At a recent annual gathering of state regulators who focus on
charitable organizations, participants shared tips with one another
on effective enforcement of consumer protection laws and offered
insights to nonprofit executives and advisors into how they
operate. One of the major takeaways from this conference was that
state charity regulators have concern about nonprofits'
compliance with applicable state laws governing charity
activity.
While there has been much discussion among the state charity
officials about the lack of resources to support their oversight
efforts, recent actions show that states will aggressively pursue
charities and those entities that misrepresent the support they
plan to provide to charities. Very recently, the New York Attorney
General's office fined a company $700,000 in a settlement of an
enforcement action in which the company was collecting used
clothing in bins throughout the state and allegedly representing
that the activity was for the benefit of two charities. The
Attorney General indicated that the two nonprofits merely licensed
to the company the right to use their names and logos for a small
fee. In another enforcement action, a company that operates running
races advertised that a portion of race registration fees would
benefit a chapter of Big Brothers Big Sisters in Tennessee without
obtaining prior written consent from the charity to make such
representation. The state of Tennessee fined that company $10,000
for using the charity's name to induce individuals to register
for the race without the charity's consent.
Association executives are often surprised to learn that their
organizations and affiliated foundations may be covered both by
state charitable solicitation laws and rules governing promotions
that involve a charitable giving component. These laws do not limit
their reach to traditional charities; rather, most of the
applicable states' laws regulate solicitation activities that
many associations engage in.
Charitable Solicitation Registration and Reporting
Charitable solicitation activities are regulated at the state
level. States generally define "charitable solicitation"
to mean a direct or indirect request for contributions for a
charitable organization or for a charitable purpose. Solicitations
may include making an oral or written request, an announcement for
a special performance or event for which contributions are
requested, grant solicitations, or a statement that a portion of a
sale of goods or services will benefit a charitable purpose.
Currently, 40 states and the District of Columbia require
charitable organizations to register with the state charity agency
prior to soliciting contributions, unless otherwise exempt.
Charitable solicitation laws and registration and reporting
requirements vary from state to state.
The charitable registration process generally requires a charitable
organization to file a state registration form along with a copy of
the organization's most recent Internal Revenue Service Form
990; financial statements; governing documents such as the
organization's articles of incorporation and bylaws; IRS
determination letter; copies of contracts with professional
fundraisers, fundraising counsel, or commercial co-venturers, if
applicable; and a filing fee, which ranges anywhere from $25 to
several hundred dollars, depending on the state. Once registered,
most states require charitable organizations to renew their
registration annually.
There are questions of jurisdiction that may come into play for
foundations which may solicit only through a website or at annual
conferences—in many instances an association and its related
foundation may take the position that it has not triggered
jurisdiction in a particular state. However, states have been
aggressive in asserting jurisdiction, usually pointing to a website
or email solicitations directed to or received by the states'
residents.
Many states exempt organizations that solicit contributions only
their members from registration requirements. For example, District
of Columbia regulations provide an exemption from registration and
reporting requirements for a solicitation of the members of a
society where the governing body "by official action" has
approved that solicitation and has made provisions to supervise the
solicitation. Of course, such exemptions do not normally apply when
an association's related foundation (usually a separate
nonprofit corporation with separate tax-exempt status from the
parent) is doing the soliciting.
Commercial Co-Venture Compliance
Associations will often offer programs that have a charitable
giving component. For example, an association may state that a
portion of the registration fee for a particular event will be
donated to a local charity. These types of promotions can implicate
a different set of state laws governing "commercial
co-venture" activities.
Approximately 25 states regulate commercial co-ventures as part of
the state charitable solicitation statutes. In most of these
states, a commercial co-venture is defined along the lines of,
"a person who is regularly engaged in a trade or business
other than raising funds for charitable causes that advertises that
the purchase or use of goods or services will benefit a charitable
organization or charitable purpose."
Although the regulatory requirements may seem burdensome in the
scope of the campaign, it is important to note that these sorts of
promotions have been receiving heightened attention from state
regulators. For example, a few years ago, the New York Attorney
General ("NY AG") concluded a yearlong initiative looking
into commercial co-venture activities involving "pink ribbon
charities." As part of the initiative, the NY AG sent
extensive questionnaires to at least 40 charities and 130 companies
conducting commercial co-ventures that were said to benefit breast
cancer causes. The NY AG then analyzed the responses and released
its "Best Practices for Transparency in Cause Related
Marketing," which details recommendations that in some
instances go above and beyond the requirements for disclosures
under New York or any other state's law.
There have been some well-publicized enforcement actions in which
commercial co-venturers have been held liable for failure to
disclose information and misleading the public through the
advertising of the commercial co-venture. By way of example, in
1996, a consumer health products company had advertised the launch
of an over-the-counter pain reliever in which it claimed that a
portion of the sale of the product would benefit a charity. The
advertising did not disclose that the company had pledged a
guaranteed minimum of $1 million dollars regardless of the level of
sales—thus, according to a multistate group of 19 state
attorneys general, misleading consumers into believing their
individual purchase was making a difference in the contributions
that the foundation would receive. Ultimately, the company settled
the case by contributing $250,000 to the National Institutes of
Health and paying almost $2 million in "costs" to the
states.
Conclusion
While high-profile examples of enforcement do exist, practitioners familiar with this area generally agree that state enforcement of solicitation and commercial co-venturer rules is not aggressive and—likely as a result of such spotty enforcement—compliance among charitable organizations and other entities is inconsistent at best. Of course, lax enforcement does not excuse noncompliance. Further, it is possible that states may view this area as a potential source of income through the collection of fines. As such, associations and their related foundations should review whether they are in compliance with the applicable registration and reporting requirements and, if not, take steps to address the matter.
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