senior
