When Is It Okay for Nonprofits to Send Text Messages?

Nonprofits are allowed to send non-commercial text messages—such as event reminders, program updates, or donation appeals—if the recipient has given general permission to be contacted by phone. This type of permission, known as “implied consent,” is usually obtained when someone voluntarily provides their phone number during interactions like registering for an event, filling out a donation form, or speaking with a staff member, and agrees to be contacted at that phone number.

The nonprofit may rely on this implied consent as long as the message relates to the organization’s charitable mission. It also applies to third parties acting on behalf of the organization, so long as the texts remain non-commercial in nature (e.g., no promoting the sales of goods or services unrelated to the organization’s mission).

What About the National Do Not Call Registry?

While for-profit businesses are barred from contacting individuals listed on the National Do Not Call Registry, tax-exempt nonprofits are generally allowed to do so, provided they are sending non-commercial messages and have obtained implied consent. This is one area where nonprofits have greater flexibility than businesses.

Opt-Out Requirements

Nonprofits must include a way for recipients to opt out of future messages. Opt-out instructions should be provided when first contacting the individual, and again at regular intervals (guidelines suggest providing opt-out instructions at least once per month). The process must be automated and interactive—for example, allowing someone to unsubscribe by replying “STOP.”

Once someone opts out, the organization is required to honor that request within 10 business days. Failing to do so could result in legal liability.

Best Practices to Stay Compliant

Even when operating within the bounds of the law, nonprofits can take additional steps to protect their reputation and maintain supporter goodwill. To that end, it’s wise to:

• Clearly identify the organization in every message.
• Keep accurate records of how and when consent was obtained and opt-out activity.
• Avoid texting recipients before 8:00 a.m. or after 9:00 p.m. in their local time zone.
• Conduct periodic reviews of your texting practices to ensure they align with current TCPA guidance. 
• Consider implementing a double opt-in process. While not required by law, it adds an extra layer of clarity and consent by asking the individual to confirm their interest, often by replying “YES”, before receiving messages.

International Considerations

The U.S. has relatively relaxed texting rules compared to many other countries. If your organization communicates with individuals outside the United States, it’s essential to be aware that most jurisdictions require explicit opt-in consent before sending any text messages. Be sure to review applicable laws and adjust your practices accordingly.

Conclusion

Texting can be a valuable tool for nonprofit engagement—but only when done thoughtfully and lawfully. By understanding the rules around consent, honoring opt-out requests promptly, and adopting a few sensible best practices, your organization can use texting to build stronger relationships and further its mission, without crossing legal lines.

Let your messages do good, not cause trouble.

The post Texting for Good, Not Trouble: A Legal Guide for Nonprofits appeared first on Perlman & Perlman.

Which Technologies Have Been Targeted? 

Meta Pixel 
Recently, one of the most popular topics related to wiretapping cases involves using the Meta Pixel tracking tool. The Meta Pixel is a free piece of code provided by Meta that organizations can implement on their websites to monitor user activity. 

Chatbots 
Chatbots are programs or software that automatically respond to messages sent via a website’s chat feature, emails, social media messages, or text messages. 

Session Replay
Session replay technologies accurately reproduce a visitor’s interactions on a website or app as experienced by the visitor.

What’s the Problem

Meta Pixels have become a prominent target of scrutiny, so let’s use this technology as an example. Users have expressed concerns that their website activities were shared with Meta without their knowledge or consent. As a result, users allege that when organizations implement these Pixels, they violate the California Invasion of Privacy Act (CIPA) and other state privacy and consumer protection laws. In essence, they argue that organizations are acting as instigators or promoters of third-party wiretapping, as seen in the case of Meta.

What to Do to Reduce Risk?

Organizations have various defenses they can use to counter these claims. To reduce risks, website owners should take the following actions:

Assess Your Website Regularly
Regularly evaluate the tools you use on your websites. Are you utilizing Meta Pixels, chatbots, or session replay technology? Determining if the data collected complies with relevant data privacy laws is essential. Conducting these assessments frequently is crucial for identifying potential privacy risks and taking proactive measures to address them. Additionally, consider implementing a review process that includes discussions with your legal counsel before adding new tracking tools to your website.

