This post discusses one recent challenge to the use of race-based criteria in grantmaking by a nonprofit 501(c)(3) organization, the Fearless Foundation, by the American Alliance for Equal Rights (AAER). AAER is a membership nonprofit that has filed several similar lawsuits against other organizations. It is led by Edward Blum, who also leads Students for Fair Admissions (SFA). SFA’s lawsuits against Harvard University and the University of North Carolina resulted in a 2023 Supreme Court decision that the admissions policies of both schools, including considering applicants’ racial backgrounds, among other factors in making admissions decisions, violated the Equal Protection Clause of the Fourteenth Amendment. 

The Fearless Foundation Litigation and Settlement
The Fearless Foundation is the nonprofit 501(c)(3) affiliate of Fearless Fund, an Atlanta-based hedge fund that invests in businesses owned by under-resourced entrepreneurs, including women of color. Fearless Foundation’s charitable programs included a competitive grant program (the Fearless Strivers Grant Contest) through which eligible Black women business owners could apply for and receive mentorship, tools to assist with business growth, and grants of $20,000. In 2023, AAER sued Fearless Foundation and Fearless Fund on behalf of three unnamed AAER members, alleging that the Fearless Strivers Grant Contest violated section 1981 of the Civil Rights of 1866 (“Section 1981”).  42 U.S.C. § 1981. Section 1981 is a federal law that prohibits racial discrimination in contracting. 

On appeal, the 11th Circuit Court granted AAER’s request for a preliminary injunction of the Fearless Strivers Grant Contest, finding it probable that the program: (1) created a contractual relationship between the parties within the meaning of Section 1981; and (2) was “racially exclusionary” and therefore potentially violative of federal law. After further litigation, the parties settled the matter in September 2024, with the Foundation agreeing to shut down the grant program instead of broadening its eligibility criteria. 

Insights from the Fearless Foundation Case
Litigation raised significant concerns and confusion among grantmakers nationwide. Here are some key takeaways.

• While the 11th Circuit Court’s ruling was not a final decision on the merits of the case, it did signal the likely outcome of such a decision if the parties had continued litigating instead of settling. 
• The direct legal impact of the Fearless Foundation ruling is limited to the 11th Circuit, which covers the federal courts in Alabama, Georgia, and Florida. The ruling does not apply to organizations outside of the 11th Circuit’s jurisdiction.  Were a similar case brought in a court in another judicial circuit, it’s unclear what the outcomes would be. A federal circuit decision is a binding precedent on all federal district courts within that circuit, but it is not binding on federal courts in other circuits. Other federal courts outside of the 11th Circuit might be persuaded to follow the logic of the Fearless Foundation ruling, or they might not. 
• The Fearless Foundation litigation illustrates the increased possibility of legal risk for funders whose grant programs use race-based eligibility criteria. Section 1981 is a federal law that was enacted as part of the 1866 Civil Rights Act to ensure that all persons have the same rights to make and enforce contracts “as enjoyed by white citizens.” 42 U.S.C. §1981(a). Although the intention of Section 1981 was to protect formerly enslaved persons, activists have utilized the law to successfully challenge programs intended to remediate the impacts of racial discrimination on Black people and other populations of color.  In granting AAER’s request for a preliminary injunction of the Fearless Strivers Grant Contest, the 11th Circuit Court held that the language of Section 1981 “prohibits intentional race discrimination” in the making of contracts. It, therefore, found that the Fearless Strivers Grant Contest likely violated Section 1981 because non-Black applicants were ineligible for the program. 
• The applicability of Section 1981 hinged on the 11th Circuit Court’s finding that the grant program likely created a contractual relationship between the Foundation and its grantees. The Court pointed to various components of the program in support of this finding, including the original contest rules, and found a “bargained-for exchange” in which grantees agreed to certain terms as part of their acceptance of the grant award from the Foundation.  In the wake of the Fearless Foundation litigation, some funders are reviewing and, in some instances, revising the terms of their grant programs or exploring alternative trust-based grantmaking models to address this risk. 

In the current environment, many nonprofit grantmakers are thinking about their strategies to advance racial equity and assessing what impact, if any, these legal developments may have on their programs.  We encourage any nonprofit considering these issues to consult legal counsel as part of that process.

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Here are some key elements to include in the written agreement and other important considerations as you move forward.

Term and Termination

Any contract, including one for professional services, should define the term of the agreement.   The term includes an effective date and a termination date.  The duration of a contract can vary, but if you aren’t sure the relationship will be a good fit, consider a shorter initial period of three to six months. A renewal can be quickly negotiated if the partnership is successful. 

Termination provisions allow either party to cancel the contract under specific circumstances.  Typically, professional services contracts allow either party to terminate upon written notice of thirty or sixty days.  It is also common to include a provision for termination “for cause,” in the event one party materially breaches the contract and fails to fix (or cure) the problem within a specified time frame.  

The organization should consider a provision for immediate cancellation in the event its good reputation is threatened.  This protection is important if the influencer’s unforeseen behavior garners bad press and reflects negatively on the charity through its association with the influencer. 

Code of Conduct

Consider including a code of conduct provision requiring the influencer to agree to online conduct that won’t interfere with the charity’s ability to fulfill its charitable endeavors, harm the charity’s fundraising efforts, or jeopardize the charity’s tax-exempt status.  The contract can require that the influencer refrain from featuring explicit music or language in its posts for the charity and prohibit the influencer from promoting other organizations in the same content created pursuant to its agreement with the charity.  

Intellectual Property

The contract should spell out which party owns any intellectual property (“IP”) developed as part of the agreement.  In addition to the usual grant of a limited license to use the organization’s logo and other trademarks, if the organization wants to secure ownership of any IP developed as part of the partnership, the contract should stipulate in clear terms that any IP created under the agreement (e.g., trademarks or copyrights) belongs to the organization.  Content can include photographs, images, videos, as well as other media created within the scope of the work done for the organization.  In some cases, an influencer may want any content that they develop and post on their own social media account to be their owned IP (excluding only the IP elements incorporated in the content that the charity may own). Ultimately, it’s most important to set clear expectations around IP ownership developed within the scope of the partnership to avoid future conflicts due to a lack of a meeting of the minds. 

Compensation

The contract should clearly state the compensation terms, including when payments are due and which expenses (if any) will be reimbursed.  It should make clear what is owed if the contract is terminated early.  If the influencer posts content encouraging people to donate to the organization, this could imply their status as a professional fundraiser, triggering charitable solicitation registration and reporting requirements in several states.  While there are certainly resources available to meet such requirements, the regulatory obligations it places on the influencer may discourage them from doing so, so be sure to have a clear discussion upfront if you are considering paying an influencer in connection with any fundraising efforts. 

Review and Approval of Content

While organizations may want to review and pre-approve any social media posts, many influencers will resist having their content, which are often primarily disseminated from their own social media accounts, managed in this way, particularly if they are doing so on a voluntary and uncompensated basis.  Your organization will need to strike a balance by being clear with its expectations upfront and thoroughly vetting the influencer’s content. One option is to pre-approve the general types of content, and provide accurate, vetted information that the influencer can use, while giving the influencer a choice of the ultimate details to be communicated.   This type of provision may require negotiation to reach mutually agreeable terms.

If a strict pre-approval process is not implemented, one other way to mitigate risk is to require that the influencer take down any posts that don’t meet the approval of the organization or contradict the vetted information provided to the influencer. 

FTC Rules 

The Federal Trade Commission (FTC) has published regulations on principles of advertising, also called the FTC Guides, which include disclosures influencers must provide to make it clear they have received compensation (in the form of money, products, and so on) for the content they are publishing.  The contract with an influencer should include the requirement to abide by the most recent FTC Guides.  

