Twenty-six states require fundraising counsel to register prior to providing services. The state’s interest is to protect charitable assets for their intended use and to ensure that donations contributed by state residents are not misapplied through fraud or other means.

Who Qualifies as a Fundraising Counsel?

A fundraising counsel (“FRC”) is generally a person or entity paid to plan, manage, advise, counsel, consult, or prepare materials for, or with respect to, a charitable solicitation. A fundraising counsel does not solicit contributions or have custody of solicited funds.  Most often, an FRC is paid a fixed fee or rate rather than a percentage of contributions collected. Consultants providing services that fit within the definition of a fundraising counsel, but who also solicit contributions, have custody of funds, or are compensated on a percentage basis may be considered “professional fundraisers” under some state laws. Professional fundraisers are subject to greater regulatory obligations, including obtaining bonds and filing detailed reports after each solicitation campaign.

Typically, an FRC provides strategic planning services with the goal of improving a charity’s fundraising activities in order to increase donations. States define “fundraising counsel” broadly, however, and thus FRC services include a variety of activities, such as the following:

• A company hired to design and manage a direct mail campaign
• A company hired to manage an annual fundraising gala
• An individual hired to design a digital fundraising strategy
• A firm hired to develop a major gift or capital campaign strategy
• An individual hired to prepare fundraising materials, including providing advice on how best to use the materials to maximize fundraising results
• An individual hired to coach an organization’s development staff or volunteers who are conducting peer-to-peer fundraising campaigns
• An online fundraising platform that is paid by a charity to help optimize its fundraising efforts. (This might include providing customized advice on how to better use the platform’s tools to maximize the charity’s fundraising success. Since each state has adopted slightly different definitions of “fundraising counsel,” states may reach varying conclusions on a platform’s classification.)

Where Do Fundraising Counsels Need To Register?

The key question in determining whether a fundraising counsel must register is whether sufficient contacts exist between the fundraising counsel and the state such that it is not fundamentally unfair for the state to subject the fundraising counsel to its registration and reporting requirements. The fundraising counsel must purposefully avail itself of the privilege of conducting activities within the state. Several Supreme Court cases have addressed whether a fundraising counsel has enough contact with a state to be subject to its regulatory jurisdiction. Interpretation of these cases suggests the following takeaways:

• Fundraising counsel should register in the state where the charity is located;
• Fundraising counsel may have to register in the state where they are domiciled;
• Fundraising counsel that advise charities with respect to solicitation in particular counties, states or regions or that, in some other way, target a particular state with its fundraising counsel activities should register in the targeted states. For example, a fundraising counsel that, as part of managing a direct mail campaign, recommends specific donor mailing lists, should register in the states where the direct mail recipients reside.

Online fundraising platforms are often structured to avoid classification as a fundraising counsel. Common reasons for falling outside the fundraising counsel definition are either that the online platform is directed at providing technology rather than consulting services, or the platform does provide fundraising counsel services but is also collecting a percentage of funds raised, thereby triggering categorization as a professional fundraiser.

Determining whether an online fundraising platform is classified as fundraising counsel, and if so, where it should register, requires a nuanced analysis that takes into consideration published guidelines for state regulation of online fundraising. A concise analysis of this issue is contained in my colleague Karen Wu’s Nonprofit Times article A Moving Target: The regulation of online fundraising platforms

Fundraising Counsel Contracts

In addition to the registration requirements, state charitable solicitation statutes require that contracts between a charity and a fundraising counsel include certain provisions. Common contract provisions required by state statute including the following:

• Legal name/address of the charity
• Statement of the charitable purpose for which the solicitation campaign is being conducted
• A clear statement of the fees to be paid to the fundraising counsel
• The effective/termination dates of the contract
• A statement that the fundraising counsel will not have control or custody of funds
• A statement that the charity exercises control and approval over the content, volume and/or frequency of any solicitation
• California and New York require lengthy cancellation provisions designed to allow the charity cancel the contract within 10-15 days of signing without penalty
• Several states require the contract to be signed by two authorized officials of the charity

The services fundraising counsel provide can be of great value to nonprofit organizations. Understanding the regulatory framework governing fundraising counsels will help you avoid missteps that can lead to actions by state regulators, including fines and penalties. It is incumbent on both the fundraising counsel and its charity clients to take the steps that ensure compliance under state charitable solicitation laws seriously. If in doubt, it’s always a good idea to seek counsel.

The post Advising Nonprofits on their Fundraising Strategy? You May Need to Register appeared first on Perlman & Perlman.

Nonprofit Hospitals

About 15 states exempt nonprofit hospitals from registration.  As a general matter, the exemption will apply to a nonprofit, charitable hospital regardless of where the hospital is licensed.  However, a number of states limit the hospital exemption to only those hospitals licensed within the state.  Additionally, in some states, the exemption is not available to hospitals that engage the services of a professional fundraiser.  Hospital foundations are exempt in only three states. 

Educational Institutions

About 33 states exempt educational institutions from registration.  Many offer a fairly broad scope of exemption that would apply to most colleges or universities accredited by a recognized regional or national accrediting body.  However, a number of states limit the exemption to those educational institutions which (a) are operating within the state only; (b) confine their solicitations to alumni, faculty, trustees, or the student membership and their families (meaning that universities that solicit contributions from foundations or corporations to support academic research, athletics, or other programs would not qualify for the exemption); or (c) qualify as a religious organization or are controlled or supervised by a religious organization.   

Religious Organizations

Most states exempt or exclude religious organizations from their charitable solicitation registration and reporting requirements. The scope of that exemption varies widely among states, both in how religious organizations are defined and in how those definitions are interpreted and applied. For some, the religious exemption provisions are broadly constructed, and exempt any “duly organized religious corporation, religious institution or religious society,” leaving the organization to determine if it falls within the exemption.  Other provisions are more narrowly drafted or applied, exempting only those organizations that are not required to file Form 990 with the IRS. These primarily include churches,¹ their integrated auxiliaries,² and ecclesiastical or denominational organizations.  Additionally, the exemption may be further limited to religious organizations that do not use the services of a professional fundraiser.  

Generally religious organizations that are required to file Form 990 with the IRS, will be exempt in some, but not all, states.  Many of those describe their mission as both religious and charitable, as together these constitute an expression of their religious faith and values.  Charitable services may include the provision of food, shelter, education, and medical support to vulnerable populations.  Oftentimes, religious organizations incorporate prayer and religious instruction into their programmatic work and require their employees to agree to an organizational statement of faith.  

