CHAPTER THREE
States' Charitable Solicitation Acts

Chapter 3 summarizes the states' charitable solicitation acts. The chapter explains how fundraising for charitable purposes in the United States is a heavily regulated activity. This regulation comes in many forms and is manifested at the federal, state, and local levels. Nearly all the states regulate charitable fundraising—although the extent and intensity of enforcement vary greatly—and do so principally by means of statutes termed charitable solicitation acts.

These laws are often intricate. In addition to their complexity, there is a considerable absence of uniformity, although the states are making some progress toward uniform reporting. This combination of intricacy and nonconformity makes this a body of law with which it is difficult to comply, particularly in the case of a charitable organization that has a multistate fundraising program—a problem aggravated by a disparity in regulations, rules, and forms. There are, nonetheless, some relatively common features of these laws.

§ 3.1 SUMMARY

About 47 states have a form of statutory regulation of charitable fundraising occurring within their jurisdiction. More than 30 states have adopted what may be termed comprehensive charitable solicitation acts. The remaining states (including the District of Columbia) have elected to regulate fundraising for charitable purposes by means of differing approaches.

The various state charitable solicitation acts are, to substantially understate the situation, diverse. The content of these laws is so disparate that any implication that it is possible to neatly generalize about their assorted terms, requirements, limitations, exceptions, and prohibitions would be misleading. Of even greater variance are the requirements imposed by the many regulations, rules, and forms promulgated to accompany and amplify the state statutes. Nonetheless, some basic commonalities can be found in the comprehensive charitable solicitation acts.

The fundamental features of many of these fundraising regulation laws are a series of definitions, registration or similar requirements for charitable organizations, annual reporting requirements for charitable organizations, exemption of certain charitable organizations from all or a portion of the statutory requirements, registration and reporting requirements for professional fundraisers, registration and reporting requirements for professional solicitors, requirements with respect to the conduct of charitable sales promotions, record-keeping and public information requirements, requirements regarding the contents of contracts involving fundraising charitable organizations, disclosure requirements, a range of prohibited acts, registered agent requirements, rules pertaining to reciprocal agreements, investigatory and injunctive authority vested in enforcement officials, civil and criminal penalties, and other sanctions.

§ 3.2 DEFINITIONS

Many of the states' charitable solicitation acts contain a glossary of the important terms used in these laws.

(a) Charitable

The function of the states' solicitation statutes is to regulate the process of fundraising for charitable purposes. Thus, the definition of the word charitable is a major factor in establishing the parameters of these laws.1 The meaning of charitable in this context is usually considerably broader than the meaning used in the federal tax setting.2

In general, the law of charity emanates from the English common-law treatment of the term, derived largely from the law pertaining to trusts and property. The meaning of the term charitable under the law of the United States has been—and continues to be—developed largely through interpretations, by the courts and the IRS, of the meaning of the term for purposes of the federal tax exemption and the federal income, estate, and gift tax deductions. State law evolves in a similar fashion, although the term charitable is, as noted, more expansive when used for purposes of the states' charitable solicitation acts.

The word charitable, as employed in the state charitable solicitation act context, is broad and sufficiently encompassing to embrace all categories of organizations that are regarded as charitable entities for federal tax exemption and deduction purposes.3 Therefore, the range of the term encompasses churches, and conventions, associations, integrated auxiliaries, and similar organizations of churches; other religious organizations; schools, colleges, universities, libraries, and museums; other educational organizations; hospitals, hospital systems, clinics, homes for the aged, other health care providers and medical research organizations; other health care organizations; publicly supported organizations of all types; and certain organizations that are supportive of public charities.4

The states, however, in defining the term charitable for purposes of regulating charitable fundraising, often additionally sweep within the ambit of these laws some or all of the following purposes: philanthropic, benevolent, eleemosynary, public interest, social service, social advocacy, humane, voluntary, cultural, environmental, artistic, welfare, patriotic, and recreational. Thus, for example, some states' charitable solicitation acts reach fundraising by organizations that are classified as social welfare organizations for federal tax purposes.5

Some states' laws expressly incorporate within the reach of a charitable solicitation statute one or more purposes that otherwise would not be covered under the most expansive definition of charitable. Thus, a statute may include within its purview solicitations for police, law enforcement, legal defense, or labor purposes. This phenomenon may also be reflected in a statute's exemptions, such as a law exempting unions from the registration requirement imposed on charitable organizations.

