In this article I focus on recipient charities, i.e., a charity that receives donations facilitated by a platform or platform charity.  Although the law does not directly impose requirements on recipient charities, the new “good standing” requirement does have significant impact on recipient charities’ ability to receive funds through fundraising platforms. 

Recipient Charities 

The majority of 501(c)(3) public charities are likely to qualify as recipient charities.  If an organization receives donations through platforms such as Facebook, Blackbaud, GoFundMe, Benevity, or Classy, it is considered to be a recipient charity. 

The chief impact of the new law on recipient charities is the requirement that platforms and platform charities are only permitted to solicit, permit, or otherwise enable solicitations, or receive, control, or distribute funds from donations for recipient charities that are in good standing in California.  This means that if your organization is not in good standing in California, a platform may stop listing you as a potential beneficiary of funds and cannot send funds to your organization. 

Depending on how a platform has set up its good standing procedure, failure to be in good standing could prevent your organization from receiving online donations through the platform, not only from residents of California, but potentially from donors in any state.

How to Comply

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should ensure that with respect to each recipient charity: (1) the organization’s federal tax-exempt status has not been revoked by the Internal Revenue Service (“IRS”); (2) the organization’s tax-exempt status in California has not been revoked by the California Franchise Tax Board; and (3) the organization is not prohibited from soliciting or operating in the State by the California Attorney General.  

Charitable fundraising platforms and platform charities are prohibited from facilitating donations for recipient charities who are on any of the following three lists pursuant to the good standing requirement:

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

What Can Charities Do Now?

Monitor your organization’s good standing status and ensure that you are submitting the required filings to remain in good standing.  We suggest that you check all three databases, even if you believe there is no reason to be out of good standing on any of these lists.  

Check your status in each of the three databases:

1. CA Attorney General Registry Verification
2. CA Franchise Tax Board Entity Status Letter | FTB.ca.gov
3. IRS Tax Exempt Organization Search | Internal Revenue Service (irs.gov)

For more information, see our recent articles on California’s new law governing charitable fundraising platforms:

California Issues Final Regulations Governing Charitable Fundraising Platforms

Has Your Organization been Blocked by Charitable Fundraising Platforms? It is likely due to California’s new “Good Standing” requirement.

California Enacts New Law to Regulate Charitable Fundraising Platforms

The post Why it Matters if Your Nonprofit Organization is in “Good Standing” in California appeared first on Perlman & Perlman.

Many NIL collectives have been structured as nonprofit entities which have sought and obtained 501(c)(3) public charity status from the IRS.  These collectives usually partner with other charities to establish NIL opportunities for student-athletes.  Under these arrangements, the nonprofit collective typically pays the athlete in exchange for his or her promotion of the partner charity through personal appearances, speaking engagements and social media, or through participation in sports clinics for community youth and the like.

This past year, the IRS announced that many NIL collectives structured as nonprofit organizations fail to qualify as tax-exempt entities.  According to a generic legal advice memorandum (GLAM), many of these entities operate primarily for the private benefit of student-athletes, and thereby fail the “operational test” under Section 501(c)(3) of the Internal Revenue Code (the “Code” or “IRC”), which requires that tax-exempt organizations operate primarily for exempt purposes.  As a result of the perspective shared in this GLAM, the IRS has begun denying NIL collective applications for tax-exemption, as reflected in two recently released IRS Private Letter rulings (the “Rulings”) (Private Letter Ruling 202414007 and Private Letter Ruling 202416015).  

According to the IRS, the nonprofit NIL collectives described in these Rulings and in the GLAM further the following stated purposes: (i) providing opportunities for student-athletes to be paid for the use of their NIL, and (ii) contributing “to the greater good of the community” by raising awareness and support of their partner charities’ missions.  This article includes further discussion of the regulatory obstacles these nonprofit NIL collectives are facing, and the implications for collectives operating with similar missions.