Update Website Terms of Use and Privacy Policies
When it comes to online policies, I often advise the following: “Do what you say and say what you do.” Transparency is essential to ensure compliance with consumer and privacy laws. Your website’s terms of use and privacy policies should clearly disclose the types of tracking technologies used, the data collected, and how that data is utilized.

Obtain Consent; Provide Opt-Out Options 
Depending on the technologies used, consent may need to be collected through banners, pop-up notices, and other methods. For instance, if your website includes chatbots, be sure to include a disclosure at the first prompt of the chat feature.

Additionally, consider giving users options to manage their privacy settings. This could include the ability to opt out of certain types of tracking, adjust cookie preferences, and access a dedicated link for questions and requests related to their privacy settings.

Addressing Dispute Procedures
Most dispute provisions typically include a prohibition against “class action” lawsuits. Historically, this approach has benefited organizations, based on the assumption that they would not face more than a handful of claims. However, there is a new trend emerging with wiretapping claims, where plaintiff attorneys are gathering aggrieved users “en masse” and overwhelming organizations with hundreds, and sometimes thousands, of demands for arbitration.

One significant issue is that organizations usually bear most, if not all, the fees associated with these arbitration proceedings. These costs can escalate quickly. For instance, in a case against TurboTax, a judge estimated that Intuit’s potential arbitration costs might reach at least $128 million—approximately $3,200 for each of the 40,000 clients represented by the law firm involved in mass arbitration.

The key takeaway is that organizations should reconsider their approach to dispute resolution. It would be prudent to include a “mass filing” requirement in their provisions. This would prevent multiple claims from being filed separately, thereby reducing the leverage of plaintiffs in these scenarios.

Review Third Party Agreements 
Review your agreements with third-party technology providers to ensure that they have appropriate limitations on their access to and use of any personal information collected on your website. 

Train Employees on Tracking Technologies and Data Privacy
Educate your team on the importance of data privacy and their role in safeguarding user information. Provide training on best practices for handling data, responding to user inquiries, and complying with privacy regulations.

Conclusion

Staying informed about evolving legal interpretations and court decisions in this area.

As privacy litigation continues to evolve, organizations must remain vigilant and adapt their practices to protect user privacy while navigating the complex legal landscape surrounding online tracking technologies.

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High-Level Considerations

Before adopting AI widely, organizations should consider its potential implications. While AI can offer significant benefits, it also presents challenges and ethical concerns, as discussed below. 

Training
As a new technology, there will likely be a learning curve. Organizational leaders should educate themselves on AI to make informed decisions about integrating it. Staff must be trained to use it properly in accordance with policy and guidelines.

Data Privacy
AI relies heavily on data, and managing sensitive donor and beneficiary information raises ethical and privacy concerns. Nonprofits must adhere to data privacy laws and implement robust security measures to safeguard sensitive information while upholding donor trust.

Data Quality and Bias
AI algorithms mirror the data they are trained on, which may contain bias and perpetuate discrimination and inequality. As the saying goes, “garbage in, garbage out.” It’s essential to exercise caution when making decisions based on AI data analysis to ensure that ethical AI practices are followed.

Impact Assessment
It is important to continuously assess how AI impacts the organization’s programs, services, and beneficiaries. This is vital to ensure that AI is being effectively implemented and utilized. Since AI is constantly evolving, it may be necessary to adjust strategies if the technology is not achieving its intended outcomes.

Risk Management
AI presents potential risks, such as damage to reputation from AI errors. Another risk is security breaches from hackers targeting AI. An organization’s “Incident Response Plan” should address these risks posed by AI.

Best Practice – Adopt an AI Governance Framework

Like an information governance policy, an AI governance policy will guide organizations in adopting and using AI, providing guideposts for its responsible and ethical use. 