Representations and Warranties

The contract should include a representation and warranty from the influencer that the content they create will not infringe upon the rights of any third parties, particularly third-party intellectual property rights. This language is essential because it provides grounds for termination for cause as a material breach of the agreement.  

Templates for Efficiency

If the organization is contemplating several contracts, either with the one influencer or many, consider creating a template that can be adapted for different purposes.  For the same influencer, the organization can have an umbrella contract and attach different statements of work, depending on the social media campaign the influencer is working on. 

The rise of social media influencers already plays an important role for charities looking to expand their brands (charities are brands too!) and reach a wider audience to support their cause.  If your organization chooses to work with influencers, formalizing the relationship through a written agreement will help reduce ambiguity, ensure alignment, and minimize risk for your organization.

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What Is a Charitable Pledge?

A charitable pledge is an agreement between a donor and a charity in which the donor promises to make a future donation or series of donations to the charity. In simple terms, it can be described as a promise to make a gift. Under traditional contract law principles, a promise to make a gift to another does not, by itself, form a contract. To create a legally binding contract between two parties generally requires: (1) a valid offer by one party; (2) an acceptance of the offer by the other party; and (3) adequate consideration on both sides, meaning that each party must receive something, or agree to do (or not do) something, in exchange for entering into the agreement.

So how does a charitable pledge become a legally binding contract? 

Creating a Legally Binding Charitable Pledge Agreement

As a starting point, a charitable pledge agreement, like any contract, should be in writing. Oral pledges often are not legally enforceable and are more susceptible to misunderstanding. 

The written pledge agreement should describe the offer by the donor, the acceptance by the charity, the terms of the pledge, and any conditions. To establish consideration, the agreement should state what the charity will do in exchange for the promised donation. However, a pledge agreement that lacks consideration by the charity may still be enforceable, as discussed below.

The enforceability of a charitable pledge agreement is governed under state law, and thus it varies by the particular state. In general terms, the courts apply one of the following theories when considering the enforceability of a written charitable pledge agreement against a donor. 

Bilateral Contract Theory   

The donor and the charity create a legally enforceable contract by agreeing that the donor will make a contribution to the charity at some point in the future in exchange for a return benefit from the charity (e.g., the charity will name a scholarship or building after the donor).

Unilateral Contract Theory 

The donor and the charity agree that the donor will make a contribution to the charity at some point in the future. However, the agreement does not become legally enforceable until the charity signifies its acceptance of the donor’s offer by taking actions or incurring liability in reliance on the donor’s pledge.

Doctrine of Promissory Estoppel or Detrimental Reliance 

In the absence of an enforceable contract (e.g., where the charity has not provided consideration for the donor’s contribution), a court still may enforce a pledge if the charity has acted to its detriment in reliance on the pledge or would be damaged if the pledge was not enforced.

The Enforceability of Charitable Pledge Agreements in New York

Historically, New York courts have most often applied the unilateral contract theory to charitable pledge agreements, though bilateral contract theory and promissory estoppel are recognized as valid grounds for enforcement as well.

A charity seeking to enforce a written charitable pledge agreement in New York should be prepared to point to evidence of actions it has taken in reliance upon the donor’s pledge. New York courts historically have taken a broad view as to the types of actions sufficient to demonstrate reliance by the charity. Examples have included: soliciting other donors based on the pledge; incurring costs; undertaking capital improvements or construction; or borrowing money on the expectation that the donor’s promised contribution will be made. 

If a charity cannot point to any actions it has taken in reliance on the donor’s pledge, it will likely be challenging to enforce the pledge agreement. In 2016, the Appellate Division of the New York Supreme Court upheld a lower court’s dismissal of a charity’s claim against an estate on the grounds that the charity had failed to demonstrate that it had taken any actions or incurred liability in reliance on the decedent’s pledge. Matter of Kramer, 140 A.D. 3d 768 (2d Dept 2016).  

Make Your Pledge Enforceable

Before your charity undertakes its next major fundraising campaign, it is advisable to consult experienced legal counsel to review or prepare a form pledge agreement. For significant gifts, donors will likely have their own legal counsel, and the specific terms will need to be negotiated. Understand how such agreements are viewed under applicable state law, be aware of any particular terms and conditions that your charity must satisfy to receive the pledge, and act accordingly after the agreement is signed.

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Basic Legal Principles

The New York Prudent Management of Institutional Funds Act (“NYPMIFA”), the New York version of UPMIFA, took effect on September 17, 2010.  That law made important changes to rules governing the spending of institutional funds and replaced key provisions of the prior statute known as the Uniform Management of Institutional Funds Act (“UMIFA”).  The new law was passed after the 2008-2009 financial crisis, a very difficult period for charities administering institutional funds, and gave nonprofit boards broader authority to spend donor-restricted institutional funds while establishing provisions to ensure that boards exercise their authority responsibly.  

Significantly, NYPMIFA made a few changes to the rules governing the modification or release of donor-imposed restrictions on institutional funds.  These changes are summarized in the guidance provided on the website of the Office of the New York Attorney General (the “Attorney General”), entitled A Practical Guide to The New York Prudent Management of Institutional Funds Act. In this article we focus on a new procedure created by NYPMIFA for lifting or modifying a donor-imposed restriction on the management, investment, or purpose of an institutional fund without donor or court approval when the institutional fund is less than $100,000 in value and has been in existence for more than 20 years. 

Below I outline the steps for releasing or modifying donor-restricted institutional funds that are under $100,000 and older than 20 years, as outlined in section 555(d) of the Not-for-Profit Corporation Law (N-PCL). In brief, if the institution determines that the restriction is unlawful, impracticable, impossible to achieve, or wasteful, the institution may release or modify the restriction, in whole or part, without court approval, after giving written notice to the Attorney General, unless the Attorney General objects to the release or modification within 90 days. It is the view of the Attorney General that such notice must also be given to the donor if available. The organization may proceed to release or modify the restriction if the Attorney General does not notify the institution within 90 days, or if the Attorney General provides its consent. 

Step 1. Identify Eligible “Small and Old Funds”

The institution should identify any donor-restricted institutional funds that are currently less than $100,000 in value and more than 20 years have elapsed since the fund was established. The institution should locate the original gift instrument and any other supporting document that indicates the fund’s age and value. 

Step 2. Determine Whether to Seek Modification/Release

Once the eligible small and old funds are identified, the institution should determine whether the restrictions on any or all of those funds are unlawful, impracticable, impossible to achieve, or wasteful, such as to warrant release or modification of the restrictions in whole or in part. This determination should be made in a careful and prudent manner by the institution’s board in the exercise of its reasonable business judgment, and documented in appropriate detail in the minutes of the board meeting where the decision was made. 

Step 3. Notify Donors 

Once the institution has determined which of the applicable small and old funds warrant release or modification, the institution must contact the original donor, if available, and try to obtain consent to the modification. A donor who is an individual is “available” if the donor is living and can be identified and located with reasonable efforts. There is no requirement to contact an executor or heir of the donor of the fund. If a donor’s current address is unknown, the institution should make reasonable efforts to locate the donor, including Internet searches and contacting known associates of the donor, such as an attorney who represented the donor when the gift was made. The institution should keep a record of its statutory notice to donors and should document the institution’s efforts to locate donors, even if those efforts are unsuccessful. If donor consent is received, the institution can proceed with its intentions without any further action. 

Step 4. Notify the New York Attorney General 

If the original donor cannot be reached or does not consent to the proposed modification, the institution must notify the New York Attorney General of the institution’s intent to modify or release the donor restrictions from the institutional funds. 

The notice to the Attorney General must contain the following. 

1. An explanation of the institution’s determination that the restriction is unlawful, impracticable, impossible to achieve, or wasteful.
2. An explanation of the proposed release or modification.
3. A copy of a record of the institution approving the release or modification.
4. A statement of the proposed use of the institutional fund after such release or modification.