IRS Rules Governing Tax-Exempt NIL Collectives

In order to obtain and maintain tax-exemption under IRC Section 501(c)(3), an entity must be organized and operated exclusively for one or more of the exempt purposes set forth in IRC Section 501(c)(3), which may be charitable, educational or scientific in nature (Treasury Regulation Section 1.501(c)(3)-1(a)(1)).

As discussed above, to be regarded as “operated exclusively” for exempt purposes, an organization must be engaged “primarily” in activities which accomplish exempt purposes (Treas. Reg. Section 1.501(c)(3)-1(c)(1)).  The presence of “a single nonexempt purpose, if substantial in nature, will preclude exemption regardless of the number or importance of truly exempt purposes” (GLAM, citing Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945)).

In addition, to be regarded as organized and operated exclusively for exempt purposes, an organization must serve a public rather than a private interest (Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii)).  To meet this requirement, an organization must establish that it is not organized or operated for the benefit of private interests, including for example, designated individuals, the founders of the organization or their family, or persons controlled, directly or indirectly, by such private interests.

That said, private benefit will not prevent an organization from obtaining exemption if the private benefit is incidental in both a “qualitative” and “quantitative” sense.   

The IRS has stated that to be “qualitatively incidental,” the private benefit must be a “byproduct” of the exempt activity or a “necessary concomitant” to the “accomplishment of the exempt purpose” (GLAM).   A private benefit that is a “direct or intentional” benefit to designated or identifiable individuals would not be “qualitatively incidental” (GLAM).  

To be “quantitatively incidental,” the private benefit “must be insubstantial in amount when compared to the overall public benefit conferred by the activity” (GLAM).

IRS’ Analysis and Conclusion Regarding Nonprofit NIL Collectives

According to the IRS, the nonprofit NIL collectives described in the Rulings and the GLAM operate primarily for the private benefit of student-athletes, in violation of the “operational test” under IRC Section 501(c)(3).  The following are key factors that went into its determination.  The IRS concluded that:

1. Providing paid opportunities for student-athletes is a primary purpose of the nonprofit NIL collectives’ activities — which means these collectives serve a private, rather than a public interest.

2. The private benefit to student-athletes is not “qualitatively incidental” to the collectives’ exempt purposes.  This benefit is not a “necessary concomitant” to accomplishing their exempt purpose of supporting partner charities.  According to the IRS, there “are alternative means by which you could promote local charities without conferring a substantial private benefit on these student athletes, such as by encouraging volunteerism” (Private Letter Ruling 202414007).

3. The private benefit to student-athletes is not “quantitively incidental” when compared to the overall public benefit conferred by the collectives’ activities.  In the GLAM, the IRS noted that many collectives pay 80 to 100 percent of all donations to student athletes.  The IRS said, “for payouts anywhere within this range, the benefit to private interests is substantial by any measure and cannot be dismissed as merely incidental to [their] other purposes and activities” (GLAM).

4. Student-athletes being paid by nonprofit NIL collectives are not themselves a recognized charitable class.  The IRS noted in the GLAM that “absent a finding that NIL collectives select student athletes for participation based on need, such that their activities could be considered” as being “conducted for the relief of the poor or distressed, …payments to the student-athletes are properly regarded as serving private rather than public interests.”

The Future of Nonprofit NIL Collectives

As discussed herein, the IRS has begun denying tax-exempt status to some nonprofit NIL collectives for the reasons discussed above.  For similar reasons, the IRS has indicated that it may reconsider the exempt status of nonprofit NIL collectives that have already been granted exemption (GLAM).¹  These actions also have implications for donors, who cannot take a charitable deduction for contributions to nonprofit collectives whose exemption has been denied or revoked.

With the above in mind, it is critical for nonprofit NIL collectives to review the Rulings and the GLAM with counsel and ensure that their purposes and activities do not confer impermissible private benefits to student-athletes.  Nonprofit NIL collectives should also consult with counsel on the pros and cons of converting to a more flexible legal form, including, for example, a for-profit limited liability company structure, which is not subject to limitations on the type of activities it facilitates.