The policy framework should include the following elements:

1. Ensure the AI policy aligns with the nonprofit’s mission and core values. Clearly define the policy’s purpose and scope, including the AI initiatives and applications covered.
2. Remember to address “change management” issues—ensuring employees understand that AI will help them work more creatively and strategically, not take their jobs.
3. Define the roles and responsibilities of individuals, board committees, and staff members responsible for oversight and implementation.
4. Plan to train the board and staff on AI ethics, responsible AI practices, and the organization’s AI policy.
5. Explain how the organization will interact with the community, including donors, volunteers, funders, and vendors. Collect feedback and address their concerns about AI initiatives.
6. Outline the process for reviewing, updating, and approving changes to the AI policy, involving relevant parties as necessary.
7. Articulate the ethical principles that guide AI initiatives, such as fairness, transparency, accountability, privacy, and non-discrimination. Emphasize the organization’s commitment to identifying and mitigating bias in AI algorithms and data sources.
8. Address how the organization will ensure compliance with AI-related laws and regulations, including data protection laws, and describe how the organization stays informed about changes in legal requirements.
9. Develop a timeline for the AI policy and initiative implementation stages. It’s advisable to take small steps.
   
   
   

The Don’ts of AI

One of artificial intelligence’s (AI)  main limitations is its lack of “consciousness,” which can result in inaccurate or even entirely false information. A significant concern is AI’s ability, and some might argue its tendency, to create realistic images and generate fake news or stories. Furthermore, like humans, AI can have inherent biases based on the data it receives, leading to skewed responses and analyses. If the input data contains biases, these biases will also be present in the output. Considering this, it’s essential for nonprofits and all users and organizations to be mindful of how they utilize AI. Here are some practical guidelines.

Don’t Plagiarize
AI systems are constantly improving, but we should keep in mind that AI-generated content may include inaccuracies or contradictions, which can be seen as ‘hallucinations’. Since AI relies on existing content or generates its own, it’s best to avoid directly copying and pasting whatever it creates. It’s also important to consider the risk of unintentionally using copyrighted content, especially in the case of images, which can violate third-party intellectual property rights.

Check the Facts
Similar to the previous comment, it is essential to always verify the truth and accuracy of AI-generated content.

Caution with Search Engine Optimization (SEO)
Google and other popular search engines can detect AI-generated content and may flag it as spam, negatively impacting search engine ranking efforts.

Keep Control of “Brand Voice”
While AI can provide helpful content suggestions and even generate new ideas for brand positioning, it cannot replace the brand expertise and organizational knowledge of your internal and external resources.

Know your License!
It’s important to remember that AI platforms have specific licenses and terms of use that govern their usage. These licenses offer different rights and limitations, and some may not allow for commercial use of the AI output. This means that if an organization uses the AI output for commercial purposes, they are violating the license. Before using AI internally, it’s crucial to carefully read the applicable license and ensure that your planned use aligns with the rights granted to you.

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

Term and Termination

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

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

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

Code of Conduct

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

Intellectual Property

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

Compensation

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

Review and Approval of Content

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

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

FTC Rules 

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

Representations and Warranties

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

Templates for Efficiency

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

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

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Winston Churchill once said, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”. As AI becomes more advanced and accessible, it has shown its potential to radically transform how nonprofits operate, helping them to boost efficiency and optimize fundraising. As with all new technology, the promise of increased efficiency certainly comes with both risks and rewards. In this article I discuss the current state of AI, and ways in which AI is being adopted and utilized by nonprofit organizations.  

Current State

In general terms, AI systems work by ingesting large amounts of data and analyzing it for correlations and patterns, then using these patterns to make predictions about future states. A recent study conducted by unite.ai found that 89% of nonprofit organizations believe that AI will improve efficiency, but only 28% say they currently use it. This low adoption rate is not surprising as the practical uses of AI are still being developed. But even in its infancy, AI provides a variety of useful tools and benefits.