Some solicitations by nonprofit organizations for contributions lie outside the range of a state's charitable solicitation act because the gifts are not to be used for charitable purposes. An illustration of this is solicitations of contributions by political organizations or for political campaign purposes.6 For the most part, these unreached solicitations are implicit in a reading of the statute on its face. Sometimes, however, a statute expressly recognizes this fact by means of an exclusion;7 about 10 of these laws are expressly not applicable to solicitations for political purposes.

Some fundraising is undertaken for the benefit of a named individual. It is common for this type of solicitation to be excluded from one or more aspects of regulation. Also, although state regulators disagree on the point, a respectable argument can be made that fundraising for the benefit of one individual is not fundraising for a charitable objective because of the private benefit inherent in the effort. (For federal income tax purposes, an organization benefiting only one individual cannot be a charitable entity.)8

No court opinion generally delineates the ultimate scope of these laws, from the standpoint of the boundaries of the term charitable.9 In general, the government officials interpreting these statutes accord the concept of charitable great latitude when determining their jurisdiction over fundraising regulation matters.

(b) Charitable Organization

A charitable organization usually is defined for these purposes as any person organized and operated for a charitable 10 purpose. The word person is then broadly defined, employing terms such as individual, organization, trust, foundation, association, partnership, corporation, firm, company, society, league, or other group or combination acting as a unit.

Often, the term charitable organization also includes a person that “holds itself out” as a charitable entity or one that solicits or obtains contributions solicited from the public.11

These laws usually operate even in the absence of a soliciting charitable organization. That is, anyone soliciting for a charitable purpose generally is required to be in compliance with one or more of these statutes.

(c) Solicitation

Another key term usually defined in a charitable solicitation act is the word solicitation. Solicitation generally is broadly defined. This fact is evidenced not only by the express language of the definition but also by application of these acts to charitable solicitations conducted, in common terminology, “by any means whatsoever.” A solicitation can be oral or written. It can take place by means of an in-person request, mail, email, facsimile, advertisement, other publication, television, radio, telephone, or other medium. Contemporary debate over the legal consequences of charitable solicitation over the Internet highlights the importance and scope of the word solicitation.

A most encompassing, yet typical, definition of the term reads as follows: the term solicit means any request, directly or indirectly, for money, credit, property, financial assistance, or other thing of any kind or value on the plea or representation that such money, credit, property, financial assistance, or other thing of any kind or value is to be used for a charitable purpose12 or benefit a charitable organization.13

Usually, the word solicitation is used in tandem with the word contribution. The term may, however, encompass the pursuit of a grant from a private foundation, other nonprofit organization, or government department or agency. About a dozen states exclude the process of applying for a governmental grant from the term solicitation. Occasionally, state law will provide that the word contribution includes a grant from a governmental agency or will exclude the pursuit of a grant from a private foundation. Thus, a charitable organization seeking this type of financial assistance should explore the need to register pursuant to one or more charitable solicitation acts before submitting the grant proposal.

It is clear, although few solicitation acts expressly address the point, that the definition of solicitation entails seeking a charitable gift. There is no requirement that the solicitation be successful; that is, that the request actually results in the making of a gift.

One court created its own definition of the term solicit in this setting, writing that the “theme running through all the cases is that to solicit means ‘to appeal for something,’ ‘to ask earnestly,’ ‘to make petition to,’ ‘to plead for,’ ‘to endeavor to obtain by asking,’ and other similar expressions.”14 This court held that a state's charitable solicitation act did not apply to gambling activities held to generate funds destined for charitable purposes.15

(d) Sale

A few charitable solicitation acts include a definition of the term sale (or sell or sold). A statute may provide that a sale means the transfer of any property or the rendition of any service to any person in exchange for consideration. This may be said to include any purported contribution without which the property would not have been transferred or the services would not have been rendered.

The term consideration is the critical element of this definition, inasmuch as it represents the principal dividing line between a sale and a contribution.16 Consideration is the core component of a bona fide contract: both parties to the bargain must receive approximately equal value in exchange for the participation of the other. Consideration is the reason one person enters into a contract with another; the contracting party is motivated or impelled by the benefit to be derived from the contract (for goods or services), while the compensation to be received by the other contracting person is that person's inducement to the contract. A transaction that is not supported by adequate consideration cannot be a sale.

