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Charitable Solicitation Compliance in a Virtual Fundraising World

By Timothy Hammond, on February 16th, 2023

Most organizations are familiar with the laws and regulations surrounding charitable solicitation in the locales they physically operate in, which has been sufficient to assume compliance in the past for all but the largest organizations. Some organizations go a step further and have explored their compliance with the laws and regulations of locales from which they know they actively solicit in and/or receive substantial contributions. However, few consider their compliance with the laws and regulations of all states and territories. Why not? The complexity of dealing with the differing regulatory structures of upwards of forty jurisdictions that require some form of solicitation registration and reporting is one factor, cost is another, as professional assistance is usually necessary to make sense of it all. However, it also is not an obvious issue to even consider– if I am not located in Kansas, do not receive any contributions from Kansas residents, and don’t actively send any solicitations to Kansas residents, why would I need to register and report anything to the state of Kansas? An unnecessary question just a few years ago, but one that needs to be considered in the virtual world.

The nonprofit world did have some foresight on this issue. In 2001, the National Association of State Charity Officials (NASCO) developed what are known as the Charleston Principles, which address how online solicitations, both passive and active, should be handled in the context of state charitable registration and reporting. The Charleston Principles appear reasonable, albeit vague. Simply put, if you do not target persons located within a state, do not “routinely” receive contributions from persons in a state, and are not required to register in a state for any other reason, then registration and reporting is not necessary in that state. So, under the Charleston Principles, if you only passively solicited residents of a state (such as, with a “donate button” on your website, or had a social media campaign, accessible by residents of that state), or just receive a few non-recurring contributions from residents of that state, you would not be required to register in that state. That seems reasonable, right?

One major problem is adoption of the Charleston Principles was voluntary, and many states only adopted them as guidelines or only adopted portions, still leaving us with a patchwork of laws and regulations to contend with. Even for those states who did adopt the Charleston Principles in their entirety, we now live in a virtual world. It is easier than ever for individuals to relocate. The impact is past and potential donors for your organization are likely to come from more diverse geographies. This potentially leads to receiving contributions from persons in various states, or unknowingly targeting persons in other states just through change of address notifications. We also now live in a viral world. Online exposure of worthy causes spreads like wildfire. A simple mention of your organization or cause or sharing on social media often leads to a significant uptick in contributions from a variety of locations. A good problem to have I would say, but a problem, nonetheless.

What can an organization do to stay on top of these compliance requirements? There are several tasks that should be undertaken regularly to not only take stock of your current level of compliance, but to also stay on top of any changes necessary.

  1. Identify who in the organization solicits for contributions and who and where they are soliciting. The list of solicitors may be larger than you think. For example, do any of your social media posts contain solicitations or links to your website that has a “donate button?” If so, your social media manager needs to be involved, and they should determine where your followers are located. Are these posts are targeting any certain followers directly? What about if your employees share your organization’s posts with their followers? Another example— do individual departments perform decentralized outreach to their alumni and in the process solicit?
  2. Take inventory of where your contributions have originated from for the last several years. This should be the simpler task depending on the sophistication and integrity of your donor database. An example of a data accuracy issue to consider is when a contribution is received from a donor advised fund, is the address on file that of the donor-advisor or the fund?
  3. Repeat these two steps regularly, at least annually, in advance of fiscal year end to identify any new potential jurisdictions that may need to be registered and reported in.

At this point, you may have an extensive list of states and territories to consider. This may seem daunting, at least initially. Next, I recommend identifying the states on your list that you would likely be required to register in. This could be your state of incorporation, states where you have a physical presence, states where you actively make targeted solicitations, and states where you have significant recurring donors. Unfortunately, there is no easy way out at this point; each of these states’ laws and regulations must be identified, interpreted, and applied to your situation to determine if registration and reporting is necessary. Lastly, weigh your exposure versus the potential risks and determine if you should research registering in any remaining states from your list. Professional assistance is certainly recommended. This would begin with your attorney who considers the applicability of laws and regulations of each of these states. Then work with your accountant to consider the logistics of registering and filing in those states.

Being subject to a state’s charitable solicitation registration and reporting requirements has further exposure beyond simply filing a form annually and paying a fee. Assurance services, such as an audit or a review, may be required by certain states, which comes at a significant cost. Certain states, such as New York and California, regulate governance matters. Some examples include the requirement for and makeup of the audit committee, conflicts of interest policies and practices, and rules surrounding related party transactions.

You may be asking yourself what the benefit of this arduous process is for what seems like a significant cost and effort. Certainly, analysis of costs versus benefits and risk management needs to be a component of any decision process by an organization. Also, states have relatively minuscule enforcement budgets, barely allowing them to enforce compliance for those organizations already registered, let alone find those who are unregistered. The most serious risks then may be reputational. For example, if a donor asks why you are not registered or not current on annual reporting, if a donor makes a complaint to a state’s Attorney General, or if a news outlet publishes your lack of compliance. Further, compliance with laws and regulations would generally be considered a fiduciary duty of those charged with governance; therefore, noncompliance would potentially be a breach of that duty.

This is a lot of information, some of which you may have a good handle on or some you may have never considered. So, if you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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