The notice to the Attorney General must be submitted with the following supporting documents.

1. A copy of the gift instrument and other documentary evidence sufficient to show that the fund’s total value is less than $100,000 and that more than 20 years have elapsed since the fund was established.
2. If the donor is available, and particularly if the donor has withheld consent, a copy of any correspondence between the institution and the donor regarding the proposed release or modification.

The notice must also be given to the original donor, if available. The Attorney General has 90 days to review the notification and object to the release or modification. If the Attorney General does not respond within 90 days, or if the Attorney General responds favorably, then the modification or release is deemed approved. 

Given the many specific requirements that must be met to obtain approval for the release or modification of small and old funds, institutions should consider consulting with legal counsel to ensure compliance with the required process. 

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Current Trends and Issues in Charitable Regulation

Regulators
Conference panels presented by various state regulators covered ongoing trends and issues. Public trust of the charitable sector was a topic of general concern, based on surveys indicating a decrease in the trust in the nonprofit sector.  The regulators noted that they play an important role in enhancing trust by providing meaningful oversight of the sector.

Noteworthy topics included the importance of Board governance and oversight, particularly in monitoring the organization’s finances. The panelists noted a rise in for-profit entities soliciting in-kind disaster relief, particularly those that do not have a nonprofit partner. This trend has been largely observed in connection with the rise of natural disasters and the war in Ukraine.   Regulators are also troubled by the balloon and bust of opioid-crisis relief organizations. This is threatening given the importance these organizations play in their local communities. Such failures have been attributed to their overly rapid growth.

Several state regulators noted an increase in mergers and acquisitions filings of hospitals. Approval of these transactions generally turns on the question of whether the transaction is in the best interest of the community. As for charity care, regulators noted that nonprofit hospitals have a duty to provide subsidized care to patients in need, something they say they have seen too little of.

A notable increase of fraud, committed in the name of charities or directed at charities, is also of concern. It is reported that there has been a rise of bad actors using the name and information of known and respected charities to commit fraud.  One typical scheme is the impersonation of regulators claiming that registration fees are past due. Charities that receive such calls are admonished to use best efforts to confirm the identity of caller.

NASCO puts out an annual report detailing trends on state regulation and enforcement.

Nonprofit Sector and Practitioner Panelists
In the afternoon, other stakeholders in the charitable sector spoke on the trends they have observed during the past year. Jan Masaoka, CEO of the California Association of Nonprofits, discussed the Association’s concerns with donor-advised funds (DAFs) arising from the delay in time between donor benefit (i.e., the donor’s tax-deduction) and the donation reaching its target community. Erin Bradrick, Principal of NEO Law Group, spoke on the growth of fiscal sponsorships and the lack of sector education and oversight that exists. She observed that Decentralized Autonomous Organizations (DAOs) have the theoretical ability to seek 501(c)(3) status without having a governing body (the core distinguishing characteristic of DAOs).  Ms. Bradrick also noted an upward trend in the politicization of issues directly tied to key nonprofit areas, which have created a tension between state and federal law., naming the recent cannabis and abortion access laws as prime examples.

NFT and Cryptocurrency
Sara Hall, Chief Legal Officer and General Counsel of ALSAC, Andrea Kramer, Partner of McDermott, Will & Emory, Ruth Madrigal, Principal of the Exempt Organizations Group at KPMG, and Beth Short, Director of Outreach and Education, Charitable Law Section of the Ohio Attorney General’s Office, discussed cryptocurrencies, NFTs, and other emerging forms of donation.  The panel noted that these forms are not suitable for all organizations, as there is significant risk and several complex issues to consider in accepting donations of cryptocurrency.

It was noted that organizations that decide to accept NFT or cryptocurrency donations should ensure they have a detailed donation acceptance policy and procedure in place.  The policy should include how the organization will protect the security of the crypto wallets through which they accept the donation, how to appraise the cryptocurrency or NFT, and whether to use an intermediary service like a Donor Advised Fund (DAF). Including the development department on any decision on acceptance of these donations is critical.

Now and Next in Charitable Giving
In her keynote address, Dr. Una Osili, Associate Dean for Research and International Programs at the Indiana University Lilly Family School of Philanthropy, made a deep dive into the data to identify donor trends. Among those Dr. Osili highlighted are that giving is at an all-time high, that individuals remain the largest group of donors, and that fewer households are donating. She also pointed to a downturn in religious donations, historically the largest generator of donations, and an upturn in donations to racial identity and environmental groups. Donors are moving from a trend of making passive donations to getting more involved in the causes they support through active engagement and education.

Dr. Osili ended by sharing some of her key findings, notably that giving is the great equalizer. Adjusted for gross income, charitable giving is the same across all groups. Technology, specifically crowdfunding websites and social media, has become one of the strongest vehicles for attracting donations, making up 40% of all giving. Finally, charities should start thinking of the value of donating one’s testimonial and network of connection, not just time and gifts. For more information, visit the Indiana University website at Generosity for Life.

Establishing a Healthy Board
Dr. Gerri King, President of Human Dynamics Associates, taught board mediation and communication techniques. Her talk centered on the five states of group development: Forming, Storming, Norming, Performing and Adjourning. Dr. King explained that at each stage, there are unique challenges affecting Board dynamics, and that any change to the make-up of the Board can be a setback.

Dr. King emphasized the importance of creating a no blame, no gossip environment among the team and the organization, noting that although it sounds simple, it can be intensely difficult to achieve. The benefits, as she noted, are indispensable., creating higher accountability, cohesion, trust and efficiency.

Update on the California Charitable Fundraising Platform Law
Brian Armstrong, Deputy Attorney General of the California Attorney General’s Office, discussed Assembly Bill 488, which is set to take effect on January 1, 2023. This is the first law in the U.S. specifically designed to regulate online charitable fundraising platforms, including through a new registration and reporting requirement, specific required public disclosures, and other provisions designed to safeguard charitable donations received through these platforms.

The proposed regulation is currently in the “review of public comments” stage. Armstrong indicated that a second, 15-day period for public comments will open up again once the review is complete, but did not specify when that would be.  During the follow-up Q&A, our team learned that the registration portion of the law is not likely to go into effect on January 1, 2023. Still pending would be final regulations and the development of the new registration forms. However, the AG’s office intends to begin enforcement of those portions of the law which are not dependent upon the passage of final regulations (e.g., the disclosure requirements).

Charitable fundraising platforms and platform charities should take time to carefully review their current platform disclosures (including disclosures made throughout the user/donor flow, as well as the platform Terms of Use) and ensure they are in compliance with these new requirements.  For more details on the legislation, please read California Enacts New Law to Regulate Charitable Fundraising Platforms by firm partner Karen Wu.

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Bequests in wills and trusts can be a considerable source of income for charitable organizations.  Such organizations and their counsel, while remaining sensitive to the concerns of donors’ families, are well advised to pursue and protect their interests in any estate or trust proceeding involving a charitable bequest.  I describe here some important considerations on how best to protect the charitable interests in trusts and estates.

Review the instrument, such as the will or trust document, which provides for a bequest or payment to a charity.¹
If a charity learns that it has an interest in an estate or trust, someone should review the actual instrument in which such interest is set forth.  This should include ascertaining the amount or nature of the interest (including whether it is an outright payment of a specific amount, or a portion of the residuary), as well as any restriction imposed on the charitable gift being provided.  The charity and its counsel should not simply rely on a representation by counsel for the estate or trust, but ask to at least review the relevant language in the instrument.