Confirming Exemption from Registration

While a few states have a formal exemption review and approval process which includes submission of exemption forms and supporting documentation, a number of states have no formal process.  For these states, organizations may simply submit a letter advising the state of its own determination of exemption.  

A number of other states will consider hospitals, educational institutions, and religious organizations exempt based on their own determination, and may or may not require submission of a confirmation letter. It may be prudent, however, for organizations to submit a letter and have it noted in the state’s files even when not required. Doing so may help facilitate discussion with any professional fundraiser, fundraising consultant, or commercial co-venturer engaged by the organization, which must ensure that their charity clients or partners are properly registered or otherwise exempt from registering and may even insist upon receiving evidence of such registration or exemption in order to protect their own compliance obligations.  Further, funders and even individual donors may base contribution decisions on an organization’s compliance with registration requirements.  

Implications of New California Law Governing Charitable Fundraising Platforms on Hospitals, Educational Institutions, and Religious Organizations

We recently became aware of a number of nonprofit hospitals that were blocked from receiving donations through Facebook and other online fundraising platforms as a result of the platform’s implementation of a new “good standing” requirement which is part of California’s recently enacted law governing charitable solicitation, known as Assembly Bill 488 (AB 488).  Online fundraising platforms must block organizations that have a delinquent status with certain state and federal regulatory agencies from receiving donations through their platform.  The issue occurred even though the blocked hospitals met the statutory requirements for exemption from registration in California. A charitable organization’s failure to be in good standing in California has implications far beyond that state because platforms will generally block all online donations made to delinquent organizations from donors located anywhere, not just donations made by California residents.  

To learn more about California’s new “good standing” requirement, how it affects exempt organizations, and steps your organization can take to avoid or resolve a “good standing” issue, read Has Your Organization Been Blocked by Charitable Fundraising Platforms?

1 The term “church” includes churches, temples, mosques, and other houses of worship.

2 See https://www.irs.gov/charities-non-profits/churches-religious-organizations/integrated-auxiliary-of-a-church-defined.

The post Are Hospitals, Educational Institutions, and Religious Organizations Exempt from Charitable Solicitation Registration? appeared first on Perlman & Perlman.

Unfortunately, a charitable organization’s failure to be in good standing in California has implications far beyond the State. Charitable fundraising platforms will generally block all donations made to any organization that is not in good standing, not just those made by California residents. In many cases, the first time the organization became aware that they had a delinquency issue that needed to be resolved was when they received a notice sent by a fundraising platform informing them that they are not in good standing in California.  Unfortunately, many of these charities learned the hard way that resolution is neither quick nor easy, resulting in significant loss of donations, not to mention the expenses incurred when getting back into good standing.   Given the significant amount of fundraising now taking place through online fundraising platforms, it is paramount that charities ensure that they are in good standing pursuant to California’s new law.

How to Comply with California’s New “Good Standing” Requirement

Under AB 488, a charitable fundraising platform or platform charity may only “solicit, permit, or otherwise enable solicitations, or receive, control, or distribute funds from donations for recipient charitable organizations or other charitable organizations in good standing.” 

For a summary of the key provisions and definitions of “charitable fundraising platform” and “platform charity,” see California Enacts New Law to Regulate Charitable Fundraising Platforms. 

For a summary of the California Attorney General’s notice advising which provisions of AB 488 go into effect on January 1, 2023, and which were delayed due to pending issuance of implementing regulation, read Key Provisions of California Assembly Bill 488 Regulating Charitable Fundraising Platforms Take Effect January 1, 2023. According to the notice, the “good standing” requirement went into effect on January 1, 2023.

To comply with California’s “good standing” requirement, fundraising platforms and platform charities receiving funds through the platform must ensure that, with respect to each recipient organization: (1) the organization’s federal tax-exempt status has not been revoked by the Internal Revenue Service (“IRS”); (2) the organization’s tax-exempt status in California has not been revoked by the California Franchise Tax Board; and (3) the organization is not prohibited from soliciting or operating in the State by the California Attorney General.  

The California Department of Justice (“DOJ”) published a notice which includes links to the three lists that charitable fundraising platforms and platform charities must check for compliance with this requirement.

1. The IRS’s Tax-Exempt Organization Search Tool
2. California Attorney General’s list of charities that may not operate or solicit in the State
3. California Franchise Tax Board’s Revoked Exempt Organizations List

Note that “good standing” does not necessarily mean that every recipient charitable organization included by a fundraising platform or platform charity must be registered to solicit in California.  For example, a small, local community organization based in another state that does not engage in solicitation in California, and generally does not receive donations from residents of California, including through fundraising platforms, would generally not be required to register in California due to lack of a sufficient jurisdictional nexus.  

Key Reasons that Organizations Fall Out of Good Standing

Common reasons that have caused organizations to fall out of good standing in California, and thereby get blocked by fundraising platforms, include the following:

1. The organization was late in registering or renewing registration with the California Attorney General’s office, typically due to late completion of the organization’s IRS Form 990 or audited financial statement, which triggers delinquent status. 
2. The organization filed its registration renewal paperwork but was sent a notice that the submission was incomplete, but the notice was not received.  
3. The organization may have been mailed letters from the California Attorney General’s office advising them to register, but those letters were either lost in the mail, went to an incorrect address, or otherwise did not make their way to the right person. Failure to respond by registering (or seeking confirmation of exemption, if applicable, or otherwise establishing with the office that the organization is not required to register) automatically results in a delinquent registration status.  The initial letter from the AG advising the organization that it may be required to register may have been triggered by some common scenarios:
   
   
   1. The organization incorporated in the State of California, which, due to coordination between the California Secretary of State’s office and the Attorney General’s office, automatically triggers a letter advising the organization to register with the Attorney General’s Registry of Charitable Trusts. This letter may have gotten lost in the mail, or it failed to elicit a timely response.  
   2. A professional fundraiser or fundraising consultant of the organization listed the charity as a client in its California registration filings, triggering the letter.  Since the charity historically had not solicited contributions in California and did not understand the scope of its fundraiser’s services to include California, it may have chosen to ignore the letter.

Note: These misplaced or lost deficiency letters issued by the AG’s office are generally accessible by searching the California AG’s Online Registry Search Tool.