1 However, the IRS has also noted that in reconsidering the exempt status of such collectives, it may be appropriate to grant relief under IRC 7805(b) to limit the retroactive effect of any such revocations.

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Who is affected by the regulations? 

Charitable Fundraising Platforms (“Platforms”)

Charitable fundraising platforms include any person or entity that uses the internet to provide an internet website, service, or other platform to persons in California, and performs, permits, or otherwise enables acts of solicitation to occur.  The broad definition includes not only technology platforms specifically designed to facilitate online charitable donations, but also applies to many online retail websites and mobile apps that facilitate cause marketing promotions, invite customers to donate at checkout, or offer to make a donation in exchange for a free action taken online. 

Read this article to learn about the limited exceptions to the definition of “charitable fundraising platform,” and how the new law applies to platforms that meet the definition of more than one regulated fundraising category.  

Note that certain requirements vary based on the Solicitation Type(s) conducted on a platform.

Platform Charitable Organizations (“Platform Charities”)

Platform charities receive donations on platforms that are recommended or advised to be granted to another charitable organization.  

Recipient Charitable Organizations (“Recipient Charities”)

Recipient charities are those that are listed within a platform as a potential recipient of donations generated through the platform, and include donations received directly from the platform, or as a recommended donation or grant from a platform charity.

Persons Who are Sent Funds in Peer-to-Peer Charitable Fundraising 

A person may be required to register as a trustee with the California Attorney General’s office if they are sent funds from a platform as part of a charitable peer-to-peer fundraising campaign and cannot send the funds to the recipient charity within 10 business days of their receipt of the funds.

What do the regulations cover? 

The following is a high-level overview of the requirements covered by the Regulations, organized by date. For a more detailed summary, please see the article California Issues Final Regulations Governing Charitable Fundraising Platforms.

Effective March 26, 2024

Definitions (Section 314)

The definitions provide additional clarification to terms defined in the statute and create names for the different Solicitation Types described in the statute. 

Good Standing of Charities (Section 316)

The Regulations provide new procedures for implementing the “good standing” requirement, which affects when platforms can and cannot send funds to a recipient charity. 

Solicitation Disclosures (Section 317)

The Regulations expand on the disclosure requirements, particularly in peer-to-peer fundraising, and clarify that information on fees can be included in a hyperlink. 

Donations Held by Platform Users in Peer-to-Peer Fundraising (Section 323)

Persons conducting peer-to-peer fundraising campaigns that are sent donated funds from the platform or platform charity must send the donated funds to the recipient charity within 10 business days after receipt of the funds, or else register as a trustee with the California Attorney General’s office.

Effective June 12, 2024

Registration and filing requirements (Section 315)

The new registration and filing requirements applicable to charitable fundraising platforms become operative on June 12, 2024, and must be filed online.  

Effective January 1, 2025

Charity consent for solicitations (Section 318)

The regulations outline certain details that must be included in any agreement entered into between a platform or platform charity and recipient charity. 

Tax donation receipts (Section 319)

The regulation specifies that “prompt” issuance of tax donation receipts means no later than five (5) business days after the donation is made. 

Sending of donations to charities (Section 320)

The time in which platforms must disburse donations to recipient charities varies based on the Solicitation Type at issue, and whether the recipient charity consented or not to being included on the platform. 

Accounting of donations to charities (Section 321)

Certain information about the donations, including fees, and the activities that generated the donation, must be provided by platforms to recipient charities with the donated funds.

Information for Donors Regarding Donations Sent (Section 322)

Platforms must allow donors/users to find out whether their donations (or donations generated by their purchases or other activity) reached the recipient charity or alternative charity. 

Want to know more?

Previous articles covering the new California law governing charitable fundraising platforms provide additional information on its requirements. 