How AI is Helping, and Can Help, Nonprofits 

1. Screening and Predicting Donor Behavior

AI analyzes data to screen prospective donors, provide segmentation and create predictive models about their behavior. Inputting AI data about past and potential donors assists nonprofits to identify new donor sources, gauge how much they are likely to give, and offer strategies for engagement. AI tools can also help analyze strategic donor profiles to suggest personalized engagement techniques such as A/B testing for different segments of donors, thus refining outreach strategies continuously. AI creates personalized emails and pitch letters by analyzing the organization’s information and data on previous and potential donors. 

2. Automating Routine Tasks 

AI automates routine tasks, freeing up time to focus on more important work and critical tasks while reducing the risk of human error. Examples include reviewing and updating donor prospect profiles, reading, and responding to incoming communications, and sending internal and external reminders.

3. Managing Communications, Social Media Engagement & Programmatic Support 

Generative AI learns patterns and structures in order to generate text, images, media, marketing copy, newsletters, and other communication material. Generative AI tools such as ChatGPT, Bard, and Bing generate draft press releases, social media posts, marketing copy, newsletters, and other communications material. AI-powered social media management tools can be used to analyze social media trends, write post text, image captions, and hashtags, and monitor engagement on multiple platforms. 

4. Managing Data and Evaluating Outcomes; Operational Support

AI-powered customer relationship management software and its analytic capabilities enable nonprofits to identify the most effective interventions and optimize resources. For example, AI can analyze financial data and make suggestions for budgetary planning. AI tools also make the process of managing data “at scale” a lot easier. AI is useful in evaluating programs, analyzing data to identify program outcomes, assess effectiveness, understand sentiment around the programs, and identify potential improvements.

5. Customer Service

Chatbots can handle inbound queries and requests, simulating human conversation by using natural language processing. These interactive AI assistants mimic human conversation and offer pop-up assistance to the user on a nonprofit’s website. This provides customer service and resources 24/7. AI provides “predictive analytics” by analyzing patterns of donor and website visitor behavior.  

6. Evaluating Programs 

AI helps organizations evaluate programs by analyzing output data to identify program outcomes, assess effectiveness, understand sentiment around the programs, and identify potential improvements. Nonprofits can then use these insights to make programming more efficient and effective for those who participate. 

7. Fraud Detection; Internal Controls

AI can help nonprofits protect financial transactions and sensitive donor information. For example, AI can analyze workflows and access privileges to ensure that authorized users’ duties and controls remain separate to prevent fraud. Similarly, it can automatically alert decision-makers when someone requests approval for a transaction. AI tools can be programmed to monitor suspicious activities or notice language that may indicate fraudulent activities in emails, chat logs, or submitted forms.   

AI is Here to Stay

It’s a certainty that AI is here to stay, and its impact on how we live and work will be transformational. In my next article, I will provide high-level considerations that organizations should address prior to adopting AI on a broad level. I’ll recommend best practices to adopt when employing AI, as well as a few “don’ts” for its use. Stay tuned!

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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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Data breaches are the leading threat in today’s digital world, with a new cyberattack occurring approximately every 39 seconds. Non-profit organizations are increasingly being targeted by cybercriminals, not only because of the wealth of data they possess, but because they simply do not take the same precautions nor employ the same resources as their for-profit counterparts.  In fact, small-to-medium-sized organizations are actually more likely to be targeted by hackers for that very reason.

The financial cost of managing a data breach is well documented.  A recent study estimated the average cost of a breech in 2021 at 4.24 million dollars, a 10% rise from 2019.  Although less tangible, the potential loss of trust of the nonprofit’s donors, volunteers and the community can be significant. Such a loss is not only difficult to restore, it can also affect fundraising activities, volunteer engagement, and partnerships with other organizations for years to come.

