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Working with Professional Fundraisers

Donations are the lifeblood of most charities and therefore maintaining the right to fundraise in various states is of critical importance. While many charities know they must maintain their own state registrations to protect their ability to fundraise, they aren’t always as vigilant when it comes to working with professional fundraisers.

Professional fundraisers are regulated in many states where they are also known as professional solicitors, professional fund-raising counsel and commercial co-venturers. Once a fundraising contract is executed, both parties have an obligation to disclose the relationship in the states where fundraising will occur based on services being provided. If both parties are registered and the contract has all the required information, the contract should be accepted and charitable solicitations may commence upon acceptance.

However, from time to time, a charity may receive a notice that the professional fundraiser is not properly registered or current with its registration or vice versa.  The notice will state that fundraising in the state must cease until the unregistered party obtains or renews its license.  The unregistered party will receive a separate notice notifying them of the need to register or submit a renewal application.

If the fundraiser does not register and the charity, knowingly, continues to use their services to solicit in the state they received a notice from, both the charity and the fundraiser can be subject to fines and consent agreements which they would be required to disclose in other states.  Depending on the severity of the violation, a state can impose more severe penalties.  For example, a charity can have its registration exemption revoked (if it is on record as an exempt organization from registration), fined, or required to return funds received during the period of non-compliance.

We recommend both the charity and the professional fundraiser include language in their contract requiring each party to comply with state law in the applicable states and to make the failure to keep each other updated on changes to the status of their registration a basis for termination of the agreement.

It is important to remain in communication throughout the contract term with regard to the status of registrations – especially when preparing for a campaign.  Coordination to ensure both parties are properly registered can prevent loss of revenue, for example, in printing for a direct mail campaign and/or avoid financial penalties if caught unregistered.

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Registration Strategies for Small Nonprofits

Yes, charitable registration laws really do apply to small charities. Many states have minimum fundraising thresholds, but those thresholds generally apply to funds raised by the organization nationwide, not in that specific state (a common misconception!). Therefore, unless your charity is so small as to be practically non-existent or fits into another common exemption (e.g., churches), it is still likely required to register in most states with registration requirements.

One approach for small organizations with online fundraising operations is a strategic registration. A strategic registration requires the charity to review its fundraising and determine where it is currently soliciting. Next, the charity must determine which states regulate fundraising and whether the states in question have exemptions that may apply. Based on that analysis, the charity can then register in only those states.

Further, if the charity has a “Donate Here” button on its website, several states refuse to follow the Charleston Principles and  interpret that as a solicitation in their state. Accordingly, the charity should either state on its website that the solicitation is not directed toward residents of those states or it should register in those states.

Donations that come in from states where the charity is not soliciting do not trigger registration. Its the solicitation that triggers the requirement to register, not donation. However, any good fundraiser worth his or her salt will want to follow-up and ask for more. At that point, the charity is once again soliciting in a new state and will have to evaluate whether it needs to register.

The key to making strategic registration work  is staying on top of solicitations and ensuring that registration requirements are considered whenever solicitations are directed to a new state.

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Cause Related Marketing and Commercial Co-Venture Best Practices

Cause Related Marketing and Commercial Co-Venture Best Practices

According to causegood.com, cause marketing campaigns have exploded in the last decade – driving $700 million in sales in 2002 to $2 billion in 2016. Everywhere consumers look there are offers that promise to benefit a charity or cause. What many companies don’t know, is that cause related marketing triggers legal obligations for both the businesses making the offer and the charities that benefit.

Often companies are blissfully unaware that their charitable sales promotion is a regulated activity and are surprised to learn that there are regulations they must comply with. However, states have an interest in protecting consumers from false and misleading advertising. They also have an interest in protecting charities from being exploited. Accordingly, at least 20 states regulate cause marketing offers which are referred to interchangeably as “commercial co-ventures” or “charitable sales promotions.”

While definitions vary from state to state, in general, a commercial co-venture is an advertising or sales campaign conducted by a business which represents that the purchase of goods or services offered by the business will benefit a charitable organization or purpose.

A number of states require the business making the offer to enter into a contract with the charity they plan to benefit. As of this writing, four states require some form of registration. Others require the parties to enter into a written contract and even specify certain terms to be included in the contract. Two states require copies of the contract to be filed with the state before any actual sales occur. Two states even require the business to obtain a bond and register it with the state.

Most state regulators also require the charitable beneficiary to register to fundraise in the states where the offer is going to be made. Failure to register can lead to fines, and in some states, criminal penalties.

