Generally, if a charitable organization is engaged in the solicitation of funds for charitable purposes, there are state rules that require registration, reporting and disclosures by the charitable organization or someone fundraising on its behalf. Forty-four states and the District of Columbia have laws that regulate fundraising activities, with the specific rules and requirements varying from state to state. As such, before fundraising in a particular state, the applicable state rules should be reviewed. The following guidelines are, however, generally applicable to the regulation of fundraising activities across the board.
What is the solicitation of funds for charitable purposes?
The solicitation of funds for a charitable purpose, a/k/a charitable fundraising, is the act of asking for a gift (including cash or noncash) to benefit a charitable organization or a charitable purpose. There is no uniform definition of charitable purpose among the states that regulate charitable fundraising activities; however, it is generally understood to include any benevolent, educational, philanthropic, humane, scientific, patriotic, social welfare or advocacy, public health, environmental conservation, civic or other eleemosynary objective.
It is important to understand that it is the act of soliciting (i.e., asking for the gift) that triggers the applicable regulations. Solicitations can happen in any form where a request is made for a gift to support a charitable organization or purpose. Examples include, but are not limited to, telephone, face to face, website, online platforms, emails, direct mail, tickets for fundraising events, purchase of goods to benefit a charitable organization, raffles, bingo, sweepstakes, auctions, television or radio ads, or social media.
Who is subject to the charitable solicitation rules?
The “persons” (which can include an individual, organization, trust, foundation, group, association, entity, partnership, corporation, society, or any combination thereof) soliciting charitable contributions generally can be classified into four types: charitable organizations; professional fundraisers; professional fundraising counsels; and commercial co-venturers.
1 Charitable Organizations
Generally, a charitable organization is that is, or holds itself out to be, established for a charitable purpose. 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” certainly include 501(c)(3) tax-exempt organizations recognized as charitable by the IRS, it may also include other Section 501(c) organizations, other nonprofit organizations defined by state law—or, in some states, even for-profit entities. In essence, the important consideration is whether an organization engages in the solicitation of contributions to support a charitable purpose.
In some states, depending on the amount of total contributions or the nature of their activities, charities such as religious or educational institutions, hospitals, and membership organizations may be exempt from registration. In addition, as further explained below, organizations that solicit solely via the internet (and do not engage in any targeted activity directed to any state) may not be required to register in any state—other than in the state in which they are domiciled.
There are 41 states plus the District of Columbia that require charitable organizations to register in order to solicit their residents. The registration process for a charitable organization typically involves filing a state registration form, providing a copy of the organization’s IRS Form 990 (if one is required) as well as financial statements (which may be required to be audited, depending on the organization’s annual revenue), copies of contracts with fundraisers and commercial co-venturers, and a filing fee. Additional documentation that may be required with the initial registration includes a copy of the organization’s charter, bylaws, and IRS determination letter (if the organization qualifies for tax-exempt status).
2 Professional Fundraisers
Generally, a professional fundraiser (PFR), a/k/a professional solicitor/paid solicitor/commercial fundraiser, is a fundraiser that is hired for compensation to solicit contributions on behalf of a charitable organization and may have custody and control of the contributions received. PFRs may also have a role in the overall management of a fundraising campaign. Examples of PFRs include, but are not limited to, telemarketers and door-to-door or other in-person solicitations.
There are 42 states that require PFRs to register, post a surety bond, file contracts with their nonprofit clients, and file campaign financial reports. Also, many states require PFRs to disclose their professional status as a paid solicitor prior to making the request for a contribution.
3 Professional Fundraising Counsels
A professional fundraising counsel (FRC) is an entity retained for compensation to help plan, consult, advise on, or produce and design solicitation materials on behalf of a charitable organization. FRCs do not, however, make the solicitations. As a general rule, if an FRC is compensated based on a percentage of the funds raised, or has custody or control of contributions, it will be considered to be a PFR. Examples of FRCs include, but are not limited to, strategic consultants, direct mail consultants and fundraising event planners.