For organizations seeking to decrease their cybersecurity vulnerabilities, a good first step is to obtain a comprehensive understanding of the current risk environment. For example, what kind of data does your organization collect, store, share and transmit?  Where and how is the data being stored, and who has access to the data?  How does the organization transmit data? (Data transmission is often one of the most significant vulnerabilities; any time data is sent from one location to another, there is a risk of interception.) During the COVID-19 pandemic, the risk of insecure data transfer has increased as more and more individuals have begun accessing critical data from personal mobile devices or using personal digital storage solutions.  Assessing these weak points can be achieved through a data-privacy audit whereby information gathered is then used to strengthen the organization’s cyber-readiness.

Additionally, organizations should consider implementing the following measures:

Implement (Or Update) Organization-Wide Cybersecurity Policies
The first step in ensuring the security of an organization’s data is to have consistent, documented cybersecurity policies in place for all employees to follow.

Provide Ongoing Cybersecurity Training
Next, all individuals within the organization who have access to secure data should receive annual cybersecurity training.

Focus Your Cybersecurity Efforts/Revaluate Third-Party Vendors
Focus on security controls that would be the most effective based on your specific needs and resources. And as many breaches occur from the actions/omissions of third-party vendors who store an organizations data, review the legal terms of all such agreements to make sure there are appropriate terms and conditions to protect your organization (read Are You Protected? Five Points to Include in Every Technology Agreement).

Create A Data Retention and Deletion Policy
Most organizations collect more data than they need, and hold the data longer than necessary or practical.  The more data your organization stores, the greater the liability if a breach occurs.  It is imperative that organizations adopt a policy that dictates the types of data to be stored, and when/how that data is deleted when no longer relevant.

Prepare for the Unexpected
Every organization needs a plan for what to do in case of a data breach. An incident response can help organizations plan to comply with applicable laws and regulations, and launch a rapid and coordinated response that will mitigate the damaging consequences of a data breach.  On a side note, the recently enacted NY SHIELD Act requires organizations that collect information from NY residents to have both a Data Retention and Deletion policy as well as an Incident Response plan in place, among other requirements (read The SHIELD Act – A New York State of Mind … and Privacy).

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Within a week, the group created the ConstitutionDAO, organized its followers on Discord (a messaging and community platform), and raised roughly $47 million in virtual currency.⁴ Armed with their new war chest, the group bid on, but ultimately failed to win, the Sotheby’s auction, losing out to a hedge fund billionaire who purchased the copy of the Constitution for $43.2 million (the Constitution DAO had withheld some funds to cover costs associated with winning the auction).⁵

Following their loss, the creators of the group were faced with what to do with the virtual currency sitting in the DAO’s treasury. Many of the community members sought refunds, only to learn that the transaction costs (also known as gas fees) would eat up much of their original contribution.⁶ Ultimately, the ConstitutionDAO’s founders decided to shut it down.⁷ The token issued in connection with the project, originally intended to be used to allow holders to vote on what the DAO would do in the future, lives on, with some holders still hoping to profit.⁸

What if the ConstitutionDAO had succeeded? Who would have “owned” the copy of the Constitution the group would have purchased? In a later interview one of the founders of ConstitutionDAO, Jonah Erlich, disclosed that the group had partnered with a traditional nonprofit organization that would have had legal custody of the Constitution.⁹ The fact that this new type of organization would be reliant on a traditional nonprofit provides excellent insight into the emerging world of DAOs. It also gives us an entry point to examine this new structure.

WHAT ARE DAOS?

In a traditional corporation or limited liability company, the organization is formed by filing paperwork with a government office, typically a state’s Department of State. By creating a legal entity, the people behind the organization are protected from liability. When someone sues a corporation over a contract dispute or other liability, the directors, officers, employees, members, and volunteers are not liable individually. Rather, it’s the corporation that must answer for its liabilities.

In a DAO, however, there is no formal legal entity. Built using the same blockchain technologies that underly the virtual currency ecosystem, DAOs are organizations that are never incorporated in any state (with limited exceptions). The founders create the DAO, and it simply exists.

While DAOs actual structures vary, most DAOs issue a token that gives members of the DAO voting rights. Once tokens are issued, in order to make decisions, all token holders are allowed to vote. The idea, touted by DAO supporters, is that this new structure democratizes organizational decision-making, placing it in the hands of the members. An oversimplified comparison would be a for-profit company that has no paid executives or board of directors, making every decision by allowing all shareholders to vote.

