Navigating the Maze of State Charitable Fundraising Regulation

Navigating the maze of the financial, compliance and reporting requirements for charitable fundraising can be a daunting experience for charities and their fundraisers and sponsors. Currently, 45 states and the District of Columbia have some degree of statutory regulation of charitable solicitation activity conducted within their borders. Many states—though not all of them—require registration and reporting of financial and other information. Those reporting requirements apply to charitable organizations, professional fundraisers (commercial fundraisers or solicitors), professional fundraising counsels (consultants) and commercial co-venturers.

Although an organization that solicits contributions nationally may find compliance with registration requirements to be burdensome, the penalties for noncompliance can be harsh. They range from monetary penalties to cease and desist orders 
to intervention in an organization’s operations by the state attorney general.

It is important that charitable organizations and their advisers have a strong basic understanding of what constitutes a charitable solicitation, how the various entities are defined and the extent to which they are subject to the state’s charitable solicitation laws.

The Purpose of State Charitable 
Fundraising Regulations

In general, state solicitation laws serve two purposes:

1. To provide the public with information relating to persons who solicit charitable contributions in order to prevent (a) deceptive and dishonest practices in the conduct of soliciting funds for or in the name of charity; and (b) improper use of contributions intended for charitable purposes; and
2. To improve the transparency and accountability of organizations that solicit funds from the public for charitable purposes, so that donors can make better-informed giving decisions.

The solicitation of charitable contributions is fully protected activity under the First Amendment, even when conducted by a professional fundraiser with a profit motive. Of course, the state may enforce its anti-fraud laws to prohibit fundraisers from obtaining money on false pretenses or by making false statements. This tension between the federal constitution and the states’ legitimate interest in preventing fraud continues to be a central issue in the state regulation of charitable solicitation.

Defining Charitable Solicitation

In most instances, it is the act of making a “charitable solicitation” that triggers a state’s registration and reporting requirements. Although the definition varies from state to state, generally, a charitable solicitation is any direct or indirect request 
for contributions for charitable purposes, including oral and written statements, offers for sale and announcements for special events. Notably, the state solicitation laws do not apply to the receipt of unsolicited donations or other types of charitable activities, such as fees related to operating charitable programs. In other words, in order 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 charitable organization.

Entities Subject to Charitable 
Solicitation Rules

The “persons” soliciting charitable contributions generally can be classified into four types of entities. Each state identifies and defines only those entities that are regulated under its solicitation laws:

Charitable organizations. 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 section 501(c)(3) organizations recognized as charitable by the Internal Revenue Service (IRS), it may also include other section 501(c) 
organizations, other nonprofit organizations defined by state law or, in some states, for-profit organizations.

In essence, the important consideration is whether an organization engages in the solicitation of contributions to support a charitable purpose. Charitable purposes include, but are not limited to: relief of 
the poor, distressed or underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency. Typically, the registration process for a charitable organization 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 upon 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 acknowledgement letter (if the organization qualifies for tax-exempt status).

Currently, of the 45 states with charitable solicitation statutes, 41 states plus the District of Columbia require charitable organizations to register before they begin solicitations. In some states, depending upon the amount of overall contributions or the nature of the activity, charities, such as religious and educational institutions, hospitals and membership organizations may be exempt from registration. Also, organizations that solicit solely via the internet (and do not engage in any targeted activity in any state) may not be required to register in any state other than the one in which they are based.

Professional fundraisers. Generally, a professional fundraiser is hired to solicit the general public, directly or indirectly, on behalf of a charitable organization (e.g., telephone and/or door-to-door solicitations) and may have custody and control of the contributions received. Professional fundraisers may also have a role in the overall management of a fundraising campaign. Forty-three states require professional fundraisers to register, post a surety bond, file contracts with their nonprofit clients and file campaign financial reports. Also, many states require them to disclose their professional status as paid solicitors prior to making the request for a contribution.

Professional fundraising counsels. A professional fundraising counsel an entity retained to help plan, consult, advise on, or produce and design solicitation materials on behalf of a charitable organization. Professional fundraising counsels do not, however, make the solicitations or, as a general rule, have custody or control of contributions. Currently, 31 states require them to register and file contracts, and, in a few states, post bonds.

Commercial co-venturers. A commercial co-venturer is an 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. For example, a McDonalds’ advertisement may state that for every hamburger sold, McDonalds will donate $1 to the Ronald McDonald House (a nonprofit organization). Currently, six states require registration, contract filing, the posting of a bond and/or the filing of a campaign financial report. In addition, 20 other states regulate the activity by requiring specific contract terms and point-of-sale disclosure, but do not require registration or contract-filing by the commercial co-venturer. Instead, the charitable organization that benefits from the advertising may be required to file and/or report the contract.

Not all activities by commercial entities will fall within commercial co-venturer regulation. For example, a retail store may ask a shopper to “round up” his or her total purchase to the nearest dollar amount, with the rounded-up amount being donated to a charitable organization. This would not be considered a commercial co-venture. The key question in considering whether an activity is a commercial co-venture is who is making the donation? If it is the commercial entity making it out of its own profit, it will be a commercial co-venturer.

Having an understanding of the regulatory framework governing charitable solicitations will make it easier for organizations to identify compliance issues and prevent potential fines, penalties and other consequences.

Excerpted with permission. Tracy L. Boak, Navigating the Maze of State Charitable Fundraising Regulation. Taxation of Exempts (July/August 2015). Pages 38-41.