Likewise, a transaction that is completely supported by consideration cannot be a gift. Some transactions partake of both elements, where the consideration is less than the amount transferred, in which case only the portion in excess of the consideration is a gift. The two most common types of these dual character transactions are the quid pro quo contribution17 and the bargain sale.18

In those states that define a commercial coventure as a charitable sales promotion,19 the term sale usually is defined in that setting.

(e) Contribution

A contribution basically is a transfer of money or property in the absence of consideration—it is to be contrasted with a sale.20 The term may be defined in a charitable solicitation act as a gift, contribution, bequest, devise, or other grant of any money, credit, financial assistance, or property of any kind or value. The statutory definition may embrace promises to contribute (pledges).

The law on this point is the most developed in, not surprisingly, the federal income tax charitable giving setting. Years ago, the U.S. Supreme Court observed that a contribution is a transfer motivated by “detached or disinterested generosity.”21 Another observation from the Court was that a “payment of money [or transfer of other property] generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return.”22 Earlier, the Court referred to a contribution as a transfer made “out of affection, respect, admiration, charity or like impulses.”23

The Court has adopted use of the reference to consideration in determining what is a contribution. Thus, it wrote: “The sine qua non of a charitable contribution is a transfer of money or property without adequate consideration. The taxpayer, therefore, must at a minimum demonstrate that he [or she] purposefully contributed money or property in excess of the value of any benefit he [or she] received in return.”24 Essentially the same rule was subsequently articulated by the Court, when it ruled that an exchange having an “inherently reciprocal nature” is not a contribution and thus cannot be a charitable contribution where the recipient is a charitable organization.25

Dues, being payments for services, are not contributions. The term dues embraces payments by members of an organization in the form of membership dues, fees, assessments, or fines, as well as fees for services rendered to individual members.

A loan is not a contribution, including a loan to a charitable organization. If a person makes a loan to a charity, with the intent to subsequently forgive it, and the amount of the loan, or a portion of it, is subsequently forgiven, the amount forgiven becomes a contribution as of the date of forgiveness. As noted, a single transaction can embrace both the elements of a contribution and a sale.26

Essentially, the concept in this context is that a contribution is a payment to a charitable organization where the donor receives nothing of material value in return.27 Thus, a court ruled that a state's charitable solicitation act did not apply to the solicitation of corporate sponsors for a marathon, stating that the transaction was a “commercial” one, “[i]t is not a gift,” “[i]t is a corporate opportunity,” and “[i]t has nothing to do with philanthropy.”28

The amount or value of a charitable contribution may be pertinent in the application of a state's charitable solicitation act. Certain small solicitations are often exempted from these acts. These determinations are made on the basis of the monetary value of the gifts in the aggregate.29 In most instances, these calculations are made on the basis of (i.e., are confined to) the payments, or portions of payments, that are in fact contributions.

(f) Membership

The states' charitable solicitation acts often define the word membership or member. The principal purpose, when this definition is given, is to define the term in relation to the exclusion for solicitations that are confined to the membership of the soliciting organization.30

The statute may define the term membership to mean those persons to whom, for payment of dues, fees, assessments, and the like, an organization provides services and confers a bona fide right, privilege, professional standing, honor, or other direct benefit, in addition to the right to vote, elect officers, or hold offices.

This type of statute is likely to add the point that the concept of membership does not extend to those persons who are granted a membership upon making a contribution as the result of a solicitation.

(g) Professional Fundraiser

There is considerable confusion about the meaning of the term professional fundraiser. The dilemma arises from the fact that the term, and its nemesis professional solicitor, was developed in an era when the roles of the parties were discrete and thus much easier to identify. Basically and historically, a professional fundraiser was a consultant—an individual or firm that did not directly participate in the solicitation process but rather who worked with the charity in designing the fundraising plan. In most cases, the charitable organization was the person that undertook the actual fundraising, using volunteers. By contrast, a professional solicitor was a person who was paid to solicit gifts in the name of the charity.

During this era, the roles were separate and distinct. The fundraiser planned and did not solicit. The solicitor pursued gifts and was not involved in planning the campaign. In many instances today, that formal dichotomy is followed. Increasingly, however, the roles are being blurred, usually because the professional fundraiser is undertaking one or more roles in the area of solicitation.

Most states adhere to a definition such as this: a professional fundraiser is any person who, for a flat fixed fee under a written agreement, plans, conducts, manages, carries on, advises or acts as a consultant, whether directly or indirectly, in connection with the solicitation of contributions for or on behalf of a charitable organization. This type of definition usually is followed by the admonition that a professional fundraiser may not actually solicit contributions as a part of the services.