Although the ConstitutionDAO is a well-known example, DAOs are proliferating in the nonprofit community. Here are a few interesting examples: DiatomDAO is raising support to protect the oceans;¹⁰ KlimaDAO hopes to speed up solutions for climate change by increasing the price of carbon assets;¹¹ Bloomeria is using NFTs to increase biodiversity; ¹² and The Regen Network is issuing a token as part of a group of entities to realign the agricultural economy with ecological health.¹³

While each of the foregoing organizations uses the language of the DAO and decentralization, they also demonstrate how the DAO community encompasses many different structures. For instance, the Regen Network is comprised of a traditional C-Corporation, a traditional 501(c)(3) public charity, and a decentralized DAO program.¹⁴ The DiatomDAO is purely a decentralized entity, “owned and directed” by its token holders (see more on this below). The ConstitutionDAO, while operated as a decentralized DAO, would have relied on a traditional 501(c)(3) public charity (one named EnDAOment¹⁵) had it won the Sotheby’s auction and needed a legal entity with which to hold the copy of the Constitution. As you can see, while many groups use the mantle of “DAO”, the term encompasses many different structures.

WHAT ARE THE BENEFITS OF DAOS?

Now that we’ve discussed what DAOs are, and seen some examples, let’s step back to consider what DAO proponents like about the structure. In theory, a pure DAO offers each supporter the opportunity to participate in the group’s decision-making. If a member of a charitable DAO wants to make a grant, they would propose it to the rest of the DAO community. The members then hold a vote. Using this structure, a DAO represents a more direct form of organizational decision-making and, for donors, more direct-action philanthropy.

Further, by avoiding any legal structure, some DAO proponents believe this new structure will give DAOs greater flexibility. Without a state’s laws dictating how decisions have to be made or how boards have to be structured, a DAO might be nimbler. Some libertarians believe that DAOs, who have no real jurisdictional nexus to any state, might even be able to avoid generally applicable laws.¹⁶

WHAT ARE THE DRAWBACKS OF DAOS?

While there is a lot to be excited about by DAOs, they use an organizational structure in its infancy, with many more questions than answers. One critique is that the voting structure adopted by most DAOs (1 token = 1 vote) replicates existing problems with shareholder structures, namely, that the larger shareholders control organizational decision-making, alienating smaller shareholders. If one person holds 60% of the DAO’s tokens and the DAO implements a 50+1% vote threshold decision-making could be even more centralized than it would be in a traditional organization with a board and executives who can counterbalance a large shareholder’s interests. The DAO community has proposed some possible solutions to this problem, such as limiting votes to one per token holder, or creating non-transferable tokens to limit token holder hoarding. Each of these solutions have drawbacks, but they could drive decision-making closer to the idealized notion of the DAO.

Another issue is the legal uncertainty of DAOs. Assume that the libertarian notion that DAOs are legally unaccountable as organizations, since they are not organized in any state nor do they have any other jurisdictional nexus with any local, state, or federal government. That might put the DAO beyond the reach of regulators and law enforcement, but it would not exempt the individuals participating in or working for the DAO, all of whom are real people subject to normal laws. Actually, the idea of a group of people running an unincorporated organization isn’t new. In New York, for instance, such an entity would be deemed an “unincorporated association.” Under longstanding common law, an unincorporated association is not legally separate from the members who comprise it.¹⁷ That means that members of a DAO could be taking on direct legal risk from their participation in the DAO. If the DAO were to breach a contract, discriminate against an employee, or cause other real-world harm, the DAO’s members might be jointly and severally liable.