Best Practices for Businesses

  • Carefully vet charitable beneficiaries to ensure the charity enjoys a good reputation as an ethical and effective organization;
  • Enter into a written contract with the charitable beneficiary securing the right to use their name and marks to promote the offer and that includes the terms and disclosures required by certain states’ laws;
  • Ensure the charity files a copy with the states that require it;
  • Either obtain and register a bond in the states that require a bond or clearly state the offer is not valid in those states in all promotional material;
  • State the offer in clear and unambiguous terms;
  • Include the required disclosures at the point of sale;
  • Ensure advertisements list the donation on a per unit basis wherever possible;
  • If an offer is based on a percentage of profits, clearly disclose any minimum sales requirements or sales caps; and
  • Look for charitable beneficiaries who are registered (or who are willing to register) to solicit in the states where the offer will be valid.

Best Practices for Charitable Beneficiaries

  • Before agreeing to participate in a charitable sales promotion, make sure the business is aware of and willing to fulfill its legal obligations;
  • Require a written contract;
  • Ensure the contract makes clear the dates of the offer and which states the offer will be valid in and register to fundraise in those state before the campaign begins;
  • Ensure the item or service that is being sold is clearly described;
  • Ensure the offer is clear and unambiguous and written in a way that the amount owed to the charity can be tracked;
  • Include a limited, non-exclusive, nontransferable, non-assignable, revocable license to use the charity’s trademarks and service marks as part of the promotion;
  • Clarify how and how often payments will be made to the charity and ensure the reporting schedule adheres to any statutory minimums (every 90 days is typical); and
  • Require regular accountings of the campaign.

Cause Marketing can be an effective strategy for companies to promote products and gain market share. It can also be a welcome source of funds for charities. However, cause marketing can backfire when proper consideration isn’t given to legal compliance. For assistance preparing protective cause marketing agreements and complying with the various state’s laws, please contact info@carternonprofitlaw.com.

If you are seeking advice regarding co-venture contracts, disclosures and registrations, contact info@caritaslawgroup.com or call us at 602-456-0071.

 

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The Long Arm of Charitable Solicitation Law

DIY Nonprofit LawMust charities register as fundraisers in every state with a registration requirement because their websites are available to users in every state? The Pennsylvania Attorney General thinks so. One IRS official has even queried whether noncompliance with state registration requirements could adversely affect an organization’s tax-exempt status due to a violation of public policy. Echoing this sentiment, the revised Form 990 now asks filers to:

“List all states in which the organization is registered or licensed to solicit funds or has been notified it is exempt from registration or licensing.”

Inconsistent Registration Requirements.

Forty-one U.S. states as well as the District of Columbia and many local jurisdictions require some type of registration for charities trying to solicit funds. These laws create a patchwork of largely inconsistent laws that nonprofits must contend with. To add to the confusion, the jurisdictions that require registration have different definitions and standards regarding who must register, which documents are required, whether nonprofits must renew their registrations, and which government agencies process the registrations.

Typically, state charitable solicitation statutes regulate the following:

  • Charitable Organizations that solicit
  • Professional Fundraisers that plan fundraising campaigns
  • Professional Solicitors that solicit on behalf of charities
  • Charitable Sales Promotions where a company offers to donate a portion of sales proceeds to charity

Many states define “solicitation” extremely broadly. The solicitation does not have to be successful. The mere request often triggers a duty to register.

Unified Registration Statement.

The National Association of State Charities Officials and the National Association of Attorneys General created a form Unified Registration Statement in an attempt to standardize the registration methods across the country. Over 36 jurisdictions accept the Unified Registration form; however, they often differ in their specific requirements.

Charleston Principles.

In an attempt to offer some clarity to the murky legal landscape facing charities and state regulators, the National Association of State Charity Officials (“NASCO”) released non-binding guidelines, known as “The Charleston Principles.” The Charleston Principles attempt to provide guidance to both charities and state regulators regarding the application of state registration requirements to charities soliciting donations over the Internet.

In general, the Charleston Principles attempt to define the type and extent of activity that will trigger the duty to comply with a state’s registration requirements. The following summarizes the key points:

Activities that do trigger a duty to register.

  1. A charity is domiciled in the state and passively or actively solicits contributions over the internet.
  2. A charity is domiciled in the state and its principal place of business is located in that state.
  3. A charity is not domiciled in the state, but its non-internet activity in that state would require registration under existing law.
  4. A charity solicits donations through an “interactive website”; and the charity either:
  • “specifically targets persons” located in the subject state for solicitation; or
  • receives contributions from the state on a “repeated and ongoing basis or a substantial basis” through its website.

5. A charity solicits donations through a non-interactive website, and the charity either:

  • invites further offline activity to complete a contribution; or
  • establishes other contacts with the subject state (i.e., by sending e-mail messages or other communications that promote the site).

Activities that do not trigger a duty to register.