California Enacts New Law to Regulate Charitable Fundraising Platforms

Key Provisions of California Assembly Bill 488 Regulating Charitable Fundraising Platforms Take Effect January 1, 2023

How Does California’s New Fundraising Platform Law Affect Cause Marketing?

Has Your Organization been Blocked by Charitable Fundraising Platforms? It is likely due to California’s new “Good Standing” requirement.

This article is for informational purposes only and is not intended to be an exhaustive summary of the new requirements.  Any persons or entities affected by the new law and regulations should consult with their legal counsel to ensure full compliance with the new requirements.

The post California Issues Final Regulations Governing Charitable Fundraising Platforms appeared first on Perlman & Perlman.

CALIFORNIA

Due to recent changes in California’s law, charities that are delinquent with the California Attorney General (AG), California Franchise Tax Board (FTB) or the Internal Revenue Service (IRS) are effectively being shut out of charitable fundraising platforms, including, but not limited to, Facebook and Blackbaud.  The law prohibits fundraising platforms from allowing charities that are delinquent with any of these agencies to fundraise or receive donations in California via their platform. This effectively shuts down a significant amount of online fundraising activities not just in California, but in all states, due to platforms’ compliance with the California law.  Moreover, since the agencies may take three to six months or even longer to process and confirm the correction of the delinquencies, this change is seriously impacting many charities’ ability to fundraise for an extended period of time.  

Delinquencies with the AG’s Registry of Charities and Fundraisers typically occur when a charity’s registration has expired and it has not submitted renewal documents, or because a deficiency has been identified upon the state’s review of the renewal registration.  In either instance, the delinquency status is effective immediately. The AG has changed its procedure and is no longer sending notices of deficiency with time to cure. Similarly, missed filings with the FTB will cause a charity to be included on its revocation list, which requires the platforms to shut down online solicitation or receipt of donations for the charity in California. 

It is imperative that all filing requirements in California are timely, complete, and accurately met.  If your organization is a California charitable corporation, or conducting operations in the State, it must submit annual filings with the FTB in addition to the annual filings with the AG’s Registry of Charities and Fundraisers.  All charities which solicit contributions in California, unless exempt, have an annual registration requirement with the AG. 

For more information on the California law, please see Has Your Organization Been Blocked by Charitable Fundraising Platforms? It is likely due to California’s new “Good Standing” requirement.

TENNESSEE

Effective July 1, 2024, charities soliciting in Tennessee must file a copy of any applicable commercial co-venturer agreement, along with a state form, at least five (5) business days before the promotion begins in the state.  Applicable commercial co-venturer agreements include those in which the territory of the promotion includes Tennessee.  

UTAH

Following a recent change to Utah’s Charitable Solicitation Law, effective May 1, 2024, charitable organizations will no longer be required to submit an annual registration with the Utah Division of Consumer Protection.  To this end, we have been notified by the Consumer Protection Division that as of March 29, 2024, it is no longer accepting registrations from charitable organizations.  With the elimination of this charitable registration requirement, Utah has also eliminated the requirement to pre-notify the state about charitable sales promotions taking place in Utah.  

The changes in Utah law also require Utah nonprofit corporations or foreign nonprofit corporations doing business in Utah to file their most recent Form 990 as part of their annual corporate registration filing process, unless the organization is exempt from filing a 990 with the IRS. This change will take effect in January 2025 and the Division will promulgate new Administrative Rules reflecting this change. 

Please see our recently updated charts

Charitable Solicitation Registration and/or Filing Requirements

Charity State Registration, Reporting and Contract Filing Obligations Relating to Commercial Co-venturer (CCV) Promotions

The post Charitable Registration Filing Updates for California, Tennessee, and Utah 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. 

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State of the Nonprofit Sector 

Tim Delaney, President & CEO, and Donna Murray-Brown, Vice President of Strategy and Development at the National Council of Nonprofits, presented an overview of the charitable community.  Included in their discussion was the current scale and scope of the sector, external threats to its sustainability, and ideas for how state charity regulators and members of the sector can continue to work together to better protect and serve the community.  