4. The organization may have qualified to do business in California in the past, by employing individuals residing in the State.  (Note that whether an organization is required to qualify to do business in California is a specific, fact-driven analysis). Once qualified to do business in the State, the organization is unaware that it is subject to annual reporting obligations with the California Franchise Tax Board, thus causing an inadvertent delinquency when such filings are not submitted. 
5. The organization may have had its 501(c)(3) tax-exempt status revoked by the IRS.  This often affects smaller organizations, particularly ones solely operated by volunteers, who were unaware that the organization had an annual IRS Form 990 filing obligation.  Failure to file the IRS Form 990 for three consecutive years leads to automatic revocation of federal tax-exempt status as soon as the third annual filing deadline passes.

In a number of cases, the charity at issue may be eligible for a statutory exemption from registration in California due to its status as a hospital, educational institution, or religious organization.  While California’s statute does not explicitly require such organizations to confirm their exemption from registration, as a matter of practice, the California Attorney General does require these organizations to confirm their exemption. For more information on registration exemptions, read Are Hospitals, Educational Institutions, and Religious Organizations Exempt from Charitable Solicitation Registration?

The documents and information that must be submitted to confirm an organization’s exemption from registration are outlined in California’s initial registration form instructions, and the AG’s office must issue a letter or notice confirming the organization’s exemption.  If California issued a letter advising the exempt organization that it may be required to register, and the letter goes unanswered, even if the organization would otherwise qualify for exemption, the organization will be put on the California AG’s May Not Operate or Solicit List. 

Obstacles to Establishing Good Standing (and How to Get Back into Fundraising Platforms’ Databases)

Many charities have found that the process to reinstate good standing is slow and painful. There are multiple steps to address deficiencies, delays in regulatory agencies’ processing of documents, and challenges to communicating an organization’s unique circumstances to the regulatory agencies. 

When a charity’s registration with California Attorney General’s office has expired, it must submit its renewal paperwork by US mail, landing the submission in an enormous pile of papers that the state is months behind in processing.  Even if an online process is available, the Attorney General’s time to review and final approval could be 90 days or more.

Similarly, the process for reinstatement with the Franchise Tax Board or IRS is cumbersome and time-consuming, involving back filings and reinstatement forms/applications.

Finally, charities should be aware that platforms may require blocked organizations who have resolved delinquency issues to take special steps to reactivate donations through the platform.  A number of platforms have issued public guidance on how they are addressing AB 488 compliance, including Meta and Bonterra. Complying with the platform’s process for reinstatement further delays a charity’s ability to fundraise on that platform.  The May Not Operate or Solicit List is only updated by the AG’s office once a month, thus further delaying the reinstatement process after organizations have resolved their delinquency.

Final Regulations are Still Pending that May Affect Implementation of the Good Standing Requirement

On November 17, 2023, the California Attorney General’s office issued a third set of Proposed Regulations to implement the provisions of AB 488, which include modifications to the procedures relating to “good standing”. The comment period ended on January 2, 2024.  We have been advised that final regulations are expected to be released in the next few months, which could cause some fundraising platforms to revise their procedures. Our firm is watching the status of the regulations. Stay tuned for further updates. 

A Final Note

We leave organizations with a final word of advice – Make sure your organization is not delinquent in California!  Given the broad, practical implications that failure to be in good standing creates, including the blocking of online donations received from any state through any charitable fundraising platform, organizations should make sure they closely monitor the applicable registration and filing deadlines to ensure they will not fall out of good standing in California. 

The post Has Your Organization been Blocked by Charitable Fundraising Platforms? It is likely due to California’s new “Good Standing” requirement. appeared first on Perlman & Perlman.

You can find an overview of the new requirements in my previous article. 

What businesses and activities are affected?

Companies conducting the following online activities to raise funds for charitable causes are subject to the law: 

• Online charitable sales promotions benefiting 7+ charities per year. 

Prior to the enactment of the new law, companies engaging in charitable sales promotions in California (whether in-store or online) were regulated as a “commercial co-venturer” under the law governing charitable solicitation activities.¹ These companies were required to either register with the California Attorney General’s office, or alternatively, comply with certain requirements, including (1) entering into a written agreement with the charity, signed by two officers of the charity; (2) transferring funds to the charity every 90 days throughout the campaign; and (3) providing a written accounting to the charity in connection with each transfer of funds (note that if these requirements were followed, registration was not required).  

These longstanding requirements still apply to all charitable sales promotions conducted in brick-and-mortar stores, or to online charitable sales promotions directed at California residents and which benefit six or fewer charities each year.  However, any company engaging in online charitable sales promotions benefiting 7+ charities per calendar year must comply with the new requirements applicable to charitable fundraising platforms. 

• Inviting customers to donate online at checkout.

Companies inviting customers to donate online during the checkout process are subject to the new law. In the past, customer donation campaigns, whether conducted online or in-stores, were not generally subject to specific regulatory requirements.  These campaigns are typically conducted by businesses on a voluntary and uncompensated basis and can raise significant funds for many charitable organizations.  Despite the lack of any compensation or profit from the campaign, the new law nevertheless covers businesses conducting these types of campaigns online.  As such, any retail business inviting its customers to donate while checking out on its e-commerce site will be considered a charitable fundraising platform.    

Read the excellent articles on point-of-sale fundraising, thanks to our friends at Engage for Good. 

• Inviting the public to take certain actions online to generate donations.  

Several companies have developed online platforms, including mobile apps, that engage the public to take various actions that support positive social impact.  The campaigns conducted on these platforms are often sponsored by companies seeking to engage with customers, the broader public, or even their own employees.  Online users may be invited to take an action that triggers a donation which is often paid for by a sponsoring for-profit business to a charity.  For example, donations might be triggered by taking a free online survey or playing a game on a mobile app.  Employees of a company may be invited to make a donation online that will be matched by their employer. Companies operating platforms that engage the public in taking actions online to generate charitable donations are now subject to the charitable fundraising platform regulations. These rules apply even if online charitable activations are just one feature out of many within a technology platform, or an activation is only conducted for a short time period.

In addition, charitable fundraising platforms sometimes partner with a “platform charity” to facilitate the receipt of donations, which are then granted to various other designated charities (defined as “recipient charitable organizations” in the new law). Charities playing this role are defined and regulated as “platform charities,” and therefore are subject to many of the same requirements as charitable fundraising platforms.  

What new requirements apply to charitable fundraising platforms?

Charitable fundraising platforms must comply with several new requirements, including (1) annual registration and reporting; (2) required disclosures; (3) obtaining written consent of charity beneficiaries (except in limited circumstances when such consent is not required; (4) soliciting or receiving funds only for charities in good standing; (5) segregation of funds; (6) prompt distribution of donations/grants; and (7) accounting of fees.  

