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Be Aware of These 2 Fundraising Compliance Gray Areas
by Cary Schwartz
The world of nonprofit compliance is complicated, with regulations changing constantly at both the federal and state levels. Along with changing fundraising trends, donor expectations, and the abrupt shifts out of and back into in-person events we’ve experienced since 2020, it’s a lot to keep up with! But as a nonprofit professional, you know it’s all important.
Nonprofit fundraising regulations exist to protect donors and ensure tax-exempt charitable organizations are actually serving their tax-exempt purposes. However, they do make your job more difficult, and they’re not always clear-cut
There are a number of compliance gray areas that can be tricky to navigate on your own. In this guide, we’ll discuss the part that your next peer-to-peer fundraising campaign can play in your strategic plan. Specifically, we’ll talk about how peer-to-peer fundraising campaigns can assist you in reaching your fundraising goals.
Gray areas in nonprofit compliance largely spring from two root causes:
Outdated coverage or complete gaps in existing regulations.
You’re likely already familiar with the process of charitable solicitation registration. This standard state-level regulation requires nonprofits to formally register with state governments in order to solicit donations from their residents. Registering and renewing your nonprofit’s registration allows states to periodically check that your nonprofit is legitimate and in good standing before potentially putting donors at risk of fraud.
The solicitation registration process easily covers on-the-ground and straightforward fundraising via the phone or direct mail. But online fundraising is the new norm, and it allows donors from anywhere to contribute to your campaigns.
How does this fit into the existing registration laws? In most states, it doesn’t.
Most state regulations do not explicitly cover or mention online fundraising or the need to register to solicit online donations. The variance between existing state laws about registration complicates matters. And combined with the explosion of more decentralized, peer-to-peer style fundraising on crowdfunding and social media sites, this is an obvious gap that needs filling.
So although online fundraising has made it easier and more cost-effective than ever to fundraise, it also opens up new opportunities for fraud, something that certainly needs attention.
Clearer guidance and regulations on online fundraising would protect donors and the future of fundraising alike, but these laws must be passed on a state-by-state basis.
A cohesive framework is unlikely to emerge soon, although there is a new model to follow in California’s Assembly Bill 488, recently signed into law. This bill lays out a series of rules that requires online fundraising platforms to register and maintain compliance with the state charities office, and it prohibits these platforms from serving nonprofits that aren’t in good standing with the IRS and California offices.
The California law could serve as a leading example for other states as awareness of this regulatory gap grows more acute each year. In the meantime, what should nonprofits do to cover their compliance bases while fundraising online?
Due diligence technically requires registering in all states where you’re likely to receive donations. However, for smaller nonprofits, the cost and logistics of registering in many states can be prohibitive.
The standard recommendation is to register in the most populous states (California, Texas, Florida, New York, etc.) or those where you reasonably expect you’ll receive donations. Then, include written disclosures on your donation forms that state you’re unable to accept donations from other jurisdictions. This will help to minimize your liability.
Consulting with experts for legal compliance tips for nonprofit fundraising is recommended when developing a customized compliance plan to meet your needs.
Commercial coventure (CCV) campaigns are those in which your nonprofit partners with a for-profit business in order to collect or solicit donations from each purchase that its customers make. These partnerships allow nonprofits to tap into a wider audience of potential donors, and they allow businesses to boost their public images in the community.
CCV campaigns can come in all shapes and sizes (a fact that contributes to the regulatory fuzziness around these activities). These campaigns are also often referred to as “cause marketing” campaigns. Common types of CCV campaigns can involve:
- The business contributing X% of total sales revenue to its partner charity.
- Allowing customers to choose from a list of charities to receive X% of their sale value.
- Asking customers to add a specific or open-ended donation amount to their purchase.
- A nonprofit selling the right to use its logo on endorsed products or marketing materials.
These can be extremely beneficial partnerships for both the nonprofit and business when planned well, but the regulations surrounding them are particularly complex.
As with more straightforward forms of fundraising, laws regulating CCVs vary greatly from state to state. California’s AB 488 has clarified the state’s CCV regulations, but this is not the case in most other jurisdictions. The intersections and overlaps of state laws, federal financial reporting requirements, and the laws that the for-profit partner is subject to can make the whole situation even more complicated. Not to mention CCV campaigns are increasingly being conducted online! Consider these regulations and unique requirements:
- 22 states currently have statutes regulating CCV campaigns.
- State laws can control and often specify the required contents of a CCV contract, associated advertisements, public disclosures, state registrations, and other filings.
- Several states require the for-profit partner to file post-charitable sales paperwork.
For example, South Carolina requires both the for-profit and nonprofit to file a joint financial report following a CCV campaign. 12 states require that advertisements explicitly show the percentage of sales revenue that the nonprofit will receive. Some states also require that written CCV contracts contain specific provisions regarding descriptions of goods and geographical locations where sales will take place. Clearly, there’s a lot that goes into planning and conducting a compliant CCV campaign.
Failing to plan and structure your CCV campaign in compliance with relevant laws can result in legal and financial ramifications like fines, penalties, and being required to pay unrelated business income tax (UBIT) on campaign proceeds.
The bottom line: The overlapping layers of regulations that come into play can make CCV campaigns particularly complex. Working with legal and compliance professionals will be the safest move for nonprofits that don’t have the in-house expertise and capacity to appropriately manage these campaigns themselves.
Pitfalls in nonprofit compliance aren’t always because of neglect on the nonprofit’s part—sometimes they’re a result of genuine gray areas where regulations and requirements are confusing or totally undefined. Online fundraising and commercial coventures are the most prominent examples, but stay on the lookout for others.
Compliance experts should be able to serve as valuable long-term partners for your organization as you navigate the landscape. They’ll help you protect your donors, your reputation, and your future fundraising abilities.
Learn more about how Charity Dynamics can help Peer-to-Peer Fundraising fit into your strategic plan