External threats include an increased demand for nonprofit services in an environment of increased costs and reduced contributions.  At the same time, nonprofits are faced with the antiquated and broken systems of government contracts and grants while the sector is experiencing a workforce shortage.  This has weakened the delivery of services to the public.  

Charity regulators and nonprofits are encouraged to work together to protect and serve the public by focusing their efforts on preventing bad actors from misuse of the charitable nonprofit system and on stopping scam artists from masquerading as charitable nonprofits. 

Lessons in Nonprofit Governance from the Big and Small Screen

Gene Takagi, principal of Neo Law Group, entertained participants with key points about “good and not-so-good governance” by quoting characters from popular television shows and movies. My favorites included Ted Lasso (“Believe”), Captain America (“How do we do this? As a team!”), Spiderman (“With great power comes great responsibility”) and Dumbledore (“it takes a great deal of bravery to stand up to your enemies, but a great deal more to stand up to your friends”).   Gene used the quotes to walk participants through key issues of the duties of care and loyalty, delegation, trust and reliance, board composition and vacancies, succession planning, prohibition of private benefits, as well as governance and charitable solicitations.  For more detail, read Gene’s Lessons in Nonprofit Governance from the Screen.

Purpose Driven Board Leadership

Dani Robbins, Director of Governance Strategy at Board Source, delved into a new way of framing nonprofit board members’ roles through a discussion about purpose-driven board leadership which prioritizes purpose and mission over the organization’s needs.  In summary, this framework is premised upon four principles. 

Purpose Before Organization 

Prioritizing the organization’s purpose and the problems it addresses versus the organization as an entity by reframing the “duty of loyalty as the center of its own gravity” to how the organization can best steward its resources to serve its purpose.

Respect for Ecosystem 

Acknowledgment that because an organization’s actions have an impact on the ecosystem it requires an obligation to consider the organization’s actions as part of its decision-making processes. 

Equity Mindset 

Commitment to advancing equitable outcomes, avoiding ways in which the organization’s work may reinforce systemic inequities and being willing to break down barriers that may have been created by the organization in the past. This must be applied across a number of areas including allocation of the organization’s resources, programmatic oversight, and creating a diverse and inclusive board. 

Authorized Voice and Power 

Recognition that the organization’s power and voice must be informed and authorized by those who are impacted by the organization’s work, which requires decisions to be made in the context of real understanding of community assets, needs, preferences, and aspirations, listening to community needs and experiences, and sharing power by inviting individuals to the board who have relevant lived experiences.  

Reframing for purpose requires a shift in focus from the board’s traditional position of operating in service to the organization to a primary responsibility for sustaining the organization and its ability to exist in service to its mission and to its service for the public good with a primary responsibility to steward organizational capacity such that it maximizes positive effect to that core purpose. 

The Uses of Different Business Structures by Charities

While the agenda promised a discussion of “some of the latest developments in what can be complex arrangements and structures in the section,” this session focused on just one – the Versatile LLC. Sharon Lincoln, Partner with Casner & Edwards, LLC, shared her insights about the Versatile LLC in the session “What Board Members and State Regulators Need to Know”.  

She explained that a limited liability company (LLC) is the U.S. version of a private limited company, one that provides flexible tax treatment and limited liability for its members.  It offers three options for the tax classification -corporation, partnership, or disregarded entity.  Ms. Casner then focused her discussion on answering the following three questions. 

Can an LLC operate for philanthropic purposes? 

The short answer is yes, but it requires a review and understanding of statutory considerations, the LLC’s certificate of formation and operating agreement, as well as who or what are the members of the LLC and how the activities of the LLC will be funded.

Can an LLC operate as or be a 501(c)(3) organization? 

A single-member LLC may be a subsidiary of a 501(c)(3) organization (see also IRS Notice 2021-56 which permits an LLC to apply on its own for recognition as a 501(c)(3) under certain circumstances). 

