Regulation Of Charitable Solicitation

Whether you are a nonprofit organization or a for-profit professional fundraiser, compliance with state fundraising and charitable solicitation regulators can be overwhelming and a significant administrative burden.

Fundraising and charitable solicitation are governed by state law, which means that solicitors must understand and comply with the varying regulations on a state-by-state basis. For nonprofits, timely registrations and renewals are critical to protecting Tax exempt status.

For professional fundraisers, transparent and unambiguous disclosures are critical to avoid fines and penalties by state regulators. Evaluating triggers to charitable solicitation and fundraising registrations is a fact-specific analysis that our attorneys frequently conduct for clients to guarantee compliance and avoid unnecessary administrative filings, when possible.

Once registration obligations are established, managing annual compliance obligations with the applicable regulatory agency is critical to secure a charity’s ability to engage in fundraising activities. Tovella Dowling assists its clients in expansions of fundraising and programmatic activities nationwide, as well as, supporting annual compliance obligations to ensure uninterrupted operations and fundraising efforts.

Fundraising Vehicles and Cause Related Marketing 

Tovella Dowling assists various fundraising professionals, platforms, and nonprofits relating to the legalities and structure of various fundraising vehicles.

In the era of social responsibility, there is an increasing expectation for companies to do their part in making a social impact. Cause-related marketing and social impact campaigns are now the norms and consumers want to know that businesses share in their desire to make the world a better place by supporting an important cause.

Strategic affiliations and fundraising models should be mutually beneficial to for-profit and nonprofit partnerships, allowing the generation of a positive effect on the consumer by borrowing from the equity and goodwill of the partnered cause, ultimately increasing purchaser intent. Cause-relating marketing and social impact vehicles can involve complex laws and stringent regulations to enforce transparent and ethical practices.

Cause-related marketing activities are a diverse spectrum. Each type differs considerably in structure and presents different legal considerations to both the nonprofit and the for-profit participants. 

Commercial Co-Ventures

Commercial Co-Ventures or Percentage of Sale Programs are campaigns implemented by for-profit businesses that are generally not in the business of raising funds for charity involving the public representation that a portion of sales revenue will be donated to a charitable organization.

On a federal level, organizations must always be cognizant of Section 5 of the Federal Trade Commission (FTC) Act, which prohibits unfair or deceptive ads or practices (UDAP).

It is essential that any campaign or fundraising effort cannot be construed as being misleading to the public consumer. On a state level, each state has its own regulatory process, which typically includes: (i)an initial registration statement; (ii) payment of a filing fee; (iii) filing of a written contract; (iv) posting of a bond; (v) preparation and filing of a final accounting or closing statement disclosing gross receipts and expenditures incurred; (vi) mandated disclosures on products; (vii) filing of a copy of any advertisement that will be used; and (vii) mandated frequency of fund disbursements.

Commercial Co-Ventures should evaluate and address the following legal considerations:

• Written Agreement between participating business and charity addressing legally required terms imposed under state law
• Duration of Commercial Co-Venture campaign
• The calculation methodology for funds subject to donation, such as clarification as to gross sales versus net sales
• Representation and warranties as to registration and compliance obligations of all campaign participants
• Clarification as to any exclusions or specificity of products and/or services subject to campaign
• Audit and accounting procedures for funds subject to campaign
• Frequency of fund disbursement
• Notice requirements for compliance filings of all campaign participants to ensure consistency in representations made to state regulators
• Approvals of advertisements and public statements related to the campaign
• Disclaimers of fundraising guarantees from participating charity

Point of Sale Programs

A Point-of-Sale Program or Register Program is a campaign implemented at a consumer’s point of sale. A representative of a participating retailer, generally a cashier, solicits a shopper for a donation (active cause marketing) or signage is prominently displayed at the register to encourage the shopper to donate (passive cause marketing).

Here are some legal considerations involved with a Point-of-Sale Program:

• Participating entities should enter into a formal written agreement to clarify the goals and expectations of the campaign
• The formal written agreement should address the duration of the campaign, audit and accounting procedures for funds raised, disbursement schedule, and allocation for risk of loss
• Intellectual property considerations, including permission to promote the campaign and all involved parties, should be addressed

Corporate Sponsorships

A Corporate Sponsorship is a fundraising vehicle frequently used by 501(c)(3) nonprofit organizations. Generally, a Corporate Sponsorship is a payment made by a for-profit business to a 501(c)(3) nonprofit, often in connection with an event or program, lending a tax benefit and other perks to the corporate sponsor, such as public acknowledgment of the sponsor’s support.

Importantly, Corporate Sponsorships are an exception to the general rule of federal corporate tax imposition resulting from revenue deriving from unrelated business income (“UBIT”), so long as there is no expectation or actual receipt by the corporate sponsor of a “substantial return benefit”, as defined by the Internal Revenue Service regulations.