A charity, operating on a purely local basis or within a limited geographic area, does not target states outside its operating area if the charity’s website makes clear that its fundraising focus is limited to that area even if it receives contributions from outside that area on less than a repeated and ongoing basis or a substantial basis.

Practical Approach.

In light of the complexity and expense of registering in every jurisdiction, what should charities who take donations over the Internet do to protect themselves? Some practical suggestions include:

  • Follow the rules of each state for registration, reporting, documentation, etc.
  • Register in your home state and states where you target donors.
  • Register before you start fundraising.
  • Determine the number of contributions from states other than those in which you are currently registered. If contributions from other states exceed cost of registration, register there.
  • Place a disclaimer on your website that donors must be located within certain state(s).

If you are seeking advice regarding fundraising contracts, disclosures and registrations, contact info@caritaslawgroup.com or call us at 602-456-0071.

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Announcement – Ohio Law Change

Ohio Senate Bill 227 has been signed into law and impacts all charitable organizations (domestic and foreign) registered to solicit under Ohio Revised Code section 1716.02.  Effective April 6, 2017, all annual reports with a due date of April 17, 2017, and after may be subject to a $200 late fee if they are not filed in a timely manner. Registration is considered complete when the Annual Report and filing fee, if applicable, has been submitted to the Ohio Attorney General. Any charitable organization that fails to pay the required fee at the time that it is due, shall pay an additional fee of two hundred dollars ($200).  However, the attorney general may waive the late fee if the reason the charitable organization failed to pay the fee timely was beyond the control of the charitable organization

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Top State Charitable Solicitation Registration Myths

Top State Charitable Solicitation Registration MythsForty-five states and the District of Columbia regulate charitable solicitation. Charitable organizations are required to register and submit annual report/registration in forty-two (including DC) of those jurisdictions. Many organizations are not aware that this requirement to register exists and some organizations are under the impression that they are exempt from such requirements. For those that are aware of the registration requirements, there are a number of points that many nonprofits are confused about. For those that were unaware, these points will help create an understanding of the registration requirements and aid the organization in compliance.

  • Exemptions Are Not Automatic. While almost all states grant exemptions from registration for certain types of charitable organizations, each state’s registration requirements will need to be closely reviewed to determine if a particular organization qualifies. In addition, most states require a formal request for exemption, whether it be on a form provided by the state or simply sending a letter with a copy of supporting documents.
  • Some States Do Not Follow the Charleston Principles. A non-exempt charitable organization engaged in any fundraising activities is required to register in each state in which it requests a donation. One method of fundraising that is often problematic for charities is online solicitation – social media, a donate button on the organization’s website, and online cause-related marketing promotions. Whether these types of solicitation trigger national registration or simply registration in a couple of states is a question many charities have. If the organization’s offline activities don’t trigger registration, in most instances, the Charleston Principles can be applied. However, there are now at least 4 states that have defined their registration threshold based on repeated and ongoing basis and/or substantial basis, which would likely trigger registration requirements for online solicitations.
  • Minimum Receipts Thresholds are Based on Charities’ Total Gross Receipts. Another common mistake among charitable organizations is failing to understand the minimum receipts threshold. In most states, charities that raise more than $25,000 dollars are required to register. Many organizations assume the threshold applies solely to receipts within the state. However, the threshold is based on total national revenue as reported on Part I, line 12 of the organization’s Form 990. The only state that has an exemption provision based on amount raised from within its borders is New York. New York exempts a charitable organization that raises less than $25,000 in the state and did not utilize the services of an outside paid fund-raiser.
  • Penalties Can Amount to More than A Financial Penalty. States are increasingly imposing late fees and fines on organizations that conduct fundraising activity without proper registration. In addition to the fines and fees, failing to register can lead to an Assurance of Voluntary Compliance or Settlement Agreement that would need to be disclosed in other states. Failure to register can also lead to investigations that expand beyond the registration issue and that lead to an examination of overall operations.
  • Formal Grant Requests are Solicitations. Many nonprofits seem to think their out of state grant solicitations do not trigger registration requirements. Unless an exemption applies and has been approved by the State, grant applications are solicitations that trigger registration under the law.
  • States Actively Search for Charities that Do Not Comply. Our clients have received notices from the California Attorney General based on grants reported on grant-maker’s Form 990s. All the AG has to do to generate a list of nonprofits that are out of compliance is to cross reference the registration database with Schedule B of Form 990. The growth of electronic filing and information sharing among state regulators and the IRS makes it increasingly likely that the failure to register will be discovered and enforced.

To determine whether your organization needs to register based on its purpose and/or activities and learn more about our registration services, contact us at info@caritaslawgroup.com or call us at 602-456-0071.

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