When can an LLC be useful to a charity?

This answer depended upon the various forms of corporation, partnership, or disregarded entity.

The discussion concluded with some state-specific considerations, such as what purposes the LLC statute permits and charity bureau oversight in related-party transactions, mergers, asset transfers and dissolution. 

State Update

Unfortunately, noticeably lacking in this year’s conference was a robust discussion about the state regulators’ enforcement efforts.  Only twenty minutes of the five hours allocated were devoted to sharing enforcement updates.  The Annual Report on State Enforcement and Regulation, which highlights enforcement actions in the areas of deceptive solicitations, governance and trusts and estates, as well as summarizes outreach efforts and published guidance, transaction reviews and updates regarding regulations and legislation was provided with the conference materials.  It was not, however, a substitute for the usual color and insight that have been shared with conference attendees in the past, a key incentive for attendance by members of the sector. 

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What is CPA?

The Colorado Privacy Act (CPA) is a state law that gives consumers the right to know what personal information is being collected about them, why it is being collected, and how it will be used. The CPA also gives consumers the right to control how their personal information is used and to remove their personal information.

Who Should Care?

The CPA applies to any organization that controls or processes personal data regarding 100,000 Colorado consumers or derives revenue or receives a discount on the price of goods or services from the sale of personal data and processes the personal data of 25,000 Colorado consumers or more. The CPA defines ‘consumers’ as Colorado residents acting in their individual or household contexts. Excluded from that definition are individuals acting in a commercial or employment context. For nonprofit organizations “consumers” includes donors and visitors to their websites. 

What Consumer Rights Are Granted By the CPA?

The CPA grants Colorado consumers various privacy protection rights related to their personally identifiable information, and the opportunity to learn more about the types of data being collected, shared, and sold. These rights include:

• The right to opt out of the sale of personal data.
• The right to opt out of the collection or use of personal data for targeted advertising or various types of profiling.
• The right to know whether an organization is processing or collecting their personal data.
• The right to access personal data an organization has collected.
• The right to delete personal data an organization has collected.
• The right to correct the data an organization has collected.
• The right to download a copy of their personal data.
• The right to transfer their data from one platform to another (up to two times per year).

How Can My Organization Comply with CPA?

To comply with the CPA, organizations must provide consumers with clear privacy notices and conduct data protection assessments for any personal data processing that presents a heightened risk of harm to consumers. What qualifies as a “heightened risk” is not clearly delineated, however. Generally speaking, organizations which are subject to the CPA should:

• Update their privacy policy to address the CPA requirements, including the “categories” of personal data processed. 
• Update their contracts with third parties (i.e., anyone that “processes” personal data on their behalf) to ensure that they comply with the CPA. The CPA requires that these contracts include (i) processing instructions, including the nature and purpose of the processing; (ii) the type of personal data and duration of the processing; and (iii) obligations to delete or return all personal data at the end of the services period.
• Ensure that they are implementing appropriate physical, organizational and technical cybersecurity safeguards and depending on the nature and use of the data collected, conduct a data-protection assessment.
• Create a process to allow consumers to submit requests and receive information regarding their use of consumers’ personal data. Generally, organizations have 45 days to respond to such requests. 
• Provide clear and conspicuous notice of the right to opt out of targeted advertising and sales of personal data. 
• Establish the technical specifications of a user-selected universal opt-out mechanism by July 1, 2024. 
• Obtain consumers’ informed consent before collecting sensitive data. 
• Establish a procedure to determine when to conduct a data protection assessment.

Universal Opt-Out 

In an interesting twist, the CPA will make Colorado the first state to explicitly require companies to honor a universal opt-out signal. Starting July 1, 2024, organizations must allow individuals to opt out of targeted advertisements and/or the sale of personal data through a universal opt-out mechanism that meets the technical specifications established by the State Attorney General (AG).  I’ll explore this in detail in a future article. 

