Chapter 1
State Regulation of Nonprofit Fundraising

Fundraising is the lifeblood of all nonprofits. Without gifts from donors, most nonprofits would cease to exist. Fortunately, Americans have proven to be generous givers. In 2008 alone, nonprofits raised over $307 billion in donations, including over $229 billion from individual donors. Not surprisingly with so much money at stake, there are many laws and government agencies that regulate nonprofits. First and foremost among these is the IRS, which is in charge of granting nonprofits their exemption from federal income taxes and making sure that they follow federal tax rules.

However, while the IRS’s role is vital to all nonprofits, it is not the only player in the nonprofit regulation game. All states have nonprofit corporation laws governing nonprofit corporations organized within their state. States also have consumer protection laws intended to protect the public from all forms of fraud, including fraudulent fundraising by nonprofits and professional fundraisers.

This book deals with a particular subset of state nonprofit laws related to fundraising by nonprofits. Thirty-nine states and the District of Columbia have enacted laws—often referred to as “charitable solicitation acts”—that specifically regulate fundraising by nonprofits and the professional fund­raisers they hire. These laws are primarily intended to protect donors from fraud by nonprofits in their fundraising efforts. They require nonprofits to register with a state agency before engaging in any fundraising activities in that state and to file periodic reports with the state. They also prohibit fraudulent or deceptive fundraising practices, regulate professional fundraisers, and impose penalties for violations.

Clearly, there is a need to protect the nonprofit community, particularly donors, from abuses related to how money is raised. While most nonprofits are legitimate and deserve to be generously supported, according to the Federal Trade Commission, 1% of all charitable donations are misused or collected using fraudulent or deceptive practices. That amounts to over $3 billion every year. In addition, because of the obligations imposed on nonprofits by these fundraising laws, it is crucial for nonprofits to understand and comply with them before engaging in any fundraising in a state that has a charitable solicitations act.

Need additional information on other laws affecting nonprofits? For information on IRS tax laws that affect nonprofits and their tax-exempt status, see Every Nonprofit’s Tax Guide, by Stephen Fishman (Nolo). For more on consumer protection and other state laws regulating nonprofits, contact your state’s charity regulator. A list of state charity offices can be found at the National Association of State Charity Officials website at www.nasconet.org/documents/u-s-charity-offices.

Charitable Solicitation Laws—The Basics

All nonprofits should have a basic understanding of the charitable solicitation laws of every state where they plan to solicit donations. These laws impose registration and periodic filing requirements on nonprofits that solicit contributions in that state and regulate certain fundraising-related activities. Charitable solicitation acts vary from state to state, which can make this a difficult task for a nonprofit that fundraises in numerous states. In the hopes of creating some uniformity among states, two national organizations, The National Association of Attorneys General (NAAG) and the National Association of State Charity Officials (NASCO), created A Model Act Concerning the Solicitation of Funds for Charitable Purposes. You can download a copy of the model act from the NASCO website at www.nasconet.org.

Most states included the basic provisions from the model act when they created their own solicitation laws. Reading through the model act will provide a good overview of what most state solicitation acts look like. However, most states also included their own variations in the law and define key elements of the act differently. For example, while all states require nonexempt nonprofits to register with the state charity agency, the type of financial information that must be disclosed varies from state to state—some states require audited financial statements, while others do not.

State Solicitation Acts Apply to All Nonprofits—Not Just 501(c)(3) Organizations

State solicitation acts regulate fundraising activities by all types of tax-exempt nonprofits. Nonprofits that obtain their tax-exempt status under Section 501(c)(3) of the Internal Revenue Code are the most common type of tax-exempt nonprofit. They include organizations like the Red Cross and United Way and a myriad of others that perform charitable work and whose activities are also heavily regulated by the IRS because of their tax-exempt status. However, there are 27 types of tax-exempt nonprofits other than 501(c)(3) organizations. Unless they are specifically exempted, the state charitable solicitation rules apply to these organizations whenever they solicit donations from the public for educational, philanthropic, humanitarian, scientific, patriotic, social welfare or advocacy, public health, environmental conservation, civic, law enforcement, public safety, or any other charitable purpose.

The most common of these non-501(c)(3) organizations are social welfare organizations which must be operated exclusively to promote social welfare. These include, for example, volunteer fire companies, homeowners associations, and advocacy organizations such as the League of Woman Voters. Other types of nonprofits include membership organizations created primarily to benefit their members such as social and recreational clubs, business leagues (chambers of commerce), fraternal organizations (college fraternities or membership lodges), cooperative organizations, and credit unions.

When we use the word “nonprofit,” we are referring to all types of nonprofit organizations.

Now let’s look at some of the key provisions that are found in most state solicitation acts.