When evaluating the threshold for what constitutes a “substantial return benefit”, the regulations clarify that the following will be deemed permissible “disregarded benefits, so long as the total value of the benefit provided to the sponsor does not exceed 2% of the corporate sponsorship payment:

• Goods, facilities, services, or other privileges
• Rights to use an intangible asset, such as intellectual property
• Sponsorship acknowledgments omitting qualitative or comparative descriptions of the sponsor’s products and/or services
• Exclusive provider rights

When implementing a Corporate Sponsorship program, the following legal considerations should be addressed in a written Corporate Sponsorship Agreement:

• Itemize specific corporate sponsorship benefits to avoid any “substantial return benefit”
• Impose insurance requirements and insist on indemnification terms to mitigate risk and exposure to the corporate sponsor’s liabilities
• Specify the term and duration of the sponsorship, including triggers for early termination
• Address intellectual property considerations, including guidelines for reciprocal use of logos, corporate names, and other materials in publicizing the sponsorship

Call to Action

A Call-to-Action campaign directs a consumer to act, such as posting a picture on social media or engaging in public commentary, which in turn triggers a charitable donation or brings awareness to a charitable cause, philanthropic endeavor, or charitable organization.

This campaign can foster creativity, brand recognition, and engagement between for-profit and its consumers. In turn, the charitable campaign participant can capitalize on the goodwill, recognition, and fundraising results generated from the campaign activity. Call to Action campaigns should evaluate and address the following legal considerations:

• Media consents and waivers if the campaign involves intellectual property and social media platforms
• Licensing of Intellectual Property
• Terms and Conditions of Use for online platforms
• Regulatory compliance registrations and renewals
• A written agreement between campaign participants
• Written agreements, including Terms and Conditions of Use, Click-Wrap Agreements, and Consents with participating consumers
• Disclaimers of liability from participating consumers
• Disclaimers of fundraising guarantees from participating charity

Joint Ventures and Strategic Alliances

A joint venture or strategic alliance occurs when an organization aligns or partners with a third-party entity to share in ownership, returns, risks, costs, and/or resources in furtherance of a specific philanthropic accomplishment.  Typically, strategic collaborations come from common goals of leveraging resources or complementary strengths, reducing costs, or increasing visibility, rather than purely a revenue-generating motivation.

Strategic alliances present in a continuum of structures, ranging from informal affiliations to the establishment of a legally distinct entity with shared ownership of participating partners. The following legal considerations should be evaluated and addressed when entering a joint venture, strategic alliance, or other formal collaboration:

• The proper vehicle for collaboration, including required agreements and entity structures to accomplish each partner’s intent
• Ownership of real property, personal property, and intellectual property acquired through venture
• Allocation of risk and liability, including insurance and indemnification considerations
• Delegation and/or limits of authority and establishment of obligations and expectations in carrying out venture
• Establishment of duration and term for venture 

Raffles

Raffles are a type of lottery where prizes are awarded to individuals that have paid, generally through the purchase of a ticket, for a chance to win. In some jurisdictions, charities fall within an exception to the general constitutional prohibition against lotteries and gambling allowing certain nonprofits the ability to utilize raffles as a fundraising mechanism in furtherance of their exempt purpose.

Since fundraising is governed by state law, registration and compliance obligations vary depending upon the jurisdiction in which the raffle will be conducted. If allowable within the state, charities generally must register and periodically report to the regulating agency relating to the initiation, operation, and result of any raffle held within the state for charitable purposes.

Additionally, many states impose further restrictions on raffles, such as limitations on the percentage of proceeds deriving from the raffle that must be expended for exempt purposes, limitations, or restrictions on the ability to conduct the raffle online, waiting periods once qualified in the state before registration eligibility, and other specific compliance obligations.

Galas, Golf Tournaments, and Other Events

501(c)(3) organizations and other nonprofits often host various events such as galas or golf tournaments. Often, such events are in furtherance of fundraising efforts or to carry out specific programmatic activities.

Although such events can lead to significant successes, it doesn’t come without risk and significant administrative burden. To ensure the initial intent of an event is not defeated by cost, liability, or other detrimental factors, it is critical to holistically evaluate the event and the legal considerations involved:

• The necessity for a written agreement with venues and vendors, including the ability to accept in-kind donations and in-kind services to avoid cutting into the bottom line
• Implementation of liability acknowledgments and waivers for event attendees
• Evaluation of legally compliant disclaimers relating to quid-pro-quo donations and deductibility limits related to purchasing of event admission
• Consideration of required federal, state, and local licenses and permits
• Evaluation of insurance requirements, including appropriate policies for volunteers