The new requirements are more fully summarized in this previously published article. Additional updates regarding which provisions of the new law are effective as of January 1, 2023, and which ones are delayed, are summarized in this article.  

What should companies and charities do now? 

Here are a few practical tips for companies and charities engaging in online charitable campaigns to think about during the campaign pre-launch period to help ensure compliance with the new requirements.

• Identify which online campaigns and activations are subject to the new regulations.
• Communicate with your partner in advance of the launch to acknowledge the impact of the new law and ensure alignment around the compliance requirements.
• Review sample campaign pages to ensure that the disclosures are properly displayed on the website or within the mobile app.  
• If the campaign is powered by a third-party platform through which users will engage in the campaign activation, ensure that the platform is fully aware of the new requirements, and is able to comply with all aspects of the new platform law, including properly displaying the required disclosures, ensuring that the platform charity operates in compliance with the good standing requirements, and scheduling timely donation and grant disbursements. 
• Monitor for updates on the final regulations and related registration forms, which will be released later this year. Keep your eye out for the next article once the regulations and forms are finalized. To be sure you are notified, please subscribe to our blog.

1 A commercial coventurer is defined as “any person who, for profit, is regularly and primarily engaged in trade or commerce other than in connection with the raising of funds, assets, or property for charitable organizations or charitable purposes, and who represents to the public that the purchase or use of any goods, services, entertainment, or any other thing of value will benefit a charitable organization or will be used for a charitable purpose.”

The post How Does California’s New Fundraising Platform Law Affect Cause Marketing? appeared first on Perlman & Perlman.

The new law defines a “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.”  The broad definition of charitable fundraising platform applies to most consumer-facing websites that facilitate the receipt of online donations, with limited exceptions.[1] It also applies to websites that run multiple promotions advertising that a portion of the purchase price from the sale of goods or services will be donated to specified charities, as well as websites or platforms that voluntarily invite customers to add a donation during the check-out process, or that encourage individuals to take certain actions to trigger donations.  According to one legislative analysis, examples of charitable fundraising platforms include Amazon, Benevity, Charity Navigator, CrowdRise, eBay, Facebook, GoFundMe, Google, GuideStar (Candid), Lyft, Overstock, and PayPal.

The bill also regulates platform charities, which are charitable organizations that facilitate acts of solicitation on a charitable fundraising platform.

Key New Requirements
The bill contains a number of new requirements applicable to charitable fundraising platforms and platform charities, including the following:

1. Registration and Reporting. Charitable fundraising platforms and platforms charities must annually register and submit financial reports to the California Attorney General’s office. Additional regulations addressing the content of the registration and annual report forms and the manner and timing of the filings will be issued by the Attorney General.[2]

2. Required Disclosures. The new law will require charitable fundraising platforms to clearly disclose certain information, including: (1) a statement about who will receive the donations; (2) if applicable, a statement that a recipient charity may not receive donations or grants of recommended donations, with an explanation identifying the circumstances under which a recipient charity may not receive the funds; (3) the length of time it takes to send the donation or a grant of the recommended donation to a recipient charity; (4) the fees or other amounts (if any) deducted from or added to the donation or a grant of the recommended donation; and (5) whether the donation is tax-deductible or not. The new law permits some, but not all, of these disclosures to be provided through a conspicuous hyperlink, so long as the disclosure is conspicuous when the hyperlink is selected.

3. Written Consent of Charity Beneficiaries (and a Limited Exception). The law generally requires that a charitable fundraising platform or platform charity obtain the written consent of any recipient charity before using its name in a solicitation, but provides that such written consent is not needed if all of the following circumstances are met: (1) the platform only includes certain information about the recipient charities on the platform, as set forth in the new law or future regulations (e.g., the recipient charities’ name, address, telephone number, internet website, EIN, registration number with the California AG’s office, NTEE Code, and publicly available information from the recipient charity’s tax or information returns filed with the Internal Revenue Service or the California AG’s office); (2) the platform conspicuously discloses before persons can complete a donation that the recipient charity has not provided consent or permission for the solicitation, and has not reviewed or approved the content generated by individuals engaging in peer-to-peer charitable fundraising, when applicable; (3) the platform promptly removes any recipient charity from its list or any solicitation regarding the recipient charity upon written request by the recipient charity; and (4) the platform or platform charity does not require that a recipient charity consent to any solicitations as a condition for accepting a donation or grant of a recommended donation.

4. Soliciting or Receiving Funds Only for Charities in Good Standing. 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.

5. Segregation of Funds; Accounting of Fees. Charitable fundraising platforms and platform charities must hold charitable funds raised in a separate account or accounts from other funds belonging to the platform or platform charity, and must promptly ensure that donations and grants of recommended donations are sent to recipient charities with an accounting of any fees imposed for processing the funds.

6. Prompt Distribution of Donations/Grants. In addition to the requirement for platforms to disclose the amount of time it takes for donations to be sent to recipient charities, the Attorney General is authorized to establish regulations regarding the maximum length of time a platform or platform charity may take to send the donated funds, taking into consideration various facts and circumstances.[3] For platforms that make donations or grants based on purchases or other activity performed on the platform, the platform must send donations or grants of recommended donations to the recipient charities no less frequently than on a quarterly basis and subject to any minimum amounts, which may not exceed ten dollars ($10).  In addition, donations or grants must be sent after four consecutive quarters regardless of any established minimum amount, unless the recipient charitable organization is not eligible to receive the funds (which ineligibility must be disclosed pursuant to the statutory disclosure requirements).

Avoiding Duplicative Registration and Compliance Obligations
Recognizing that some charitable fundraising platforms could meet the definition of one or more other regulated fundraising categories — namely, commercial fundraisers (e.g., telemarketers), fundraising counsels (e.g., direct mail companies), and commercial coventurers (e.g., retail businesses advertising that the purchase or use of their goods or services will benefit a charitable organization) — the law provides the following clarifications to avoid such overlap:

1. Fundraising Counsel: If an entity meets the definition of both a fundraising counsel and a charitable fundraising platform, it will only be a charitable fundraising platform.