Registration Requirement

The cornerstone of state charitable solicitation laws is the requirement that nonprofits must register with a state agency—typically the secretary of state or state attorney general—before soliciting donations from that state’s residents. The details on when you must register and what is involved in the registration process are covered in Chapter 2, “An Overview of the Fundraising Registration Process.”

Requiring out-of-state nonprofits to register is intended to accomplish two main purposes:

give the public easy access to important information about charities soliciting donations in their states, and

provide useful information to the state agencies that are responsible for protecting the public from fraudulent fundraising practices.

Much of the information required in the state registration process is already provided to the IRS and is readily available on private websites such as GuideStar. However, by making these disclosures a legal requirement under state law, the states can hold nonprofits and their professional fundraisers liable if they lie or omit information. This gives nonprofits a strong incentive to provide complete and accurate information.

Public Access to Information

A donor needs accurate and current information to assess a charitable organization and determine if it is worthy of a donation. State registration laws require soliciting nonprofits to disclose important information about their finances, including the amount they spend on professional fundraising; the backgrounds of their directors, officers, and employees; the nature of their activities; and whether the organization has been in trouble in the past.

In many states the registrations are available online so donors can check them before giving money and decide if the organization looks like a legitimate charity and if they approve of how it spends its money—whether it goes primarily to its stated charitable purpose or if too much goes to administrative or fundraising or other costs.

Help for Law Enforcers

Registration information also helps state law enforcers to bring enforce­ment actions against nonprofits that flout the law. For one thing, state fund­raising registrations let the state charity agency know that a nonprofit is soliciting, or intends to solicit, in the state. The registration has the current names and addresses of an organization’s directors and officers, as well as those who are responsible for maintaining custody of donated funds. It also discloses the identities of professional fundraisers employed by nonprofits.

Exemptions From Registration

All states exempt certain types of nonprofits from registration. These usually include educational institutions, hospitals, religious entities, and organizations with limited annual income. However, the definitions for each of these organizations vary greatly from state to state, so an organization that is exempt in one state may not fall within another state’s definition of exempt. We go over each state’s exemption require­ments in Appendix A.

Annual Financial Reporting

In all states, annual financial reporting is coupled with the registration requirement. Indeed, in most states the two are combined—that is, both are filed together at the same time. The financial report contains detailed financial information on the organization including its balance sheet, statement of support, revenue, expenses, and statement of functional expenses broken into program, management, and general categories. In most states, the annual financial reporting requirement can be satisfied by providing a copy of the organization’s completed and filed IRS Form 990 or 990-EZ for the prior year. However, in some states, larger nonprofits are required to file audited financial statements. These statements, prepared by an independent certified public accountant, may be more reliable than the self-reported amounts on Form 990 or
990-EZ. Annual financial reporting requirements for all states are covered in Appendix A.

Unfair and Deceptive Practice Provisions

State solicitation acts contain provisions prohibiting the use of any unfair or deceptive acts or practices when soliciting charitable donations. Here is the list of banned practices contained in the Model Charitable Solicitations Act, which many states follow (to some extent):

using any unfair or deceptive acts or practices

using any representation that implies the contribution is for or on behalf of a charitable organization, or utilizing any emblem, device, or printed matter belonging to or associated with a charitable organization, without first being authorized in writing to do so by the charitable organization

using a name, symbol, or statement so closely related or similar to that used by another charitable organization that the use thereof would tend to confuse or mislead a solicited person

misrepresenting or misleading anyone in any manner to believe that the person on whose behalf a solicitation or charitable sales promotion is being conducted is a charitable organization or that the proceeds of such solicitation or charitable sales promotion will be used for charitable purposes if such is not the fact

misrepresenting or misleading anyone in any manner to believe that any other person sponsors, endorses, or approves such solicitation or charitable sales promotion when the other person has not given consent in writing to the use of his or her name for these purposes, and

using or exploiting the fact of registration so as to lead any person to believe that such registration in any manner constitutes an endorsement or approval by the state.

Disclosure Statements

Thirteen states require nonprofits to provide a written notice, called a disclosure statement, to prospective donors. The 13 states are Colorado, Florida, Georgia, Illinois, Maryland, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, Virginia, Washington, and West Virginia. Among other things, the disclosure statement must inform anyone being solicited that information about the nonprofit can be obtained from either the state or the nonprofit itself. Most of these states require that the notice be included on every printed solicitation and every written confirmation, receipt, or reminder of a contribution. However, two states (North Carolina and Washington) require that their notices always be provided at the point of solicitation.

Each state’s disclosure statement is worded differently. As a result, nonprofits that solicit from a large number of states or nationally may have to include up to 12 different disclosure statements in their solicitation materials.