Often excluded from the ambit of the term professional fundraiser are the officers and employees of a registered31 or exempt32 charitable organization. Also usually excluded from the term are lawyers, investment counselors, and bankers, even if they advise a client or customer to contribute to a charitable organization.

Some states use a definition of the term professional fundraiser in a different manner, with some, as discussed as follows, having a definition of the term that also encompasses most categories of professional solicitors. About a dozen of the states' laws lack any definition of this term.

Part of the reason for the confusion in this area is the variation in terminology among the states. In about one-fifth of the states, the person usually generically referenced as a professional fundraiser is identified by means of that term. Other states, however, intending the same meaning, use the term professional fundraising counsel. Still other states prefer fundraising counsel. Other terms used in various state laws are fundraising consultant, professional fundraiser consultant, and professional fundraising consultant.

Presently, the state laws regarding fundraising regulation reflect considerable misunderstanding of the meaning of the term professional fundraiser in relation to the term professional solicitor.33 As noted, some state laws so broadly define professional fundraiser (or equivalent term) that the term includes what is normally meant by professional solicitor. Terms used to describe a professional solicitor include phrases such as professional fundraising firm, professional commercial fundraiser, and commercial fundraiser for charitable purposes. A few states use the term professional fundraiser to describe what is generically meant by the term professional solicitor.

(h) Professional Solicitor

The discussion about the traditional and contemporary roles of professional fundraisers and professional solicitors is to be recalled, in understanding the confusion between the two terms as seen from the perspective of the term professional solicitor.

The term professional solicitor is generally defined in a state charitable solicitation act in one of two ways.

Most states define the term professional solicitor to encompass one of three types of persons or relationships. One is a person who, for a financial or other consideration, (1) solicits contributions for or on behalf of a charitable organization, where the solicitation is performed personally or through agents or employees; or (2) solicits through agents or employees specially employed by or for a charitable organization, who are under the direction of such a person. The other is a person who, for a financial or other consideration, plans, conducts, manages, carries on, advises, or acts as a consultant to a charitable organization in connection with the solicitation of contributions but does not qualify as a professional fundraiser (or equivalent term).

When this definition (or something comparable to it) is used, about one-half of the states employ the term professional solicitor. A few use the term paid solicitor. Other phrases used are professional commercial fundraiser, professional fundraising firm, paid fundraiser, and commercial fundraiser.

This definitional approach is usually accompanied by exclusions for officers, employees, lawyers, investment counselors, and bankers. On rare occasions, there will be other exclusions, such as for persons whose sole responsibility is mailing fundraising literature.

Some states define the term professional solicitor to mean any person who is employed or retained for compensation by a professional fundraiser to solicit contributions for charitable purposes. With this definition, the terms used are professional solicitor, paid solicitor, or professional fundraiser.

The confusion in the law in this area, regarding the appropriate line of demarcation between the terms professional fundraiser and professional solicitor, is seen in use of the prevailing definition of the term professional solicitor in defining the term professional fundraiser. One law defines a professional solicitor as a commercial fundraiser for charitable purposes, while another law terms what is generally known as a professional solicitor as a paid fundraiser. The law in a state dubs what is usually defined as a professional solicitor a professional fundraiser and separately defines the term professional solicitor.

(i) Fundraising

Given the uncertainties surrounding the foregoing definitions, it is not surprising that the term fundraising can be confusing. Nowhere is this confusion more evident than in the definition of the phrase fundraising activities employed by the IRS in its instructions accompanying the annual information return.34 Thus, the IRS's fundamental definition of fundraising is that it consists of “activities undertaken to induce potential donors to contribute money, securities, services, materials, facilities, other assets, or time.” The inclusion of time and services in this definition of fundraising is perplexing. For example, a request of someone to serve on a board of directors or otherwise as a volunteer (a gift of time and services) is hardly fundraising. A key component of the word fundraising is fund.

The IRS's position is that fundraising activities include “publicizing and conducting fundraising campaigns; maintaining donor mailing lists; conducting fundraising events; preparing and distributing fundraising manuals, instructions, and other materials; professional fundraising services; and conducting other activities involved with soliciting contributions from individuals, foundations, governments, and others.” However, the maintenance of a donor mailing list can be thought of as an administrative or other management function; the preparation and distribution of fundraising materials can be regarded as an educational undertaking. The references to foundations and governments invoke the solicitation of grants as the equivalent of solicitation of contributions. The catchall phrase about activities involved with the solicitation of contributions is rather sweeping.