2. Commercial Fundraiser:
If an entity meets the definition of both a commercial fundraiser and a charitable fundraising platform, it will only be a commercial fundraiser when the entity, for compensation, performs any of the following acts of solicitation:
(i) Direct mail solicitation, excluding electronic mail or messages;
(ii) Estate gift or estate planning solicitation;
(iii) In-person solicitation through a fundraising event, door-to-door or other public spaces, or a vending machine or similar equipment that does not use a person to perform the solicitation;
(iv) Noncash solicitation;
(v) Nonincidental acts of solicitation that are not internet based, including solicitation through print, radio, or television;
(vi) Solicitation involving receiving something of value, or a chance to win something of value, in connection with a donation; or
(vii) Telephone solicitation.

3. Commercial Coventurer: An entity that meets the definition of both a commercial coventurer and a charitable fundraising platform by listing one or more recipient charities to receive donations or grants of recommended donations made by the platform based on purchases made or other activity performed by persons who use the platform will be only a commercial coventurer when the acts of solicitation through an internet website, service, or other platform to persons in the state are for six or fewer recipient charities per calendar year.[4] Entities that undertake charitable sales promotions or other activities that trigger donations on the internet for seven or more recipient charities per calendar year will be a charitable fundraising platform.

During the annual conference of the National Association of Attorney General (NAAG) and the National Association of State Charity Officials (NASCO) held on October 13, 2021, NASCO President, Yael Fuchs, noted that while she could not advise whether any specific states were planning to introduce similar legislation to AB 488, NASCO does have a Crowdfunding Working Group that has been following the California bill closely, and that the various state agencies are watching to see whether and how California’s law enhances regulatory oversight of online fundraising activities.

The new law goes into effect on January 1, 2023.  Beginning on January 1, 2022, the Attorney General is authorized to establish rules and regulations necessary to administer the new law.

[1] Exceptions include a charity’s own website, vendors that solely provide technical or supportive services to such platforms (e.g., domain hosting services or payment processing services), and sponsoring organizations of donor-advised funds that do not list or name recipient charities for solicitation purposes on its platform to individuals other than its donor-advisors. Additional clarifications for determining when an entity is a charitable fundraising platform when it meets more than one regulated fundraiser category is discussed later in this article.

[2] The law also signals that the Attorney General may issue regulations that would increase reporting efficiency by allowing partnering charitable fundraising platforms or platform charities to submit an annual report on behalf of other charitable fundraising platforms in a consolidated fashion.

[3] The considerations affecting the maximum length of time for funds to be distributed to recipient charities include the acts of solicitation being performed, the number of donations made through the platform, who the donations are made to (e.g., the platform, platform charity, recipient charities, or peer-to-peer fundraisers), whether the recipient charity has provided consent for a solicitation, whether further verification information is requested to prevent fraud, and whether donations are sent to alternate recipient charities.

[4] California does not require commercial coventurers to register with the state if they enter into a written agreement with each beneficiary charity signed by two charity officers, distribute funds to the charity every 90 days throughout the promotion, and, and provide an accounting with each payment.

The post California Enacts New Law to Regulate Charitable Fundraising Platforms appeared first on Perlman & Perlman.

What is a fiscal sponsorship?  A fiscal sponsorship generally refers to a contractual arrangement in which one entity that is a 501(c)(3) tax-exempt organization (the “fiscal sponsor”) serves as the fiscal and legal “host” of a charitable project.  While the term fiscal sponsor is not officially defined in the federal tax code, the IRS has generally approved of the function of fiscal sponsors. The critical requirement is that the fiscal sponsor must retain the legal right to ensure that the project funds are used to accomplish the tax-exempt purposes of the sponsored project.

Benefits of a Fiscal Sponsorship

There are many benefits to using a fiscal sponsorship to conduct a charitable project. Here are a few key reasons that frequently drive the decision to set up a fiscal sponsorship.

1. Ability to receive tax-deductible contributions. Donors will only receive a charitable tax deduction for financially supporting the project if the legal recipient of the donation is a 501(c)(3) tax-exempt organization.  A fiscal sponsor’s tax-exempt status and role as the legal fiduciary of the donated funds qualify them as tax-deductible.  Tax-deductible contributions, whether from the project organizer or from the public, are typically critical to funding the requirements of the project.
2. Piloting an innovative new program. Project organizers often seek to test a new approach to solving an issue, but are uncertain whether the project will have long-term viability and be worth the time and money it takes to establish a nonprofit organization.  A fiscal sponsorship can provide a convenient vehicle to pilot the project more quickly and at less cost than setting up a new tax-exempt entity.
3. Receiving the legal, financial, and administrative support of a fiscal sponsor. A fiscal sponsor takes on the legal responsibility for the funds raised. In the Direct Project Model (discussed below), it also takes on all of the legal obligations of the project. Having the benefit of a fiscal sponsor’s team to handle the legal, financial and administrative aspects of the project can allow the project organizers to focus on fundraising and implementation of the program.
4. Temporary fiscal sponsorship while awaiting independent 501(c)(3) tax-exempt status. Some organizations decide to enter into a fiscal sponsorship while their tax-exempt application is pending review. This allows them to begin receiving tax-deductible donations for the project much sooner. As of August 19, 2021, the IRS website says that applications postmarked after January 15, 2020 have not yet been assigned for review.  That seven-month queue doesn’t include the additional time needed for review once the application is assigned.  Although expedited application processing is available under limited circumstances, there is no guarantee that it will be granted.  Setting up a fiscal sponsorship may take time as well, but generally should not take as long as the IRS tax-exempt application review process.

What are the Roles and Responsibilities of a Fiscal Sponsor?

1. Project selection responsibilities
   1. Mission fit. The fiscal sponsor must ensure that any project it sponsors is consistent with, and within the scope of, the fiscal sponsor’s legal and tax-exempt mission and purposes. For example, a fiscal sponsor whose legal purposes are focused on environmental conservation will generally only take on projects that are consistent with that core mission.
   2. Written fiscal sponsorship agreement. The terms of the relationship between the fiscal sponsor and the sponsored project should be clearly outlined in a written agreement detailing the terms and expectations of the parties. Key terms include: (1) the duration of the fiscal sponsorship; (2) a clear description of the project; (3) fiscal sponsorship service fees, if any; (4) confirmation of which party will be responsible for key compliance obligations on behalf of the project; (5) the timing and process for distributing funds to, or using funds for, the sponsored project; (6) ownership of intellectual property; and (7) a clear outline of how the project will be transitioned at end of the relationship.
2. Financial responsibilities
   1. Use of project funds. The fiscal sponsor should only utilize funds raised for the project for the stated charitable purposes of the project.
   2. Donation tax receipts. The fiscal sponsor is responsible for issuing tax receipts to all donors in accordance with applicable law.
3. Legal oversight responsibilities
   1. Compliance with laws. The fiscal sponsor should comply with all applicable federal, state, and local laws and regulations. This includes annually filing its Form 990 with the IRS, and maintaining its registration with applicable state charity regulatory agencies, based on where the fiscal sponsor (including all of its projects) are operating and soliciting charitable contributions.  Project organizers should ensure that they select a fiscal sponsor that is aware of and willing to comply with all of the compliance requirements necessary to support the needs of the project.