It’s also an open question whether regulators will share the libertarian view that DAOs are not subject to local, state, or federal laws. It wouldn’t be surprising to see the Securities and Exchange Commission (SEC) bring an enforcement action against a DAO, given that it has already notified the Decentralized Finance (DeFi) community that it considers many DeFI products analogous to products regulated by the Commission.¹⁸ The SEC has already brought an enforcement action against a Wyoming organization operating under the guise of a DAO, albeit only after the entity sought SEC approval to register two tokens as securities.¹⁹

Finally, DAOs in the philanthropic sector face the additional hurdle of providing tax-deductibility to donors. In general, a contribution to a non-charitable intermediary doesn’t allow a donor to take a tax-deduction. The answer to that question isn’t clear²⁰ as it depends on how the entity is treated for tax-purposes, whether its distributions would otherwise qualify for a tax-deductions, and whether it is considered an agent for the donors or beneficiary charities. A person hoping for a tax-deduction should contact a tax professional to examine the particular DAO’s structure and the taxpayer’s circumstances. To date, I’m unaware of any DAO specifically advertising the deductibility of contributions to its treasury, nor having considered tax-deductibility as part of their DAO structure (except, of course, for DAOs like Endaoment and Regen Network that operate using a traditional 501(c)(3) corporate structure).

WHAT’S NEXT FOR DAOS?

Despite the novelty of and the uncertainty surrounding DAOs, their popularity is undeniable. This was exemplified by the incredible enthusiasm around ConstitutionDAO. Taking advantage of the late 2021 surge in the value of many cryptocurrencies, DAOs provide an opportunity for the crypto community to put its assets to work in novel ways, including philanthropy. While they are evolving, DAOs will likely persevere, barring regulator intervention to shut them down.  Donors and charities looking to participate in the DAO community should do so carefully, and with the benefits of advisors familiar with the DeFi and DAO space.

1 https://www.sothebys.com/en/digital-catalogues/the-constitution-of-the-united-states

2 Id.

3 https://www.theverge.com/22820563/constitution-meme-47-million-crypto-crowdfunding-blockchain-ethereum-constitution

4 https://www.constitutiondao.com/

5 https://www.vice.com/en/article/qjb8xv/hedge-fund-ceo-who-bailed-out-gamestop-short-seller-bought-the-constitution

6 https://www.theverge.com/2021/11/24/22800995/constitutiondao-refund-progress-steep-gas-fees-cryptocurrency

7 https://www.theverge.com/2021/11/23/22799192/constitutiondao-shutting-down-lost-auction-refunds

8 The latest price quote for the PEOPLE token can be found at  https://coinmarketcap.com/currencies/constitutiondao/.

9 https://www.theverge.com/22820563/constitution-meme-47-million-crypto-crowdfunding-blockchain-ethereum-constitution.

10 https://diatom.fund/

11 https://www.klimadao.finance/

12 https://bloomeria.org/

13 https://www.regen.network/

14 https://www.regen.network/faq/organization

15 https://endaoment.org/

16 For instance, in his conversation on the Deep Background podcast, Erik Voorhees argued that a DAO could avoid the difficulties of employment law because no states employment laws would apply. https://www.pushkin.fm/episode/whats-the-deal-with-decentralized-autonomous-organizations/

17 See, generally, New York Elec. C. Assn. v. Local Union No. 3, (NY Sup. Ct. 1941), available at https://casetext.com/case/new-york-elec-c-assn-v-local-union-no-3

18 https://www.sec.gov/news/statement/crenshaw-defi-20211109

19 https://www.sec.gov/news/press-release/2021-231; https://www.coindesk.com/policy/2021/11/11/sec-stops-wyoming-based-dao-from-registering-2-digital-tokens/.

20 For an excellent discussion, see Prof. Samuel Brunson’s blog post https://lawprofessors.typepad.com/nonprofit/2021/11/charitable-daos-revisited.html.

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

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

Frequently Asked Questions

Should we accept virtual currency?

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

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

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

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

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

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

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

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

How do we treat virtual currency for accounting purposes?

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

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

Questions to Ask a Fundraising Platform

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

Are you registered as a professional fundraiser?

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

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

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

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

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

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

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

Do you accept anonymous donations?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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