The IRS's view is that fundraising does not include gaming; the conduct of a trade or business that is regularly carried on; and activities that are substantially related to the accomplishment of the organization's exempt purpose (other than by raising funds). The parenthetical phrase is not needed inasmuch as programs and fundraising are discrete and different activities.

(j) Commercial Coventurer

Commercial coventuring occurs when a for-profit, commercial business enterprise announces to the public that a portion (a specific amount or a specific percentage) of the purchase price of a product or service will, during a stated period, be paid to one or more named charitable organizations. This arrangement usually results in a charitable contribution by the business enterprise, the amount of which is determined by and depends on consumer response to the promotion. (There is no charitable deduction for participating consumers.) This venture produces gift revenue to the beneficiary charity or charities and positive community awareness for the business sponsor.

A traditional definition of the term commercial coventurer (the for-profit business enterprise) is any person who for profit is regularly and primarily engaged in trade or commerce, other than in connection with the raising of funds or any other thing of value for a charitable organization, and who advertises that the purchase or use of goods, services, entertainment, or any other thing of value will benefit a charitable organization.

It has become common to define a commercial coventure as a charitable sales promotion. This approach defines the promotion as an advertising or sales campaign, conducted by a commercial coventurer, which represents that the purchase or use of goods or services offered by the commercial coventurer shall benefit, in whole or in part, a charitable organization or charitable purpose. In this setting, the term commercial coventurer is defined as a person who for profit is regularly and primarily engaged in trade or commerce, other than in connection with soliciting for charitable organizations or purposes, and who conducts a charitable sales promotion. These definitions, or versions closely akin to them, are used in about a dozen states.

The term commercial coventure is, in several respects, unfortunate. The word coventure suggests that the charitable organization involved is engaged in some form of a joint venture with the participating business enterprise. Also, the term implies that the beneficiary charitable organization is embroiled in some undertaking that is commercial. Both connotations have potential adverse consequences in law, in the tax-exemption setting, and in the unrelated business income setting.

(k) Administrative Agency

The enumeration of definitions in a charitable solicitation act often includes reference to the state agency, department, or official with the responsibility for administration and enforcement of the statute. Predominantly, the administrative and enforcement authority is in the office of the state's attorney general. In many states, however, the authority is in the department of state.

Otherwise, there is little commonality regarding the location of the regulatory authority in this area. In several states, the emphasis is on consumer protection; thus, the authority is in a department of consumer protection, department of agriculture and consumer services, department of commerce and consumer affairs, a division of consumer protection within the department of commerce, and the like. In a few states, the orientation is regulation of business activity; in this case, the authority is in a department of economic development, a department of business regulation, a department of regulation and licensing, or the like.

In some states, the authority to enforce the charitable solicitation act is vested in the attorney general, with the administrative or regulatory authority lodged in another department or agency of the government.

§ 3.3 PREAPPROVAL

A fundamental requirement of nearly every state charitable solicitation act is that a charitable organization (as defined in that law and not exempted from the obligation)35 that intends to solicit—by any means—contributions from persons in that state must first apply for and acquire permission to undertake the solicitation. This permission, which must be secured by both domestic (in-state) and foreign (out-of-state) charitable organizations, is characterized as a registration in most states. In other states, it is cast as an application for a license, a filing of a statement, a filing for a certificate, a filing for a permit, or a filing of a solicitation notice.36 Some states with a form of statutory law on this point do not have any registration or similar requirement for charitable entities.

Typical wording of a provision of this nature is that every charitable organization that intends to solicit contributions within the jurisdiction, or have funds solicited on its behalf, must, prior to any solicitation, file a registration statement.

If the application for this permission is successful, the result is authorization to conduct the solicitation. Application for the registration, license, or other permit is most frequently made to the office of the attorney general or the secretary of state.

Generally, the law requires a principal officer of the charitable organization to certify the accuracy of and to execute the registration statement, license, application, or the like.