If a specific amount is being given to a charity, it should make sure that the full amount is received. 
Outright payments should ordinarily be paid in full, and not subject to reductions for fees or taxes, which are not ordinarily the responsibility of charities that receive outright bequests or payments.  If a charity is asked to sign a receipt and release in order to receive the payment, it should make sure it receives the full amount.²

If a charitable gift or bequest is subject to a restriction (such as requiring it to be used for a particular purpose, and/or putting the monies into an endowment), the charity should determine that it is prepared to honor the restriction before accepting the gift. 
If for any reason a charity determines that a restriction is onerous (such as for a use which would be difficult to carry out) or inappropriate (such as for a purpose which is not part of its mission or is otherwise problematic), it should not accept the gift or bequest.  A charity should be prepared to honor scrupulously any restriction which is imposed, including any naming or honor which it is required to bestow.

If the beneficiary of a will or trust is named in the residuary (that is, the assets in a deceased person’s estate after all gifts are bequeathed and debts, taxes, administrative costs, probate fees and court costs are paid), the residuary beneficiary will be impacted by those fees and expenses.  It should therefore consider the conduct of the executor(s) or trustee(s) and the reasonableness of the fees and expenses of administering the estate or trust before signing off on an accounting by the fiduciary. 
An executor’s management of estate assets might improperly reduce the total value of the estate or trust (such as through imprudent investments or inappropriate expenditures).  The legal fees charged by the attorney representing the estate or trust could also impact the estate’s beneficiaries.  In both scenarios, assuming the charity has an interest in the residuary (as a recipient of an outright bequest should not be impacted by these considerations), charitable organizations have a right to challenge the accounting submitted by the executor (whether it is a judicial accounting submitted to the court or an informal accounting submitted to the interested parties.)

A will or trust instrument might be challenged by a family member who would benefit from the instrument being declared invalid.
When an individual chooses to leave substantial sums to charity in his or her will or trust instrument, such a bequest is often made to the detriment of the decedent’s family.  A relative of a decedent who is a “distributee” (that is, who would inherit from an estate by virtue of the relationship with the decedent in the absence of a will or trust), has legal standing to challenge the validity of the instrument.  The rules governing intestacy in New York are set forth in New York Estates, Powers and Trusts Law (EPTL) §4-1.1. Similar statutes exist in other states. The estate of a decedent who dies without a will is distributed among the distributees in a manner and order prescribed by the applicable state statute.

There are a variety of reasons why a will or trust might be challenged. 
They could include: (a) the lack of testamentary capacity of a decedent; (b) undue influence exerted on a decedent; or (c) an improperly prepared or witnessed instrument.  The technical rules on properly preparing and witnessing a will or trust are governed by state law.

Testamentary capacity and undue influence are related concepts which often form a basis for challenging the validity of a will or trust instrument. 
The testamentary capacity of the decedent can sometimes be a crucial issue, particularly when a decedent has executed multiple wills or trust instruments, has executed a codicil to a will or an amendment to a trust, has revoked a will, or has executed a document at a point in time where cognitive ability might be called into question. Since any amendments might prejudice the interest of at least one party to the original instrument, it is common for the party whose interests are impaired to raise concerns regarding the capacity of the testator or grantor.

When the testamentary capacity of a decedent is challenged, questions might be raised as to whether a beneficiary exerted undue influence to induce the allegedly vulnerable decedent to transfer or bequeath money to that beneficiary.  Charitable organizations can face both sides of these issues of capacity and undue influence, depending on whether their interests are best served by an earlier or the most recent instrument.

The circumstances with respect to a dispute involving an estate or trust, including whether a charity supports or opposes the disputed instrument, will impact the manner in which the attorney might best represent a charity.
If, for example, the charity supports the validity of the will or trust, the defense will ordinarily be led by counsel for the executor or trustee, and the charity’s attorney can minimize expenses by cooperating with or supplementing the actions of the estate or trust counsel.  If, on the other hand, a charity challenges a will or trust which might supersede a prior instrument in which the charity had a greater interest, its counsel would often have to play a more active role, perhaps in cooperation with other similarly aggrieved parties.

In New York, the Attorney General is a necessary party in proceedings where a charity has a residuary interest.
In New York and any other state where the Attorney General might have such authority, cooperation and coordination with the AG’s office in instances of disputes or questions can often enhance the likelihood that a charity will achieve a more favorable result. This could include a charity joining the Attorney General in defending or challenging a will or trust in which the charity has an interest, or disputing excessive legal fees or expenses or imprudent conduct by fiduciaries. The result can be achieved through either litigation or settlement.

Conclusion: Charitable organizations should be aware of the various issues that can arise in estate and trust matters, many of which can potentially affect the benefit ultimately received by charitable beneficiaries.
Organizations should work with their legal counsel to conduct appropriate due diligence and ensure that the organization’s interests have been protected before consenting to probate of a will or to the fees and expenses reflected in an accounting.

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Virtual currency is gaining mainstream attention with each passing day. Nonprofits such as the American Red Cross, UNICEF, and American Cancer Society leverage platforms including The Giving Block and other services to accept a wide range of virtual currencies, as part of their overall fundraising strategies.

At our firm, we continue to work with nonprofit clients as they consider whether and how to fundraise using cryptocurrency. Here are a few questions we have been asked and other questions charities should be asking of potential fundraising platform partners.

Frequently Asked Questions

Should we accept virtual currency?

For many organizations, this is an easy answer – yes. There are few risks to accepting donations of virtual currency, especially if nonprofits immediately liquidate those donations.  Donors of virtual currency typically skew younger, possibly opening up a new demographic of supporters for the organization. The board should consider including virtual currency in its Gift Acceptance Policy, a document every organization should have to guide its board, executives, and staff in their development work.

Should we immediately liquidate donations of virtual currency, or hold onto them?

This is more difficult to answer, as it is based on how much risk the organization can tolerate. Virtual currency is highly volatile – its value can skyrocket or plummet within a matter of hours or days, making it a risky asset to hold onto. Whether to hold onto virtual currency is a decision that should be made with the input of a nonprofit’s board and executive team. If virtual currency is held as part of the organization’s investments, or if a donor asks the organization to hold the virtual currency as an endowment or long-term investment, the organization should consider how that fits within the organization’s overall investment strategy and portfolio, and the applicability of state laws governing the prudent management of institutional funds/assets.

One concern is volatility – few organizations want to see their donations halve in value. For many organizations, the potential upside isn’t worth the potential risk.

A second concern is regulatory risk. As the Chinese central bank, SEC, FINCEN, IRS, and other domestic and international regulators grapple with how to regulate virtual currency, the liquidity and accessibility of virtual currency markets is up in the air. Even major players like Coinbase and Ripple have been subject to or threatened by regulatory action.

Charities are often cautious when holding virtual currency, concerned that the regulatory environment could shift in a way that devalues or freezes their holdings. If a nonprofit is using a virtual currency account on a platform that is subject to an SEC action, for instance, the platform might be forced to freeze transactions until such time as the SEC allows it to continue operations.

Organizations that are highly diversified and have the financial cushion to absorb a zeroing out of their virtual currency donations, taking into account the diversification of risk across the organization’s entire investment portfolio,  might be comfortable with the risks of virtual currency. The potential upside of assets like Bitcoin are hard to ignore – despite volatility, Bitcoin’s value has been on a consistent march upward. Other coins, like Ethereum, have not been far behind. If your organization is willing to take the risk, and has considered the prudent investment regulatory considerations, you can create a wallet at a prominent, legally-compliant platform, and park your virtual currency there and “Hold On for Dear Life” (HODL, as some in crypto-world like to say).

Fortunately, the major virtual currency fundraising platforms allow immediate liquidation of donations. Again, this is the option chosen by most nonprofit organizations. As I mentioned above, nonprofits should include virtual currency in their Gift Acceptance Policy and Investment Policy to help guide their development professionals as they consider whether and how to accept virtual currency donations.

How do we treat virtual currency for accounting purposes?