What are the Most Common Types of Fiscal Sponsorships?

The two most common types of fiscal sponsorships are the Direct Project Model and the Pre-Approved Grant Model.

Direct Project Model:  In this model, the project has no separate legal existence from that of the fiscal sponsor.  That said, the fiscal sponsorship agreement outlines how the fiscal sponsor provides ultimate oversight of the project, in accordance with its fiduciary duties, while delegating the day-to-day operation of the project to the project organizers.  All revenues/expenses and assets/liabilities of the project are attributed to the fiscal sponsor, and are incorporated into the fiscal sponsor’s financial reports, and all legal compliance obligations (e.g., federal and state compliance filings; execution of contracts; hiring of employees) are undertaken by the fiscal sponsor.  Project organizers should consider whether the fiscal sponsor has appropriate insurance policies reflective of the activities and risks associated with the project (e.g., employer practices liability insurance; cybersecurity insurance).

Pre-Approved Grant Model: In this model, the fiscal sponsor is the legal recipient of all donations in support of the project, and issues donation tax receipts to the project donors.  The fiscal sponsor distributes the funds raised as a grant to a separate project grantee.  The fiscal sponsor must pre-determine that the project grantee, a separately incorporated entity lacking 501(c)(3) tax-exempt status, is an appropriate recipient of grant funds to carry out the purposes of the project.  Once funds have been raised for the project, the fiscal sponsor grants the funds to the project grantee, pursuant to certain oversight requirements.  For example, the project grantee must provide reports to the fiscal sponsor on how granted funds have been used in furtherance of the charitable purposes of the project.  This model is often used by organizations that are in the process of applying to the IRS for 501(c)(3) tax-exempt status.

Beginning at the End

While the start of a new project is exciting, one of the most important steps in selecting a fiscal sponsor is to plan for the end of the relationship.  The fiscal sponsorship agreement should outline a clear process for the project to be transitioned to a successor tax-exempt organization (including a newly formed organization whose 501(c)(3) tax-exempt status has been approved), subject to the fiscal sponsor’s ultimate discretion to ensure that the successor is capable of carrying out the project.

[1] For many people who have a long-term vision for their charitable program, the best approach may be to set up your own separate tax-exempt organization. An FAQ on setting up a new nonprofit organization is available here.

The post Should We Use a Fiscal Sponsorship for our Charitable Project? appeared first on Perlman & Perlman.

What is a Professional Fundraiser? 

A professional fundraiser (a/k/a commercial fundraiser for charitable purposes, professional solicitor or paid solicitor) is generally defined as a person or entity who, for compensation, directly solicits contributions on behalf of one or more charitable organizations.  A professional fundraiser may have temporary custody of contributions and is permitted to receive percentage-based compensation.

Examples of professional fundraising activity include telemarketing, in-person meetings with prospective major donors, vehicle donations, thrift store operations, event ticket sales, auctions at charity events (including the acquisition of auction items), and operation of certain internet fundraising platforms.

Where Does a Professional Fundraiser Need to Register?

Generally, a professional fundraiser is required to register in any state where they are directly soliciting charitable contributions on behalf of a charity.  With respect to internet solicitations, a state may impose its registration and reporting statutes only on a PFR’s activities that meet the constitutional requirement of “minimum contacts” with that particular state.

Acknowledging these jurisdictional limitations, and given the practical reality that applying (and enforcing) their registration requirements to every internet solicitation is virtually impossible, the National Association of State Charity Officials (NASCO) issued guidelines in 2001 known as the Charleston Principles (the “Principles”).  The Principles are not binding law; however, NASCO encourages state charity regulators to use them as practical guidelines for applying their state laws to online fundraising activities.

The Principles summarize the application of state registration and reporting regimes to PFRs as follows:

1. Entities domiciled within the state.

An entity is domiciled within a particular state if its principal place of business is in the state. However, according to the Principles, a physical presence within a state, such as a branch or regional office, may also be indicative of appropriate state jurisdiction.

2. Out-of-state entities whose non-internet activities would require registration in the state (e.g., inbound telephone or face to face solicitations in the state).

3. Out-of-state entities that solicit through an interactive or non-interactive website and either (a) specifically target persons physically located in the state or (b) receive contributions from the state on a repeated and ongoing basis, or a substantial basis, through or in response to the website solicitation.

The Principles leave the definition of “repeated and ongoing” or “substantial” to the individual states.  Currently, three states, Colorado, Mississippi and Tennessee have, by regulation, formally adopted numerical thresholds.  In Colorado, an entity receives “repeated and ongoing” or “substantial” contributions if it receives at least fifty online contributions, or the lesser of $25,000 or 1% of its total contributions, in online contributions during a fiscal year, respectively.  In Mississippi, an entity receives “repeated and ongoing” or “substantial” contributions if it receives at least twenty-five contributions or $25,000 in online contributions in a year.  In Tennessee, an entity receives “repeated and ongoing” or “substantial” contributions if it receives at least one hundred contributions or $25,000 in online contributions in a year.

Professional Fundraising Contracts

In addition to the registration requirements, state charitable solicitation statutes require that contracts between a charity and a PFR be filed in the states where solicitation activity is occurring and that they include certain provisions. Common contract provisions required by state statute including the following:

• Legal name/address of the charity
• Statement of the charitable purpose for which the solicitation campaign is being conducted
• A clear statement of the fees to be paid to the professional fundraiser
• The effective/termination dates of the contract
• A statement that the charity exercises control and approval over the content, volume and/or frequency of any solicitation
• An estimate of the amount the charity is expected to receive as a result of the solicitation campaign
• California and New York require lengthy cancellation provisions designed to allow the charity to cancel the contract within 10-15 days of signing without penalty
• Several states require the contract to be signed by two authorized officials of the charity

Campaign Financial Reports

Nearly all states that regulate PFRs require them to file a report that accounts for the funds raised in the campaign.  The reports generally require disclosure of the total amount raised, the fee paid to the PFR, and certain campaign expenses.  These reports are required within a certain time period following the end of the campaign (typically ninety days) or, for ongoing campaigns, annually in connection with the anniversary date of the campaign.