Conclusion 

While many of the rights and obligations set forth in the CPA should be familiar to organizations that process personal data, the CPA includes some additional requirements not seen in the other state data privacy laws. These include new consent requirements regarding sensitive data and a universal opt-out, as well as requirements around data processing and data privacy.  Organizations should review their data privacy policies and procedures with legal counsel to ensure compliance with the CPA.

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Expansion of Electronic Consent

Under the N-PCL, members and directors are permitted to take action without a meeting by unanimous written consent, which consent can be either written or electronic. (See N-PCL §§ 614(a) and 708(b)) Under the previous law, electronic consent was limited to electronic mail, otherwise known as e-mail.

To keep up with emerging changes in technology, the legislation allows members and directors to act without a meeting by unanimous consent undertaken by “other electronic means” in addition to email. This means that director or member consent can also be provided through other technology methods besides e-mail, such as the use of electronic portals that facilitate the collection of votes.

Board Vacancies

Under the previous law, when a director was elected or appointed to fill a vacancy in an unexpired term, that director was only able to fill that vacancy until the organization’s next annual meeting. (See N-PCL § 705(c)) This provision was often impractical for organizations with classified boards in which board members serve for staggered, multi-year terms, and the seat of the director whose vacancy was being filled was not set to expire at the next annual meeting.

The legislation provides increased flexibility in selecting terms for replacement directors. A director elected to fill a vacancy in an unexpired term can now hold office until the end of the term that the director was elected or appointed to fill, or for a different term determined by the board which ends at an annual meeting. These changes give boards more leeway to select a different term when filling a vacancy that better aligns with the organization’s specific objectives.

Clarification to Board Quorums

Under the N-PCL, any action taken by the board of directors requires a quorum to be present at the time of the vote.  (See N-PCL § 708(d)) The amendment clarifies that directors who are present at a meeting but not at the time of a vote due to a conflict of interest or related party transaction are deemed present at the time of the vote in determining if there is a quorum.

Takeaway

These latest amendments to the N-PCL help to modernize and update the laws around not-for-profit governance structures in a positive way. New York not-for-profit organizations may want to consider updating their certificate of incorporation and/or by-laws to reflect these changes, which may help them streamline their governance procedures.

The post New York Modernizes Nonprofit Law by Enacting Technical Amendments 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.”

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What is a whistleblower policy?

A whistleblower policy is an organizational policy that encourages workers to report suspected illegal or improper activity within the organization while protecting workers from retaliation for making such reports.

Is our nonprofit required to have a whistleblower policy?

New York nonprofits that have at least twenty employees and annual revenues of $1 million or more are required to have a whistleblower policy under Section 715-b of the New York Not-for-Profit Corporation Law.

Keep in mind that whistleblowers have significant protections under other federal, state, and local laws, even if those laws do not explicitly require adoption of a whistleblower policy. For example, Section 1107 of the American Competitiveness and Corporate Accountability Act of 2002 (more commonly known as the Sarbanes-Oxley Act) makes it a crime to intentionally retaliate against any individual, “including interference with the[ir] lawful employment or livelihood,”  for providing law enforcement with truthful information relating to the commission or possible commission of any federal offense. Many states and municipalities have other laws that protect whistleblowers from retaliation.

A whistleblower policy helps to educate management and workers about these legal protections. It is a helpful tool in promoting a culture of lawfulness and integrity. By explicitly stating management’s commitment to protect whistleblowers from retaliation and laying out a process for reporting illegal or improper activity, a whistleblower policy encourages workers to communicate their concerns to the employer in good faith without fear of reprisal. Adopting a whistleblower policy is a recommended best practice for nonprofit employers.

What are the key changes to New York’s whistleblower protections?

