Fundraising With Your Eyes Wide Open: Regulatory Compliance
By Lyndel Lackey, HoganTaylor Tax Partner
With the current economic environment in our region, non-profits are considering ways to expand charitable fundraising efforts, which can bring additional regulatory considerations, specifically in the area of state registration and compliance. States may regulate types of fundraising activities that are monitored (i.e., solicitation), entities subject to charitable solicitation rules, registration obligations and exemptions, disclosures that must be a part of any solicitation, and internet solicitation compliance. We will try to navigate this maze at a high level in the following comments that hopefully provide some takeaways.
The “Ask” – What is a “Solicitation”?
The term “solicitation” can be defined for state regulatory purposes as any direct or indirect request for a charitable contribution, whether express or implied, through any medium, including oral and written statements, offers for sale, and announcements for special events. State solicitation laws do not apply to the receipt of unsolicited donations or other types of receipts such as fees related to program service activities. In other words, in order for the activity to constitute a charitable solicitation, there must be some affirmative act such as asking for a gift or selling goods or services that will benefit a charity. If the activity in a particular state meets this definition, then more than likely there are registration requirements; unless a specific exemption applies.
The “Mix” – Who is Subject to the Rules?
We next move to the types of entities that may be subject to the solicitation rules, and this may vary from state to state. Whether an organization has tax exempt status or may receive tax deductible contributions is a completely separate question from whether it is considered to be a charitable organization under state law. So, although “charitable organizations” obviously include 501(c)(3) organizations, it may also include other 501(c) organizations, other nonprofit organizations defined by state law, or, in some states, even for-profit organizations. Included in the mix of “outside” entities generally subject to these rules are professional fundraisers (PFRs), professional fundraising counsel (FRCs), and commercial co-venturers (CVVs). Also, some states recognize “individual solicitors” as subject to registration rules.
The “Escape” – Who is Excluded from the Rules?
Are there exemptions or exclusions from the rules for certain types of organizations? Fortunately, there are several that may apply, depending on the state. The most common include churches/religious organizations, organizations raising less than a specified threshold amount based upon national gross thresholds (most common is $25,000), educational institutions, organizations where solicitations are limited to membership, volunteers soliciting for the benefit of a named individual, political organizations, and hospitals.
The “Rules” – You Must Comply
If none of the above exemptions apply to an entity regulated by a particular state, then you will need to be registered with the applicable State Charity Office, and you will have to renew annually. Approximately 45 states have some sort of statutory regulatory scheme for charitable solicitations, and virtually all of those states require registration prior to soliciting charitable contributions. These registrations can include the prescribed registration form, financial reports, and/or a copy of the 990.
The “Transparency” – You Must Disclose
Several states require specific disclosures by charities and professional solicitors at the point of solicitation. Many states require professional solicitors to identify themselves as such in any oral solicitations. Regarding written solicitations, some states have “verbatim” disclosure requirements/language, which must be included on printed solicitations, confirmations, receipts, and reminders. Also, some states require disclosure of where financial information about the charity can be found. This may be required on websites, emails, newsletter, and signage.
The “Web” – Internet Fundraising Considerations
Fundraising on the internet is considered solicitation, and may require registration in your state of domicile plus other states. In 2001, the National Association of State Charity Officials (NASCO) approved final advisory guidelines known as the “Charleston Principles”. These are non-binding guidelines adopted by NASCO to guide states in enforcement of fundraising regulations. At a summary level, these guidelines advise that a state’s registration requirements apply to entities domiciled within that state, to out-of-state entities whose non-internet activities would require registration in that state, and to out-of-state entities that specifically target persons physically located in that state or receive contributions from that state on a repeated and ongoing, or substantial basis, through or in response to a website solicitation. Although much is written on this subject, you will find little consensus and only three states that have provisions in their laws. Some states, such as Florida, require you to register if you receive contributions from their residents, even if you are not actively targeting that state. Practically, states acknowledge the reality that applying (and enforcing) their registration requirements to every internet solicitation is virtually impossible.
The “End” – Best Practices
Promote a “due diligence” process in analyzing activities, and those “entities” involved in conducting those activities. Based on those processes, make best efforts at compliance in the various states that may require registration of your nonprofit organization.