Currently, 28 states require FRCs to register and file contracts. A few states require them to post bonds and file campaign financial reports.
4 Commercial Co-venturers
A commercial co-venturer (CCV) is a for-profit entity that does not regularly engage in fundraising, but instead advertises that the purchase or use of its goods or services will benefit a charitable organization or charitable purpose. A typical CCV is a retail store that states that for every specified product sold, it will donate a percentage of the purchase price (or a specific dollar amount per unit sold) to a charitable organization.
Currently, up to seven states require some combination of registration, contract filing, posting of a bond and/or filing of a campaign financial report. In addition, about 20 other states regulate the activity by requiring specific contract terms or point of sale disclosures, but do not require registration or contract filing by the CCV. Some states require the charitable organization that benefits from the CCV promotion to file and/or report the CCV contract.
Find additional information about the legal requirements applicable to CCVs.
What about internet solicitations?
By a literal reading of most state statutes that require registration, internet solicitations that reach residents of the state would trigger registration and reporting requirements. However, in order for a state to obtain the requisite jurisdiction to impose its regulation statutes upon an entity’s online solicitation activities (including requiring registration), those activities must meet the constitutional requirement of “minimum contacts” with that particular state. Moreover, states acknowledge the practical reality that applying (and enforcing) their registration requirements to every internet solicitation is virtually impossible. With this backdrop, in 2001, the National Association of State Charity Officials (NASCO) issued guidelines, called the Charleston Principles (the “Principles”). The Principles are not binding law; however, NASCO encourages state charity regulators to use them as practical guidelines for applying their state laws to online fundraising activities.
The Principles apply to any of the regulated entities that solicit contributions via the internet (i.e., charities, PFRs, FRCs and CCVs) and summarize that the application of state registration and reporting regimes as follows:
1. Entities domiciled within the state.
An entity is domiciled within a particular state if its principal place of business is in the state. However, according to the Principles, a physical presence within a state, such as a branch or regional office, may also be indicative of appropriate state jurisdiction.
2. Out-of-state entities whose non-internet activities would require registration in the state (e.g., direct mail or inbound telephone solicitation into the state).
3. Out-of-state entities that solicit through an interactive or non-interactive website and either (a) specifically target persons physically located in the state or (b) receive contributions from the state on a repeated and ongoing basis, or a substantial basis, through or in response to the website solicitation.
The Principles leave the definition of “repeated and ongoing” or “substantial” to the individual states. Currently, three states, Colorado, Mississippi and Tennessee have, by regulation, formally adopted numerical thresholds. In Colorado, an entity receives “repeated and ongoing” or “substantial” contributions if it receives at least 50 online contributions, or the lesser of $25,000 or 1% of its total contributions, in online contributions during a fiscal year, respectively. In Mississippi, an entity receives “repeated and ongoing” or “substantial” contributions if it receives at least 25 contributions or $25,000 in online contributions in a year. In Tennessee, an entity receives “repeated and ongoing” or “substantial” contributions if it receives at least 100 contributions or $25,000 in online contributions in a year.
Find additional guidance on online fundraising and registration in the context of cause marketing.
What are the disclosures that need to be made at the point of solicitation?
A number of states require solicitation disclosure notice statements on all written materials used when soliciting contributions. The required disclosures include the identification of how additional information about the organization may be obtained as well as a reference to certain states’ contact information for further information. The requirements apply to charitable organizations and professional fundraisers.
The disclosure notice is required to be included on every printed solicitation or written confirmation, receipt, and reminder of a contribution. Customary examples of printed solicitations are direct mail solicitations, fliers, or solicitations contained in a newsletter. Often overlooked, however, are emails or the organization’s website, which, if it includes a donate button or other request for a donation (including a link to the donate button), is a form of written solicitation.
Although these disclosures might seem onerous, they can be used as an opportunity to direct potential donors to a particular representative within the organization or to the organization’s website where further information about the organization can be accessed.
The information provided above does not constitute legal advice and is not intended to substitute for legal counsel. Prepared by: Perlman & Perlman, LLP.