Bonds

As part of the registration process, PFRs are required to obtain a surety bond.  The purpose of the bond is to guarantee against malfeasance in the conduct of charitable solicitations.  The face amount of the bonds required by the states range from $10,000 to $25,000.

Point of Solicitation Disclosures

Virtually all states require a PFR to identify its status as a professional fundraiser, and many require the PFR to disclosure that the PFR is being compensated.  If asked by the potential donor, the professional fundraiser must truthfully disclose how much of the donation will go to the charity.

In addition, a number of states require solicitation disclosure notice statements on all written materials used when soliciting contributions.  The required disclosures must include how additional information about the organization may be obtained as well as certain state regulatory agencies’ contact information where donors can obtain further information. Solicitation disclosure notice requirements apply to charitable organizations as well as professional fundraisers.

The solicitation disclosure notice is required to be included on every printed solicitation or written confirmation, receipt, and reminder of a contribution. Customary examples of printed solicitations are direct mail solicitations, fliers, or solicitations contained in a newsletter.  Often overlooked, however, are emails or the organization’s website, which, if it includes a donate button or other request for a donation (including a link to the donate button), is considered a form of written solicitation.

The services that professional fundraisers provide can be of great value to nonprofit organizations. Understanding the regulatory framework governing professional fundraisers will help avoid missteps that can lead to actions by state regulators, including fines and penalties. It is incumbent on both the professional fundraiser and its charity clients to take the steps that ensure compliance under state charitable solicitation laws.  If in doubt, it is always a good idea to seek legal counsel.

The post Are You Paid to Solicit Charitable Contributions for a Charity? You May Need to Register as a Professional Fundraiser appeared first on Perlman & Perlman.

Types of Campaigns

The core of a matching gift campaign is that a “match donor” offers to make a donation in connection with donations made by the public.  Generally speaking, there are three basic types of matching gift campaigns.

1. Matching Gift. The traditional matching gift campaign is where a “match donor” pledges to match public donations, dollar for dollar, often up to a specified donation cap and/or for a specified time period.  With this type of campaign, the amount of the pledge that must be paid by the “match donor” is contingent upon the total donations received from the public in response to the campaign.
2. Challenge Grant. A challenge “match donor” grant is one that is paid only if and when a charity raises a specified total dollar amount of funds, or receives funds from a specified number of individual donors.  With this type of campaign, the fulfillment of the pledge by the “match donor” is contingent upon hitting the target donation goals from the public – this structure is not a dollar-for-dollar match, but all-or-nothing.
3. Fixed Lead Contribution. A fixed lead contribution is one where a contribution that has already been made by a “match donor” is promoted with the goal of encouraging others to join in giving towards a larger specified financial goal.  This type of campaign is often used to fund a capital campaign (e.g., the construction/ expansion of a building), or to build or significantly grow an endowment.  The fulfillment of the lead contribution is not contingent upon public donations.

Key Legal Considerations

The following are key legal issues to consider when conducting matching gift campaigns.

1. Communicate clearly about the way in which the matching gift campaign works. All material information about how the campaign works must be clearly and conspicuously disclosed in solicitations seeking matching donations.  All materials terms regarding the requirements that must be met to trigger a donation match should be clear to prospective donors at the point of solicitation.  Consider the following analogous guidance from the NY Attorney General’s office on placement of materials terms for cause marketing campaigns: “Consumers should be able to easily understand before purchasing a product or using a service how doing so will benefit a charity. . . . [The] key details should be displayed together in a clear and prominent format and size, and in close proximity to, the text used in marketing the promotion.”  Below are a few questions that will help you consider what are the material terms that should be disclosed as part of your matching gift campaign solicitations:

a. Is the donation from the “match donor” a pledge that is contingent upon receiving donations from the public, or has the donation already been received?

b. Is there a match donation cap (i.e., a maximum amount that the “match donor”) will donate?

i. Recommendations provided by the NY Attorney General’s office in connection with cause marketing advertisements may provide useful guidance in how to structure matching donation campaigns to provide transparency to donors: “If there is a donation cap, “do not saturate the market with products; limit the number of units distributed to a quantity that is reasonably expected to produce the maximum donation.”

ii. The analogous principle in a matching gift campaign would be to forecast in good faith when you expect the organization will receive donations sufficient to hit the match donation cap, and plan the campaign so that the length of the campaign and match amount (e.g., dollar for dollar) vis-à-vis the number of recipients of the appeal are such that the organization will not expect to hit the match donation cap too early in the campaign, thereby negating many or most donors’ ability to have their donations matched per the campaign terms.

iii. Ideally, consider past history from similar types of fundraising campaigns (e.g., direct mail, email, social media) to forecast when you expect you would receive donations sufficient to hit the match donation cap, and plan so that the length of the campaign and match amount (e.g., dollar for dollar) are such that the donation cap will not be met too early in the campaign, thereby negating other donors’ ability to have their donations matched per the campaign terms.

c. What is the donation match period? Must donations be received by the specified date, or merely pledged or postmarked by the specified date?

d. What is the match ratio? 1:1? 2:1?

e. To trigger the match, do the donations need to be made through a specific website, or be specifically in response to a special direct mail appeal?

2. Obtain prior consent from the donor with respect to their commitment and the organization’s plans to use it in a public solicitation. Consent should be obtained for any situations that will involve communicating with the public about a donor’s potential or previous donation. This commitment should be obtained in writing prior to receiving any funds associated with the challenge.
3. Stop promoting the matching gift incentive once the match donation cap has been reached. Consider establishing a mechanism to track in real-time the status of donations received in response to the campaign.

a. If campaign donations are made through a unique website URL, consider posting a notice on the webpage once the matching donation cap has been reached stating that the match has been fulfilled, but donations will still be gratefully accepted.

b. If the campaign is promoted on social media, consider switching posts from promoting the match opportunity to communicating that the match has been fully met.

c. If the campaign is being conducted by email or direct mail, consider including a website URL or telephone number where donors can obtain campaign status updates.

4. Properly manage restricted gift solicitations. If the matching gift campaign is being used to raise funds for a specific project or purpose, make sure that the donation goal reflects a reasonable estimate of the amount needed to fund that project or purpose. Ensure that funds received are properly booked as restricted funds, and used only for that purpose.

The post Donor Match-Making – Legal Considerations for Matching Gift Campaigns appeared first on Perlman & Perlman.