Despite continued regulatory action in other parts of the crypto market, IRS rules around donations of virtual currency have been relatively stable. Since 2014, the IRS has been clear that virtual currency should be treated as property. A taxpayer donating virtual currency they have held for more than a year may deduct the fair market value of the currency at the time of its donation, similar to other forms of property, such as publicly-traded stocks. This provides a tax benefit to donors who invested in virtual currency in its infancy – they can support their favorite charities without being taxed on the gains they’ve enjoyed on paper.

This consistent treatment from the IRS means that charities can rest assured that they can accept virtual currency in the same way that they can accept donations of appreciated stock or other forms of property. The accounting department or external accountants should be able to handle booking donations of virtual currency without much trouble. A caveat is that, in a nonbinding FAQ, the IRS has said that nonprofits must fill out Form 8282 whenever the nonprofit sells, exchanges, or otherwise disposes of its virtual currency. This is a departure from the IRS’s treatment of virtual currency as akin to stocks, which a nonprofit can sell without filing Form 8282. While not insurmountable, nonprofits and their fundraising platforms should discuss how to operationalize capturing the information required for filing Form 8282.

Questions to Ask a Fundraising Platform

Now that we have considered some of the frequent questions nonprofits ask their advisers, let’s consider questions nonprofits should ask a prospective fundraising platform as part of their due diligence.

Are you registered as a professional fundraiser?

Fundraising is regulated in most states, with each state using its own regulatory regime. Individuals and organizations that support charities are often subject to laws regulating charitable solicitation (here’s an excellent overview from my colleague Tracy Boak). Charities are affected by these regulations and are obliged to make sure they only partner with organizations that are properly registered and licensed, if required.

Many fundraising platforms (both traditional and those dealing with virtual currency) take the position that they are not professional fundraisers, due to the way they structure their platforms and services, e.g., because they don’t affirmatively solicit donations on behalf of any charity and don’t take custody of donations. Regardless, a platform should be able to tell you why it isn’t subject to fundraising registration requirements. By asking the question, nonprofits can rest assured their fundraising platform partner is on top of its compliance obligations.

Are you registered as a Money Service Business or Money Transmitter?

Money Service Business (MSB) and Money Transmitter (MT) regulations are implemented at the federal and state levels. Their purpose is to weed out fraud and money laundering in the money transmission business. Generally speaking, MSB and MT laws create licensing structures that require licensed entities to do some due diligence on their customers, including “KYC” (know your customer) and “AML” (anti-money laundering) requirements.

Since 2013, the Financial Crimes Enforcement Network (FinCEN) has applied money transmitter regulations to some entities within the virtual currency ecosystem. According to FinCEN, if a person or organization accepts money or another instrument with monetary value from one person and transmits it to another person, that person may be classified as a money transmitter under federal regulations. (A comprehensive rundown of FinCEN’s guidance is found here). This means that any entity that accepts virtual currency from one party and transmits it to another party could be considered a money transmitter subject to the federal rules. The same rules apply if the entity accepts virtual currency, converts it to fiat currency (i.e., U.S. dollars), and transmits the fiat currency to another person or entity.

FinCEN does provide some exceptions, including those entities that only provide network access or serve as payment processors, exceptions which largely do not apply to crypto-fundraising. Whether a person or entity will be treated as a money transmitter is a facts-and-circumstances determination, but FINCEN clearly intends to define money transmission broadly and interpret its exceptions narrowly (see the discussion on pages 12-22 of the guidance linked above).

Nonprofits considering crypto-fundraising options should ask the potential partner whether it is registered as a money transmitter. If not, ask how they ensure that their services aren’t used inappropriately – do they work with a partner that is a licensed entity? Who does their KYC and AML compliance work?

Do you accept anonymous donations?

Anonymous donations are nothing new – charities have received anonymous donations large and small since long before the birth of cryptocurrency. But many charities are wary of the “dark side” of cryptocurrency and its reputation (rightly or wrongly earned) for facilitating illicit activity. Nonprofits should check with their potential fundraising platform to confirm whether they allow anonymous donations. If so, ask whether the donations are anonymous to the platform, or only to the charity. If the donation is anonymous to the platform, ask whether and how the platform ensures the anonymous donations aren’t connected with illicit activity. The answer may be that the platform does not, or cannot, do anything else to ascertain the identity of donors who wish to remain anonymous. If that is the case, the nonprofit should consider whether it is comfortable with the risks of accepting anonymous donations.

Those risks are generally the same as accepting any other high-value anonymous donation – that a donation of virtual currency could be traced back to illicit activity or a potential clawback, if the virtual currency that is donated doesn’t belong to the donor.  One difference with anonymous donations of cash or other types of property is that the virtual currency environment is highly transparent, even if it may be highly anonymized. Bitcoin transactions are viewable on the blockchain, even if the participants in the transactions may remain anonymous.

Do you issue donation receipts? Do you fill out Form 8282? Will we get a donor list?

One of the core tasks in charitable fundraising is issuing receipts to donors. Donors need to keep those receipts on file, in case they want to claim a charitable deduction. Many platforms will create automatic receipts. Nonprofits should confirm that the receipts issued by its platform partners are compliant with IRS requirements, and ask for copies for your records.

Nonprofits should also ensure that the fundraising platform will provide you with a list of your donors, to make sure you can build out your donor base.

The post What Nonprofits Should Be Asking About Virtual Currency Regulation and Fundraising appeared first on Perlman & Perlman.

You may have heard a LOT about “NFTs”, or non-fungible tokens, recently. The buzz around NFTs reached a crescendo on March 11, when Beeple’s digital artwork with a unique NFT sold in a Christie’s digital auction for over $69 million.  Basketball fans are trading digital highlights in NFT form in an online marketplace. Charmin is even getting in on the NFT-craze, selling unique toilet-paper inspired digital artwork to raise money for Direct Relief.

Given the amount of money swirling around NFTs and the digital art world, nonprofits and their benefactors have started to consider how to leverage the new technology for charitable ends. With any new technology come questions and in this article I will try to cover some considerations for nonprofits that are getting into the NFT-craze.

The Basics – What Are NFTs?
NFTs (non-fungible tokens) are a fully-digital method of proving ownership of an asset. Most assets associated with NFTs are digital assets, but NFTs could be implemented with physical assets as well. In the same way that a unique piece of art might come with a certificate of authenticity and history of ownership, NFTs use a technology that was originally developed in connection with virtual currency (called blockchain) to record and track ownership. Blockchain uses cryptography to validate transactions, making the system relatively secure. Blockchains can be private or public, depending on the use case, and NFTs are mostly stored on a public-based blockchain associated with the cryptocurrency Ethereum.

Almost anything digital can be ascribed an NFT. A tweet can be given an NFT and sold. The rights to music can be sold using an NFT.  Uses for NFTs, and the underlying blockchain, are seemingly endless – anything that involves tracking custody, ownership, or use could make use of NFTs and blockchain.  Whether or not businesses and consumers will want to buy, sell, and store an asset’s ownership records digitally on the blockchain is a different question – while cryptocurrency and blockchain supporters have been touting the technologies for over a decade, blockchain and NFTs have only gone mainstream publicly in the past few months.

Some people question the value of some NFT assets – who really wants to own the rights to an NBA highlight that is available on YouTube for free? Apparently a lot of people (at the time of writing, a Lebron James dunk is listed at $250,000 – it is a very good dunk). The original Mona Lisa painting is extremely valuable, whose worth isn’t decreased by additional prints being sold or versions being viewable for free online. Ownership is key to the asset’s value, whether we’re talking about a physical painting or a digital highlight.

NFTs and Charities – Similar to Auctions of Traditional Art
When an NFT is auctioned to benefit charity, it is deeply analogous to a traditional art auction (a topic I discussed in another post). If the artist or collector who donates a piece of digital art for sale at a charity auction wants to receive a charitable deduction, they may need to get an appraisal. The charity will need to be careful to keep records related to the donation and valuation of the asset. Prospective bidders should be told what the value of the item is, assuming a reasonable value can be determined. And winning bidders must be given a receipt which describes how much of the amount paid exceeds the fair market value of the item, if any.