The statute usually enumerates the categories of information, about the charitable organization and the solicitation, that must be in the registration statement or other application. These categories of information most frequently are some or all of the following:

  • The name of the organization
  • The name in which the organization intends to solicit contributions
  • The principal address of the organization and the address of any office in the state or, in the absence of an office, the name and address of the person having custody of the organization's financial records
  • The names and addresses of any chapters, branches, or affiliates to be located in the state
  • The names and addresses of the organization's trustees, directors, officers, executive staff, and registered agent
  • The place where and the date when the organization was legally established
  • The form of the organization (corporation, trust, or unincorporated entity)
  • A statement about the organization's classification as a tax-exempt organization under federal law37
  • The purpose or purposes for which the organization was founded
  • An income and expense statement, and an asset and liability statement, for the organization's immediately preceding tax year (perhaps audited), showing, among other items, the type and amount of funds raised, expenses for fundraising, and expenditures of the funds raised
  • The methods by which solicitations will be made, including use of a professional fundraiser and/or professional solicitor38
  • The purpose or purposes for which the contributions to be solicited will be used
  • The names of the individuals who will have final responsibility for the custody of the contributions
  • The names of the individuals responsible for the final distribution of the contributions
  • A statement indicating whether the organization is or has ever been enjoined by one or more states from soliciting contributions
  • Copies of contracts between the charitable organization and professional fundraisers and/or professional solicitors

It is common for the statute to authorize the state's regulatory agency to require, by regulations or otherwise, the submission of information in addition to that required by the statute.

The states' laws either expressly provide or contemplate that the regulatory authorities will examine the application and, where the application is legally sufficient, issue the permit or other authorization to proceed with the fundraising effort. The review authority at this stage of the process is exceedingly broad. At a minimum, the governmental authorities have the power to determine whether the application conforms with all of the legal requirements. At the same time, the discretion these officials have is not unlimited; legally, they are not empowered to make subjective judgments about the worthiness or similar attributes of applicant organizations.39

An investigation can ensue at this stage (as well as at any time thereafter). Most states' laws vest plenary investigative capacity in the regulatory and enforcement authorities, particularly the attorney general.40

Sometimes a chapter, branch, or other affiliate (other than an independent member agency of a federated fundraising organization) has the option of separately reporting the relevant information to the state. Alternatively, it reports to the parent organization, which is then required to furnish the information in a consolidated form to the state.

Permission to engage in fundraising for charitable purposes will not be issued where the regulatory authorities conclude that the charitable organization has omitted or materially misrepresented required information or would be acting in violation of one or more provisions of the state's charitable solicitation law. The law may provide that a permit to solicit will not be issued where a person violated the law, attempted to obtain the fundraising authorization by misrepresentation, or materially misrepresented the purposes and the manner in which contributions would be used.

Usually, the state levies a registration fee, which is either a fixed amount or an amount correlated with the level of contributions received, administrative or fundraising outlays, or the like.41 Most of these statutes provide for a stated fixed fee; some states levy a fee, the amount of which depends on the level of annual receipts. A state may allow the regulatory authorities to set the fee. Other states, however, allow a charitable organization to register its fundraising program without charge.

State laws differ as to the duration of the registration or other authorization to engage in charitable fundraising. In most states, the permit or license expires by law one year after the date of its issuance, at the close of the calendar year, or at the close of the organization's fiscal year. Renewal of the registration or other authorization is made by filing an updated application within a certain period before the expiration date of the existing registration. These statutes usually also require a supplemental filing during the time a registration is in effect, where there is a material change in the information submitted with the application.

In some states, the registration or other authorization remains in effect until withdrawn by the charitable organization or suspended or revoked by the state.

The statutory law in the other jurisdictions does not address the subject of duration of the authorization to engage in charitable fundraising.

These laws usually provide that, where the charitable organization has violated a provision of the applicable charitable solicitation act, the enforcement authorities are to suspend or revoke the registration or other authorization. The statute usually provides for some form of due process, including a hearing, in this type of circumstance.42

There often are separate registration requirements for professional fundraisers and professional solicitors.43

The burdens of registration imposed on charitable organizations engaging in multistate charitable solicitations appear to be moderating, as the consequence of development of a unified registration statement. More than 30 states and the District of Columbia agreed to use the form. Some states, however, require supplemental information. This form is optional for use by participating charitable organizations.44

§ 3.4 ANNUAL REPORTING

Most state charitable solicitation acts require a soliciting charitable organization (unless exempt from the requirement)45 to annually file information with the appropriate governmental agency. This is accomplished by filing a report, usually annually, which is the requirement in most states, or an annual updating of the registration, as is the case in many states. Other states mandate the filing of an annual disclosure statement, the filing of an annual statement, a filing for an annual license, or the filing of a copy of the federal annual information return. There are states with some form of statutory law on this point that do not have any annual reporting or similar requirement for charitable entities. A few states mandate both annual registration and annual reports.