The required disclosure statements for each of the 13 states are included in Appendix A under the state information. Here are examples of two of the required disclosures:

Georgia. All nonprofits in Georgia must include the following disclosure statement on every printed solicitation and every written confirmation, receipt, or reminder of a contribution:

Florida. All nonprofits in Florida must include the following disclosure statement on every printed solicitation and every written confirmation, receipt, or reminder of a contribution:

Rules for Professional Fundraisers, Solicitors, and Consultants

In addition to regulating nonprofits, state solicitation laws also have rules governing professional fundraisers, solicitors, and consultants who help nonprofits raise money. These rules differ from those that govern the charitable organizations soliciting on their own behalf, but they are intended for the same purpose—namely, to prevent any fraud or abuse when soliciting money from donors. In the case of professional fundraisers, the laws are also intended to protect nonprofits from professional fundraisers misusing donor funds they receive on behalf of the nonprofit or misrepresenting the organization in the solicitation of funds.

If your nonprofit hires outside professionals and companies to help with fundraising, you need to know about your state’s rules governing professional fundraisers. This includes, for example, hiring a telemarketing firm to call prospective donors, paying a fundraising firm to conduct a door-to-door campaign, or using a direct marketing firm to help plan a direct mail campaign.

This book does not cover the registration or other legal requirements for professional solicitors and consultants. For more information on your state’s requirements, contact your state’s charity regulator. A list of state charity offices can be found at the National Association of State Charity Officials website at www.nasconet.org/agencies.

Semantic Confusion

First, there is a good deal of confusion about the terms used to describe outside fundraisers because they differ from state to state.

Professional fundraisers. As used in this book, a professional fundraiser is any outside professional person or company hired by a nonprofit to help with fundraising. These are independent contractors who hire themselves out to nonprofits—they are not employees of their nonprofit clients. There are two basic types of professional fundraisers regulated by the states:

professional solicitors, and

fundraising consultants.

Professional solicitors. Depending on the state, professional solicitors may also be called paid solicitors, professional fundraisers, professional commercial fundraisers, professional fundraising firms, paid fundraisers, or commercial fundraisers. Whatever they are called, these people or companies are paid by nonprofits to solicit contributions directly from the public. This may be through telemarketing, door-to-door soliciting, event marketing, or any other type of direct solicitations.

Fundraising consultants. Fundraising consultants are also called fundraising counsel (though they are not attorneys) or professional fundraisers. Unlike professional solicitors, fundraising consultants have no direct contact with the public. Instead, they help a nonprofit plan or manage a fundraising campaign. Direct marketing firms often fall into this category. An outside grant writer hired as an independent contractor to help write a grant request would also be a fundraising consultant.

State Registration and Other Requirements

Because they deal directly with the public and may obtain access to cash or personal credit card information, professional solicitors are regulated very closely by the states to guard against misrepresentations and fraud. Forty-five states require professional solicitors to register or be licensed by a state agency. The only states that do not require registration are Montana, Nebraska, Nevada, Texas, and Wyoming.

Solicitors may also be required to file annual financial reports with the state regarding charitable solicitation activities conducted during the preceding year. Most states have other rules governing solicitors’ activities, such as requiring them to disclose their identity as such before soliciting donations or having to disclose their fundraising expenses and ratios upon request.

 Most states also require professional solicitors to enter into written contracts with the nonprofits they work for and post a bond before commencing work in a state (generally $10,000 or $20,000). They are also subject to extensive record-keeping requirements.

Because fundraising consultants typically do not have direct contact with donors, they are not as strictly regulated as professional solicitors. However, 28 states require fundraising consultants to register.

If You Hire Outside Fundraising Help

If your nonprofit hires an outside professional solicitor or fundraising consultant, you should always make sure it has complied with all of the legal requirements of the state or states where the funds will be raised. First, make sure the person or company is registered, if required. Although it is the solicitor’s or consultant’s obligation to register, in some states a nonprofit that hires an unregistered solicitor or consultant can be subject to fines or penalties.

Also, you should always have a written contract with a professional fundraiser. Many states will require you to include copies of all such contracts when you register or renew your registration. Failure to do so could result in your registration being rejected.

The Federal Trade Commission has prepared a useful guide for nonprofits that hire fundraising professionals called “Raising Funds? What You Should Know About Hiring a Professional.” It is available on its website at http://business.ftc.gov/documents/bus32-raising-funds-what-know-about-hiring-professional.

All required filings under state solicitation acts are public records. This includes not only the application for registration, but annual reports and contracts as well. In most states, the public can view or obtain copies of all of these records through a state website. These documents and the IRS Form 990 are heavily relied on by potential donors and others seeking information about a nonprofit. Make sure you carefully and accurately complete these forms and filings and do everything you can to make sure your organization’s good works and responsible spending are reflected in these public records.