Valuation of NFT-assets will be an extremely nuanced part of the charity auction process because the market for NFTs is so new and valuations fluctuate wildly. As an example, last year Beeple “dropped” artwork on an NFT marketplace that was resold. Between October 30 2020 and January 9, 2021, a piece that sold for $1 was resold 10 times and increased in value to $7000. Any artist, donor, or charity that places a valuation on donated digital artwork or other NFT-assets should consult with experts to document the valuation appropriately and ensure that everything is properly recorded and filed.

NFTS and Charities – New Platforms and New Problems
When Beeple’s Christie’s auction concluded, the winner paid in cryptocurrency, typical of many of the NFT marketplaces that use the Ethereum-based cryptocurrency Ether. NBA Top Shot, in contrast, will let you sign up with a credit card. As donors and charities work through the various platforms to decide with whom they want to partner to host an NFT auction, they need to consider what methods of payment are available and who their target audience will be. If the pool of potential bidders is Beeple-crazed crypto-enthusiasts, an NFT platform that requires Ether will probably work just fine. If, on the other hand, a charity wants to engage its traditional donor-base, it may want to find an auction platform that can receive traditional payments.

If the auction invites bids in cryptocurrency, the charity also needs to think through whether to hold that currency or convert it into fiat currency immediately upon receipt. Many charities, in the wake of the cryptocurrency boom of 2017, developed policies related to holding cryptocurrency – typically, the currencies were liquidated immediately upon receipt. Charities should consider crypto as a highly volatile asset, with potentially huge upsides and downsides. Most charities hold minimal amounts of crypto and only as part of a comprehensive, diversified investment strategy.

If the charity expects an auction to generate a lot of interest and a lot of funding, the charity needs to do some due diligence on the platform with whom they plan to work. With the interest in NFTs surging, so are the numbers of outlets that claim to support NFT marketplaces. If a charity wants to partner with a relatively new platform, the charity should vet the platform to make sure it is capable of performing – that it can host the auction, accept the payments, and deliver the winnings to the charity. Charities should make sure their agreement with the platform is crystal clear in terms of fees, timing, and the risk of loss if something should happen to an asset. Charities need to work with the platforms to make sure disclosures to bidders and donors are very clear on how the auction or donation will work – some states have begun to consider required disclosures for fundraising platforms, which can serve as a guide for charities and platforms.

Finally, some platforms that are operating in the NFT, blockchain, and cryptocurrency spaces may be subject to regulation as money transmitters, payment processors, or financial institutions. If a charity plans to store its assets with a platform that provides payment processing services, the charity should confirm that the platform is appropriately registered or is exempt from regulation.

Art Charities and NFTs
Similar to the concerns outlined above about vetting platforms, if an art-based charity wishes to accept a donation of NFT artwork to retain as part of its collection, the charity needs to work through the many issues around accepting and storing NFT artwork. Review the terms and conditions of any third-party platform involved in hosting or displaying the artwork. Work with the artist or collector to confirm details around the transfer, valuation, receipt, and the costs associated with the transfer on the network. Many of the tax rules governing NFT-art donations will be identical to those applicable to donations of physical art.

International Concerns
One of the appealing aspects of NFTs and blockchain is that transactions are borderless and frictionless. A digital marketplace based in ether cryptocurrency can receive payment without worrying about converting currency; there are no costs for shipping and the purchases can be delivered instantaneously. A charity that is considering receiving digital payments, selling digital goods, or transferring digital assets using NFTs or cryptocurrency has to be conscious of the risks associated with international transfers. The U.S. Department of the Treasury’s Office of Foreign Asset Control has published some guidance for charities working internationally, both in the context of specific countries as well as more generally. Charities should be cognizant of the risk posed by receiving large payments from or sending payments to individuals or organizations that are overseas and may only be known as a username or Ethereum address. Charities should work with their advisors to ensure they are taking reasonable precautions to avoid the legal and reputational trouble that could arise if the charity does business with disreputable donors or recipients. Additionally, the platforms dealing in NFTs and online fundraising may also have “Know Your Customer” requirements – charities should check with the platform that they are compliant with any applicable rules.

Other Compliance
Whether a nonprofit holds an auction online or in person, selling digital or physical art, there are traditional fundraising compliance considerations that will apply. Depending on the state in which the nonprofit is operating, the nonprofit may be required to register (my colleague Tracy Boak has a great article discussing charitable fundraising regulation). Depending on the nature of the items sold and where buyers are located, there may be sales tax considerations. Charities should check with their advisers to confirm they have considered all legal aspects of online fundraising compliance.

The post NFTs and Charities – What’s New and What Isn’t? appeared first on Perlman & Perlman.

On February 8^th, California Assemblywoman Jacqui Irwin introduced Assembly Bill 488, which would establish a new statutory framework for the ever-evolving world of online charitable fundraising platforms.¹

The proposed  bill for “charitable fundraising platforms” and “platform charities” would require:
(1) “charitable fundraising platforms” and “platform charities” to register and provide reports to the California Attorney General’s office;
(2) conspicuous disclosures to prevent a likelihood of deception, confusion, or misunderstanding;
(3) the platform or platform charity to obtain written consent of any recipient charitable organization before using its name in a solicitation unless specific requirements are met; and
(4) the funds raised to be held in a separate bank account, and donations and grants of recommended donations to be sent promptly to recipient charities, along with an accounting of any fees imposed for processing the funds.

Key Definitions
The bill defines “charitable fundraising platform” as “any person, corporation, unincorporated association or other legal entity that uses the internet to provide an internet website, service, or other platform to persons in this state, and performs, permits, or otherwise enables acts of solicitation to occur.”  Charitable fundraising platforms would likely include companies such as GoFundMe, Facebook, Amazon, Tiltify, Pledgeling, and the many other technology platforms that enable charitable giving.

“Platform charity” is defined as a trustee or charitable corporation that facilitates acts of solicitation on a charitable fundraising platform.  Platform charities would likely include well-known organizations like PayPal Giving Fund and Network for Good, as well as the many other charities that serve as the intermediary and legal recipient of all donations raised through fundraising platforms.

Disclosure Requirements
If passed, the new law will require charitable fundraising platforms and platform charities to provide all of the following key disclosures to potential donors.

• A statement about who will receive the donations (e.g., that the recipient is the charitable fundraising platform, the platform charity, the recipient charitable organization, or the person engaging in peer-to-peer charitable fundraising).
• If applicable, a statement that a recipient charitable organization may not receive donations or grants of recommended donations, with an explanation identifying the circumstances under which a recipient charitable organization may not receive the funds. (Note: This disclosure relates to the “variance power” that is well-recognized in other contexts, such as donor-advised funds and fiscal sponsorships)
• The maximum length of time it takes to send the donation or a grant of the recommended donation to a recipient charitable organization with an explanation as to the length of time.
• The fees or other amounts (if any) deducted from or added to the donation or a grant of the recommended donation that are charged or retained by the charitable fundraising platform, platform charity, or any other partnering vendor, other than digital payment processing fees.²
• Whether the donation is tax-deductible or not.