Effective January 26, 2022, New York amended Section 740 of the New York Labor Law, which protects workers who engage in whistleblowing activity from retaliation by their employers.¹ The amendments expanded the classes of protected workers, the types of protected whistleblower actions, the types of employment-related actions that are considered illegal retaliation, the time frame for individuals to file a retaliation claim, and the potential penalties for employers who do retaliate against whistleblowers. Below is a summary of some of the key changes.

1. Protected Individuals. The prior law appeared to protect current employees only. The amended law protects current employees, former employees, and independent contractors from retaliation for whistleblowing activity.

2. Protected Actions. Under the prior law, whistleblower protections only applied to disclosures or threats of disclosure that involved an actual violation of a law, rule, or regulation and presented a substantial danger to the public health or safety or constituted health care fraud. There were many types of illegal activities that did not fit within this standard, leaving employees who reported such activities at risk of retaliation. The prior law also stipulated that whistleblower protections did not apply if an employee disclosed an illegal activity, policy, or practice to a public body without first notifying the employer and giving the employer a reasonable opportunity to correct the problem.

The amended law changes these standards. An employer may not retaliate against a protected individual for doing any of the following:

• Disclosing or threatening to disclose to a supervisor or public body an activity, policy, or practice of the employer that the individual “reasonably believes” violates a law, rule, or regulation or poses a substantial and specific danger to the public health or safety;
• Providing information to, or testifying before, any public body conducting an investigation into any such activity, policy, or practice by the employer; or
• Objecting to, or refusing to participate in any such activity, policy, or practice.
• Protected individuals also need only make a “good faith effort” to report the activity, policy, or practice to the employer prior to notifying a public body. No employer notification is required at all when:
  • There is an imminent and serious danger to the public health or safety;
  • The whistleblower reasonably believes that reporting to the supervisor would result in a destruction of evidence or other concealment of the activity, policy, or practice;
  • The activity, policy, or practice could reasonably be expected to lead to endangering the welfare of a minor;
  • The whistleblower reasonably believes that reporting to the supervisor would result in physical harm to the whistleblower or any other person; or
  • The whistleblower reasonably believes that the supervisor is already aware of the activity, policy, or practice and will not correct it. 

3. Prohibited Retaliation. The amended law expands the definition of unlawful retaliation to mean any adverse action taken by an employer or the employer’s agent “to discharge, threaten, penalize, or in any other manner discriminate against” a protected individual who engages in protected whistleblowing activity. This includes:

• Actual or threatened adverse employment actions against a protected individual in the terms and conditions of employment, including but not limited to discharge, suspension, or demotion;
• Actions or threats to take actions that would adversely impact a former employee’s current or future employment; or
• Contacting or threatening to contact United States immigration authorities or otherwise reporting or threatening to report a protected individual’s suspected citizenship or immigration status or the suspected citizenship or immigration status of a protected individual’s family or household member. 

4. Increased Filing Time, Right to Jury Trial, and Penalties for Retaliation Claims. The statute of limitations for filing a retaliation claim under Section 740 is increased from one year to two years. Parties are entitled to a jury trial. A successful retaliation claim against an employer may result in any of the following penalties:

• An injunction against the employer;
• Reinstatement of the whistleblower to their same position or an equivalent position, or front pay in lieu of reinstatement;
• Reinstatement of full fringe benefits and seniority rights;
• Compensation for lost wages, benefits, and other remuneration;
• Payment by the employer of reasonable costs, disbursements, and attorneys’ fees;
• A civil penalty for the employer of up to $10,000; and/or
• Payment of punitive damages by the employer, if the violation was willful, malicious, or wanton. 

5. Employer Notice Requirement. Employers are required to inform protected individuals of their protections, rights, and obligations under the law by posting a notice “conspicuously in easily accessible and well-lighted places customarily frequented by employees and applicants for employment.” The New York State Department of Labor has issued a model notice that employers can post. Employers must also provide an electronic copy of the whistleblower notice to protected individuals via email and/or posting on their website.

1 In 2022, New York also amended Section 741 of the Labor Law, which applies to whistleblower complaints against health care employers.

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