For most nonprofit organizations, the majority of revenue is generated by donations. Whether these funds are used to pay staff salaries or purchase equipment and supplies needed to run the programs or the back-office, donations are integral to underwriting the critical work required to support the organization’s mission.
Any responsible business must stay within the law when conducting revenue-generating activities. For nonprofits, this means taking steps to ensure that its fundraising activities are compliant with all applicable laws and regulations. This is prudent from a business perspective, especially because charitable fundraising is the activity that most state charity regulatory agencies across the country focus their oversight efforts.
Although many of the fundraising compliance requirements arise from state charitable solicitation laws, federal tax law compliance must also be addressed, given its role in determining the tax-deductibility of donations and to ensure that nonprofits aren’t inadvertently treating revenues from commercial business activities as charitable sponsorships, and thereby improperly avoiding payment of unrelated business income tax (UBIT).
What should an organization do to assess its overall fundraising compliance? Following are ten steps nonprofit organizations can take to ensure their fundraising activities are legally compliant.
1. Review your organization’s state charitable registration compliance.
- Generally, if a charitable organization is engaged in the solicitation of funds for charitable purposes, there are state rules that require registration, reporting and disclosures by the charitable organization or someone fundraising on its behalf. Forty-four (44) states and the District of Columbia have laws that regulate fundraising activities, with the specific rules and requirements varying from state to state. Most charitable organizations must register in about thirty-eight (38) states. Click here for a chart of states that require charitable organizations to register.
- Review and confirm that all fundraising contracts that need to be filed as part of the organization’s registration file are being submitted in the correct states. This includes contracts with professional fundraisers, fundraising counsels, and commercial co-venturers.
2. Ensure that the organization’s fundraisers are properly registered where applicable.
- About 42 states require professional fundraisers to register, post a surety bond, file contracts with their nonprofit clients, and file campaign financial reports.
- About 28 states require fundraising counsels to register and file contracts.
- Up to 8 states require commercial co-venturers to register and/or file a copy of any commercial co-venture contract and a campaign report per contract.
- Click here for a chart of states where professional fundraisers, fundraising counsels and commercial co-venturers are required to register.
3. Review your fundraising contracts to ensure they include any state-required language as well as other general protections (e.g., termination; indemnification; trademark license and approval rights).
- Click here for more information about professional fundraiser contract provisions.
- Click here for more information about fundraising counsel contract provisions.
- Click here for more information about commercial co-venturer contract provisions.
4. Review corporate sponsorship arrangements for qualification as a qualified sponsorship payment.
- Review the organization’s corporate sponsorship cultivation strategy to ensure that it takes into account potential UBIT implications.
5. Review other fundraising contract templates (e.g., corporate sponsorship agreements, pledge agreements, royalty agreements, etc.) to ensure that they take into account any legal considerations, including donor benefits and gift restrictions.
- Ensure that pledge agreements clearly outline the expectations of the parties with respect to the gift, including the scope of any gift restrictions, and whether the agreement is intended to be legally binding (including on successors and assigns or the donor’s estate).
- Ensure that passive licensing or royalty agreements are properly structured so that the income generated is not subject to UBIT.
6. Review compliance with state solicitation disclosures (in mailings, online, emails, etc.).
- Click here for a summary of state charitable solicitation disclosures for charities and professional fundraisers, and model disclosure statements.
- Click here for more information about advertising disclosure requirements in commercial co-venture promotions.
7. For 501(c)(3) organizations in particular, review donation tax receipts for compliance with federal tax law requirements.
- Make sure the organization complies with the special rules governing quid pro quo donations
- Be aware of special exceptions whereby donations given in exchange for low-cost token items or certain recurring membership benefits may be disregarded.
- Tax-exempt organizations other than 501(c)(3) organizations should ensure that solicitations and donation receipts clearly state that donations are not tax-deductible.
8. Review direct mail solicitation practices to ensure that the communications are truthful, accurate, and not misleading.
- Consider the best practices established by the Better Business Bureau Wise Giving Alliance with respect to accuracy of solicitation materials, specifically Standards 15 and 19.
9. Ensure that special solicitation campaigns are reviewed for compliance (matching gift campaigns, sweepstakes, raffles, etc.).
- Click here for more information regarding legal considerations in matching gift campaigns.
- Note that state and federal laws govern the conduct of sweepstakes, and require specific disclosures to be made. Sweepstakes may also be subject to possible state registration and bonding requirements (although there may be an exclusion for charities if the sweepstakes is not undertaken in connection with the advertising, promotion or sale of consumer products or services).
- Note that charitable raffles are strictly regulated at the state and local level, and are difficult to conduct in multiple jurisdictions. Review the state and local laws of the jurisdiction where any raffle will be undertaken.
10. Ensure that solicitations associated to gifts-in-kind are communicated in a clear and transparent manner, and that the corresponding receipt, valuation and disposition of the gifts-in-kind are properly handled.
- Consider the best practices established by the Accord Network in connection with the receipt and distribution of gifts-in-kind.
A fundraising legal audit is a core component of a comprehensive legal audit for nonprofits, which reviews an organization’s compliance with legal requirements and best practices applicable to tax-exempt organizations across various operational areas. Stay tuned for another blog post coming soon, which will discuss the key components of a comprehensive legal audit!