Written Consent
While current California law requires that a charitable fundraising platform or platform charity obtain the written consent of any recipient charitable organization before using its name in a solicitation, the proposed law would provide that such written consent is not required if all of the following circumstances are met:

• The charitable fundraising platform or platform charity only references the recipient charitable organization’s name, address, telephone number, internet website (including through a hyperlink), employer identification number (EIN), corporation or organization number, or registration number with the Attorney General’s Registry of Charitable Trusts, classification in the National Taxonomy of Exempt Entities (NTEE) system, or other information set forth in rules or regulations established under Section 12599.10, if any. (Note that, as drafted, a recipient charity’s mission statement taken from its Form 990 cannot be included, unless written consent is obtained from that charity or the AG adopts rules to permit it. The inability to include a mission statement could potentially lead to unintended confusion by donors who are intending to support one charity and inadvertently designate their gift to benefit a different charity with a similar name but different mission)
• The charitable fundraising platform or platform charity conspicuously discloses before persons can complete a donation (or select or change a recipient charitable organization) that the recipient charitable organization has not provided consent or permission for the solicitation, and has not reviewed or approved the content generated by persons engaging in peer-to-peer charitable fundraising, when applicable. (Possible concerns remain about how this disclosure must be worded, and whether it could hamper giving by appearing to be like a “warning label”, notwithstanding the consent that may exist between a platform and a platform charity)
• The charitable fundraising platform or platform charity promptly removes any recipient charitable organization from its list or any solicitation regarding the recipient charitable organization upon written request by the recipient charitable organization.
• The charitable fundraising platform or platform charity does not require that a recipient charitable organization consent to any solicitations as a condition for accepting a donation or grant of a recommended donation.

Good Standing
Pursuant to the bill, a charitable fundraising platform or platform charity may only facilitate solicitations or the receipt of donations for the benefit of charitable organizations in good standing.  “Good standing” means the platform charity or other recipient charity’s tax-exempt status has not been revoked by the Internal Revenue Service, or the California Franchise Tax Board, or is not prohibited from soliciting or operating in California by the Attorney General.

Intersection with Other Fundraiser Registration Requirements
Over the last two decades, charitable fundraising platforms have been in a regulatory gray area, as the charitable solicitation laws were established decades before the Internet was around.  The existing regulatory framework in California and other states covers professional fundraisers (e.g., telemarketers), fundraising counsels (e.g., direct mail companies), and commercial co-venturers (e.g., retail businesses advertising that sales or use of their goods or services will benefit a charitable organization).  Many states require contracts between a regulated fundraiser and a charity to be submitted or at least disclosed, and separate campaign reports to be filed per contract (some forms even require two original notarized charity signatures!).

Most fundraisers that fall into the existing regulated categories do not support the fundraising efforts of hundreds or thousands of charities simultaneously, so compliance, while somewhat burdensome, is generally manageable.  Most new fundraising platforms, however, aim to assist hundreds or thousands of charities in broadening their fundraising reach through new innovative methods of giving.  If a platform provider is required to file hundreds or thousands of contracts and campaign reports, these reporting burdens would most likely hamper innovation and, ultimately, severely limit donations to thousands of charities, large and small.

The proposed regulations for charitable fundraising platforms provide a streamlined approach that is more appropriately suited to the way in which charitable fundraising platforms work.  The bill recognizes the potential overlap between the new “charitable fundraising platform” category and the three existing fundraiser categories, and explicitly carves out “charitable fundraising platforms” from the definition of commercial fundraiser, fundraising counsel and commercial co-venturer “when the acts of solicitation for charitable purposes occur solely through an internet service, website, or other platform provided by the charitable fundraising platform.”

While many charitable fundraising platforms will not need to comply with inconsistent or duplicative requirements applicable to the other regulated fundraiser categories, the limited scope of the carveout could still cause many fundraising platforms to remain subject to the additional regulatory requirements of other fundraiser categories.  For example, what if a platform sends an email about a specific campaign conducted on the platform to individuals who have signed up to receive communications?  What about a social media post?  Exactly how these definitional carveouts are finalized and implemented will significantly affect the amount of the compliance obligations applicable to charitable fundraising platforms.³

The passage of Assembly Bill 488 will not resolve the ambiguity in other states’ charitable solicitation laws and their applicability to charitable fundraising platforms. However, given the various states’ interest in providing oversight to these new technology-driven fundraising platforms, there is a good chance that other states may follow suit in adopting similar legislation.

Stakeholder Engagement
Assemblywoman Irwin and the California Attorney General’s office have been actively engaging with various stakeholders in the community in the development of this legislation (which has included associations of nonprofits and fundraisers, including The Nonprofit Alliance and the California Association of Nonprofits, as well as various fundraising platforms and platform charities) to ensure that innovation in charitable giving is encouraged within a framework of oversight and transparency.

In Conclusion…
The new bill is, in many respects, a much-needed update to the existing fundraising regulatory framework that more appropriately reflects the nature of charitable fundraising and giving in the age of the Internet.  However, the final codification of the legislation could have significant regulatory implications on the charitable fundraising community, so our firm is paying close attention to the bill as it makes its way through the legislative process.

1 Since 2018, Assemblywoman Irwin has introduced several bills that would govern charitable fundraising platforms, including Assembly Bills 2556 (2018), 1539 (2019), and 2208 (2020). Among the comments submitted as part of the legislative process for Assembly Bill 2208, the National Association of State Charity Officials submitted a statement of support: “The National Association of State Charities Officials (NASCO) is an association of state offices (attorneys general, secretaries of state and other offices) charged with the regulation and oversight of charitable organizations and charitable solicitation in the United States. As state regulators, we have witnessed the impact of the internet on charitable fundraising over the past 20 years. Charitable fundraising is no longer limited to solicitations through telephone, direct mail, or even a charity’s own website. Fundraising through third party websites, social media apps, and live video streaming have become the norm. The sheer volume of charitable solicitations made through online fundraising has exploded; most recently, for solicitations concerning the COVID-19 and the civil rights crises. This issue is so important that NASCO has formed a working group to look at the breadth of charitable giving through the internet, the regulatory and enforcement challenges this presents, and the need for states to address it [… ]  NASCO believes that these issues require a legislative solution to protect charities and the public, and to provide the platforms with a regulatory scheme that fit their business model. Assembly Bill 2208 represents a thoughtful and comprehensive approach to address these problems.”

2 While transparency around fees assessed is critically important in promoting trust in fundraising and avoiding deceptive solicitation violations, there may be constitutional implications depending on exactly how this disclosure requirement is ultimately codified. In a series of four cases from 1980 (Schaumburg) to 2003 (Madigan), the U.S. Supreme Court consistently held that regulation based upon fees paid to fundraisers violate First Amendment rights.  In particular, Riley v. National Federation of the Blind of North Carolina, 487 U.S. 781 (1988), invalidated a requirement that fundraisers disclose at the point of solicitation the percentage of funds they raised in the past year which went to the charity.  The Court found such “compelled speech” to improperly burden protected speech (i.e., a fundraising solicitation). 487 U.S. at 798. This mandatory financial disclosure requirement was found to be overbroad and not justified by the state’s interests in informing donors or prohibiting fraud. The Court determined that “the compelled disclosure will almost certainly hamper the legitimate efforts of professional fundraisers to raise money for the charities they represent.” 487 U.S. at 799. Since then, most state charitable solicitation laws require fundraisers to disclose their fees upon request of any donor. Given the online nature of charitable fundraising platforms, a balance may need to be struck between the constitutional concerns of compelled speech and the need for transparency in an online context. One option is to permit such fees to be disclosed within a conspicuous hyperlink.  The bill, as introduced, permits certain of the required disclosures to be included in a conspicuous hyperlink, but this fee disclosure is currently not among them.

3 Consider that a professional fundraiser that registers in 40 states and has national contracts with 100 charities would have to file up to 8,000 separate filings each year! (That number is based on one contract/solicitation notice and one campaign report per contract per state x 40 states per year) While the exact reporting that will be required under Assembly Bill 488 and related regulations to be established by the California Attorney General’s office is still to be determined, I anticipate it will be a much more streamlined reporting process that will not require separate per-charity filings. The bill does not require each charity contract to be filed either, as is required of other types of fundraisers, although contracts must be available for inspection by the Attorney General. To minimize the compliance burdens of the current regulatory framework, one solution that has been adopted is for a fundraising platform that registers as a professional fundraiser to partner with a single platform charity so that there is only one professional fundraiser relationship – the relationship between the fundraising platform and the platform charity.