The categories of charitable organizations exempted from the annual reporting requirement usually are those also exempted from the preapproval requirement.

The charitable solicitation statute frequently mandates the contents of the annual reports. The information most often requested is the following:

  • The gross amount of contributions pledged to and collected by the charitable organization—not just in the particular state but in all jurisdictions in which fundraising took place
  • The amount from the solicitation that was or is to be devoted to charitable purposes, as well as the amounts paid or to be paid for fundraising (including the fees of professional fundraisers) and for administration
  • Identification of any professional fundraisers and/or professional solicitors utilized
  • The net receipts disbursed or dedicated for disbursement within the particular state, by category of expenditure

In addition, a reporting charitable organization usually must file a financial statement covering the preceding accounting period, prepared in conformance with appropriate accounting standards. A few states require, by statute, that the reports be based on the accounting standards and reporting procedures promulgated by the Financial Accounting Standards Board and/or the American Institute of Certified Public Accountants, while a state may mandate by statute use of the standards and procedures set forth in the standards for Uniform Financial Reporting by Voluntary Health and Welfare Organizations. Presumably, the regulatory officials in other states have the discretion to select the accounting principles with which charitable organizations must comply or to develop their own. Thus, the law may provide that each reporting charitable organization must report its expenditures in accordance with standards and classifications of accounts as prescribed by the attorney general, or a comparable official, to effect uniform reporting by organizations having similar activities and programs. These reports may have to be accompanied by an opinion of a certified public accountant.

The annual report is due at varying times as required by the states' charitable solicitation statutes. The filing may have to be made within 30 days after the close of the accounting period, within 60 days of that period, within 75 days of the period, within 90 days of the period, within five months of the period, or within six months of the period. The regulators in a few states are authorized by statute to require the filing of a report, in some instances in addition to an annual report, by a charitable organization with respect to some other period.

In some states, the annual report filing requirement, or the extent of it, depends on the level of annual contributions received and/or use of a professional fundraiser and/or professional solicitor. In a few states, a registration or other authorization may be canceled or not renewed until the required annual report is filed.

The annual report of a parent charitable organization must include information with respect to all of its fundraising affiliated groups.

A few states provide, by statute, the fee to be paid with the filing of an annual report. In other states, any fees of this nature are set administratively.

Occasionally, a charitable organization soliciting contributions in a state is required to file financial reports on a quarterly basis during its first year of existence.

There often are separate reporting requirements for professional fundraisers and professional solicitors.46

§ 3.5 EXEMPTIONS

Most of the states' charitable solicitation acts provide some form of exemption from their requirements; however, these laws vary widely with respect to the exemptions available for organizations and solicitations. As noted, the basic definition of the term charitable is sufficiently broad to initially encompass all categories of charitable and other organizations. Therefore, these laws are applicable to soliciting religious, educational, health care, and other charitable organizations, unless an exemption is expressly available to them.

These statutory exemptions may be available for an organization because of the nature of the entity or for an organization to the extent it engages in a particular type of solicitation. The exemption may be from the entirety of the statute or merely a portion of it. In some states, an exemption is not effective until the organization applies for it and is recognized by the state to have it.47

(a) Churches

Churches and their closely related entities are often exempted from the entirety of the states' charitable solicitation acts.48 A typical state's statute accords total exemption to any church or convention or association of churches, primarily operated for nonsecular purposes and no part of the net income of which inures to the direct benefit of any individual.

In many of these states this exemption is not found within the portion of the statute providing for exemptions but instead is located in the definition of charitable entities.

Some states' charitable solicitation laws grant this exemption only to churches and like organizations that have been classified as such by the IRS. These organizations, however, are not required to obtain recognition of tax-exempt status49 and thus some of them do not have this type of classification; technically, then, these organizations are not eligible for the exemption.

(b) Other Religious Organizations

Many states provide an exemption for religious organizations in general from the totality of their charitable solicitation acts. A state law may exclude a corporation sole or other religious corporation, trust or organization incorporated or established for a religious purpose, any agency or organization incorporated or established for charitable, hospital, or educational purposes and engaging in effectuating one or more of such purposes, that is affiliated with, operated by, or supervised or controlled by a corporation sole or other religious corporation, trust or organization incorporated or established for religious purposes, and other religious agencies or organizations that serve religion by the preservation of religious rights and freedom from persecution or prejudice or fostering religion, including the moral and ethical aspects of a particular religious faith.