Colleges/Universities
State regulators discussed issues faced by colleges and universities in 2020. Jim Sheehan, Chief of the New York Attorney General’s Charities Bureau, stated that financial hardship faced especially by small liberal arts colleges outside metro areas has led to an increase interest in mergers as a possible solution. He mentioned that his office has witnessed situations where a merger is the only way to save the mission of a financially distressed nonprofit college or university and, in this and similar circumstances where a merger is lawful, his office is generally supportive of this activity.

In addition, regulators are reviewing how colleges or universities forced to close due to the financial strain caused by COVID-19 might implement a teach-out plan for current students (a teach-out plan is an arrangement whereby a college or university provides current students with the opportunity to complete their course of study when the institution closes). Other common issues faced by colleges/universities in 2020 of interest to state regulators include (1) determining the circumstances when it may be appropriate to utilize a larger percentage of a college or university’s endowment fund; (2) whether a financially distressed college or university should borrow from a third party or liquidate otherwise illiquid assets; and (3) under what circumstances a college or university can remove donor-imposed restrictions on charitable contributions.

The NY Charities Bureau plans to issue guidance on the use of endowment funds for institutions facing financial challenges during COVID-19. Massachusetts has already released similar guidance.

Tanya Ibanez, Senior Assistant Attorney General in the California Attorney General’s Office of Charitable Trusts, mentioned that the California Attorney General is looking closely at for-profit schools converting to non-profit organizations.

Crowdfunding
State regulators are still considering carefully how to regulate crowdfunding platforms. Ms. Ibanez briefly discussed the California Attorney General’s support of California Assembly Bill 2208, which recently died in committee. Generally, the bill required charitable fundraising platforms to register and file annual reports with the California Attorney General’s Registry of Charitable Trusts before soliciting, permitting, or enabling solicitations in California. Ms. Ibanez said that she anticipates that a similar bill will be introduced in the California legislature’s next legislative session.

In the context of discussing regulation of crowdfunding, Leslie Friedlander, Assistant Attorney General in the Texas Attorney General’s Office, reminded listeners of the recent PayPal Giving Fund settlement entered into between PayPal Giving Fund and twenty-two (22) state attorneys general. A summary of that settlement and its implications, PayPal Giving Fund Enters Multi-State Settlement, was written by my colleague Karen Wu.  Ms. Friedlander also teased upcoming donor-facing guidance on crowdfunding to be released by NAAG/NASCO in the near future. The FTC has released guidance for donors on giving through an online giving portal.

Form 990 Reporting
State charity regulators are taking advantage of the increased availability and searchability of data about charitable organizations, particularly data filed with the IRS on Form 990, to find organizations that may warrant closer is scrutiny.

Mr. Sheehan explained that organizations which disclose governance weaknesses on Form 990, Part VI, are more likely to have other governance problems such as weak internal controls that can lead to serious problems of interest to regulators. He recommended that, in addition to Part VI, tax practitioners should pay particular attention to Form 990 Schedules J (Compensation Information), L (Transactions with Interested Persons) and O (Supplemental Information). Organizations should ensure information on these schedules is complete, correct, and that an organization does not simply copy and paste information on these schedules from year to year.

Ms. Ibanez added that two additional areas of interest to regulators are the percentage of total contributions received as gifts-in-kind and joint cost allocations. She mentioned that if, for example, an organization receives 70%-80% of total contributions as gifts-in-kind then that organization is likely on the California Attorney General’s radar for a potential audit to determine whether those gifts are being properly valued.

Donor-Advised Funds
Speakers also discussed issues that regulators are grappling with when it comes to contributions made to and from donor advised funds.

Carol Washington, Manager of the Minnesota Attorney General Charities Division, shared how her office recently engaged with the Minnesota Council of Nonprofits to discuss areas of mutual public policy focus with respect to donor advised funds. The Minnesota Council of Nonprofits prepared an extensive white paper on the operation of donor advised funds, including policy recommendations on how the state might regulate donor advised funds to improve transparency and ensure that the original donor’s intent is respected.

Board Engagement During COVID-19
In answer to a question about the need for increased board engagement during COVID-19, Eunice Nakamura, General Counsel, Susan G. Komen, emphasized the importance of the board meeting early and often and encouraging board members to be proactive in discussing strategies that can be implemented and actions that can be taken now that will help the organization to weather this crisis now and into the future. Courtney Aladro, Chief of the Non-Profit Organizations Division of the Massachusetts Attorney General’s Office, mentioned that another way boards have increased engagement during COVID-19 is to create specific committees focused on issues raised by the pandemic.

Incentive-Based Executive Compensation
Ms. Aladro was asked for her thoughts on organizations that approve incentive-based compensation in order to reward nonprofit executives for staying with the organization through the difficult circumstances presented by the COVID-19 pandemic. She explained that, even assuming the compensation was reasonable, a regulator might still raise questions about such an arrangement if, for example, the organization has offered such incentive-based compensation but at the same time has made the decision to lay-off lower paid workers in order to keep the organization afloat.

Virtual/Online Events
Sara Hall, Chief Legal Officer at St. Jude Children’s Research Hospital, discussed some very practical lessons her team has learned switching from in-person to virtual fundraising events. These include: (1) obtaining all trademark clearances (for event names, hashtags, etc.) and music licenses for the event; (2) vetting and engaging a vendor with experience facilitating multi-channel, multi-platform content; (3) projecting attendance (Ms. Hall mentioned that this is particularly difficult with virtual events since there is generally no translation from in-person events); and (4) being aware of that spammers and fake websites may pop-up prior and during the event. It is important to be ready to address these issues during the event in real time.

With respect to digital engagement, Ms. Hall reminded listeners not to forget about required disclosures when engaging an influencer as part of a virtual fundraising event. For more on that subject read Influencer Philanthropy and Social Media – What are the Rules, What are Best Practices? by my colleague Jeremy Coffey.

Online Fundraising – Charleston Principles
Brian Armstrong, Deputy Attorney General at the California Department of Justice, discussed regulation of online fundraising. He pointed listeners to the Charleston Principles (which he said is generally consistent with personal jurisdiction case law) to determine when registration may be required due to online activity. For more on this topic, please see Karen Wu’s excellent article recently published in The Nonprofit Quarterly.

The post The 2020 NAAG/NASCO Virtual Conference – Noteworthy Issues for Nonprofits appeared first on Perlman & Perlman.

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.

The post Influencer Philanthropy and Social Media – What are the Rules, What are Best Practices? appeared first on Perlman & Perlman.