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In the run up to this year’s presidential election, author Shea Serrano published A Difficult Conversation, a guide to addressing the growing gap between the people who support Donald Trump and the people who do not. Priced at $0, it is a pay-what-you-want piece of art that, if you are familiar with Mr. Serrano’s Twitter feed, surprised no one. What is surprising is how much people voluntarily paid for the free e-book – at least $98,160.84 to date. In response, Mr. Serrano and his wife decided to donate all of the proceeds to the causes they believe in.

Mr. Serrano’s unexpected philanthropy fits a new pattern, for him and other social media celebrities. Celebrity philanthropy is not limited to the large televised “Live Aid” style fundraisers to raise awareness and funds for important causes.  While that model still exists, social media has created new avenues for small scale, targeted relief amplified by passionate digital followers.  In the early days of the COVID-19 pandemic,  influencers made cash payments to those impacted by shuttered businesses and missed paychecks. This new trend is getting increasing attention, including from at least one former President.

While charities continue to directly raise funds from their current donors, they are finding new supporters through partnerships with these “influencers” , i.e. the individuals who have a large active following of enthusiastic fans on social media.  Influencers have been working with charities for some time, and we’ve long known that consumers respond to them, in much the same way that celebrities shape consumer opinion in the for-profit world. What’s new is the way in which some influencers establish a relationship with their followers and charities; instead of entering into partnerships up front, social media and e-commerce allows influencers to raise large amounts of cash and distribute it to charities and directly to individuals without any extra infrastructure.

With innovations come new questions. In the case of influencer philanthropy, those questions tend to center on compliance. Influencers, and the charities they support, must take into account the social media platforms rules as well as local, state, and federal laws. In this article, I highlight some of the possible issues and considerations. I examine a few different fundraising strategies I’ve noticed. In each case, the considerations for charities may differ from those of influencers.  Some methods are straightforward, requiring little if any compliance considerations for influencers and charities. Methods involving partnerships with for-profit companies or cash giveaways by influencers can have tax and other compliance consequences.

Summary of Influencer Fundraising Models

There are a few ways that influencers try to do good. As described above, sometimes they publicize gifts after-the-fact, creating a halo effect for the influencer as well as spotlighting the charities or causes benefiting from the influencer’s gifts. For these after-the-fact gifts, there’s no pre-existing agreement between an influencer and the charity.  In fact, the charities or the individuals receiving gifts might not know that a gift is coming until they receive a check (or Venmo or CashApp or PayPal).

Another model that has emerged recently is the direct cash disbursement which is advertised in advance to the influencer’s followers. While these types of disbursements aren’t new, they became prominent in the early stage of the pandemic. Influencers told their followers that they had cash to give away– all followers had to do for a chance to receive some cash was comment on the influencer’s post and follow other Instagram accounts that had paid for the privilege of being part of the promotion. The influencer would, in turn, receive a payment from a social media marketing firm that set up the campaign.

A third method involves influencers asking their followers to send cash which the influencer will then distribute. The recipients of the cash vary – sometimes the funds are given to organizations, in other cases the money is given to individuals that the influencer deems worthy of support. At times the influencer will be specific about the organization or person that is the intended recipient, but many times the beneficiary is open-ended.

A fourth method involves for-profit charitable partnerships. For example, a dog-themed Instagram account raises awareness for a local shelter by telling their followers about a charitable sales promotion where the purchase of a particular dog food triggers a donation to the shelter. The influencer may be compensated by the for-profit, the nonprofit, or may receive no compensation at all, depending on the arrangement. Alternatively, an influencer might try to sell one of their own products (a book, for instance) and include a promise to donate some proceeds to charity.

Finally, some influencers simply attempt to drive traffic to individual fundraising campaigns that are already underway. One of Twitter’s most popular canine evaluation accounts, @dog_rates, highlights one or two fundraisers every Friday to support a dog and its humans. The influencer selects one campaign to highlight, driving small dollar donations from the account’s 8.8 million followers.

Compliance Issues

For each of the models described above, there are a few overarching compliance issues that influencers and charities need to consider. There may be tax consequences from their fundraising, for influencers, charities, or their donors. They must also review the terms and conditions for the sites on which they’re fundraising.

Platforms

The platforms’ rules are the first thing to review before launching a new fundraiser. Facebook, Twitter, and Instagram each publish specific rules governing promotions and fundraisers. In each case, some of each platform’s general guidelines will also apply to influencer fundraisers, such as the rules encouraging authenticity and discouraging fraud.

Federal Trade Commission

In addition to the platforms, the Federal Trade Commission (FTC) has published guidelines on the appropriate disclosures for influencer behavior. While targeted primarily at influencers working with for-profit brands, the disclosure guidelines are helpful for all influencers interacting with US users. These recommendations include:

• Tell users if you will receive any kind of financial, employment, personal, or other benefit in connection with a post
• Ensure that disclosures are prominent
• Use clear, simple language
• Be honest

These types of disclosures are especially important if an influencer’s post involves any possible compensation for the influencer. For instance, if the influencer is selling an item and promises that a portion of the proceeds will go to charity, they should be clear how much will be donated (a percentage or flat amount per sale), how long the promotion runs, which charity will receive the donation(s), and if there’s a minimum guaranteed donation. If the influencer is being paid to help drive dollars or attention to a charity or fundraiser, they should include a disclosure to that effect so their followers understand their motivation.

Taxes

Influencers, charities, and individuals each need to consider the tax consequences of online fundraisers. Whenever influencers collect donations from their followers, they may need to report those donations as income. There are exceptions where the influencer is acting as the agent for the recipient, but the default rule is generally that income is taxable. If the influencer makes a donation directly to an individual rather than to a charity, the individual should be able to treat the income as a gift (and therefore not taxable) but should check with a professional to confirm. There may be ways to structure a campaign to ensure the recipient doesn’t have a big tax bill if the fundraiser is especially successful.

Next, some donors want to know if their donation is tax-deductible. Although small donors aren’t typically taking their tax bill into consideration when they decide to send $10 to an influencer, the influencer collecting donations should clarify whether donors will be eligible for a tax deduction. There are multiple ways to structure campaigns that may permit donations to be tax-deductible.

State Registrations

If an influencer is receiving any kind of compensation in exchange for raising money for a charity, they may have to register to solicit with one or more states. They could be considered either a professional fundraiser or a commercial co-venturer, depending on the arrangement. Each state treats paid fundraisers differently, so the influencer must be careful to check with counsel who understand what filing requirements apply.

Best Practices

Regardless of what rules apply, best practices for any kind of fundraiser are diligence and transparency. Influencers can be diligent by planning out their posts and fundraisers. The first step is to research the charity that the influencer seeks to support. As multiple organizations may have confusingly similar names, checking will help to avoid directing someone to the wrong organization! Unless the influencer has first-hand knowledge of the charity, they should also review the charity’s most recent financial filings to make sure it is healthy and can legally use the funds the influencer plans to raise.

The influencer should get in touch If they have identified a charity they want to support. The charity may agree to collaborate to increase the influencer’s reach or, at the least, capitalize on the attention the influencer will bring. The charity may also want to set some guidelines, either through a formal agreement or just through discussions, to make sure the influencer doesn’t do or say anything that would harm the charity’s reputation or tax status.

Finally, the influencer should value transparency by explaining exactly what they plan to do with the money they raise, including the timing for distribution, the intended recipients, and what is yet unknown.  It’s possible that the influencer won’t know in advance who will receive the cash they raise, but that’s not necessarily a problem. If the influencer sets some criteria, that at least should be shared with their followers.

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