It is less common for an exemption for religious organizations to be confined to the registration or other requirements as to preapproval. Some states provide religious organizations with exemption from their registration (and sometimes reporting) or like requirements.

(c) Educational Institutions

Some states exempt at least certain types of educational institutions (often with emphasis on higher education) from the entirety of their charitable solicitation acts. Usually, this exemption applies only where the institution is accredited. The more common practice is to exempt educational institutions from only the registration or other preapproval (and sometimes reporting) requirements.

States may, either as an alternative to or in addition to the foregoing approach, exempt from the registration and reporting requirements educational institutions that confine their solicitations to their “constituency.” Thus, a state's law may provide an exemption from registration for any other educational institution confining its solicitation of contributions to its student body, alumni, faculty and trustees, and their families.

On occasion, a state may exempt solicitations by educational institutions of their constituency from the entirety of their charitable solicitation laws.

Many schools, colleges, and universities undertake their fundraising by means of related “foundations.”50 Several states expressly provide exemption, in tandem with whatever exemption their laws extend to educational institutions, to these supporting foundations. Some states exempt, from the registration requirements, parent–teacher associations affiliated with an educational institution, alumni organizations, and student groups.

(d) Libraries

Some states exempt nonprofit libraries from the registration and reporting requirements of their charitable solicitation acts.

Where a state charitable solicitation act fails to make an express provision for exemption for libraries, these institutions may be able to secure an exemption as educational institutions.

(e) Museums

Rarely does a state exempt nonprofit museums from the registration requirements of their charitable solicitation act.

A museum may be able to acquire exemption from a state's charitable solicitation act as an educational institution, where express provision has not been made for it in the exemption clauses.

(f) Health Care Institutions

Some states exempt nonprofit hospitals from the registration or reporting requirements of their charitable solicitation acts. A state may similarly exempt foundations that are related to and supportive of hospitals.

A few states exempt nonprofit hospitals from the entirety of their charitable solicitation acts. A state may similarly exempt hospital-related foundations.

(g) Other Health Care Provider Organizations

A few state laws provide exemption from registration for volunteer rescue associations. A state charitable solicitation act may exempt volunteer ambulance organizations from its registration requirements.

A rare exemption from the registration requirements is for licensed medical care facilities, mental health organizations, and mental retardation centers. A charitable solicitation act may exempt from its registration and reporting requirements any nonprofit organization that operates facilities for the aged and chronically ill or nursing care facilities. Other exemptions are for volunteer health organizations and licensed health care service plans.

(h) Membership Organizations

Charitable solicitation acts are designed to apply to solicitations of the public to protect its members from fundraising fraud and other misuses of charitable dollars. This body of law is intended to ward off misrepresentation in charitable giving by ensuring an appropriate flow of information to prospective and actual donors, thus preventing their being duped into giving in circumstances where the contributions are diverted to noncharitable ends.

Consequently, when a charitable organization solicits its own “constituency” (such as a college soliciting its alumni), it is appropriate to regard the solicitation as a private one and thus exempt from the regulatory requirements.51 This exemption is based on the proposition that the regulatory protections are unnecessary because the donor's relationship with the donee charitable organization, by means of the membership status, is such that he, she, or it can easily obtain the requisite information without the need for intervention by the law.52

In reflection of this rationale, many states exempt organizations (or, in some instances, only certain categories of organizations)—but only from the registration or like requirements—that confine their solicitation to their membership. As noted, the scope of this exemption is confined by the definition accorded the term member or membership.

A few jurisdictions exempt organizations soliciting only their membership from the entirety of their charitable solicitation act.

These exemptions often are limited, such as where the solicitation is conducted only by members or where the conduct of the solicitation is solely by volunteers.

(i) Small Solicitations

For administrative convenience and to alleviate the burdens of regulation that would otherwise be imposed, many of the state charitable solicitation acts exempt small solicitation efforts from the registration or similar requirements. The definition as to what is small, however, varies considerably from state to state.

A provision in a solicitation act typically exempts from registration charitable organizations that do not intend to solicit and receive and do not actually solicit or receive contributions from the public in excess of $10,000 during a calendar year or do not receive contributions from more than 10 persons during a calendar year. While there are variations in the phrasing of these provisions, some states provide for this exemption with the threshold set at $25,000; a few states have this type of provision with a threshold of $10,000; other limitations are $8,000, $5,000, $4,000, $3,000, and $1,500. Often, this exemption is accompanied by a provision that triggers applicability of the registration requirement should contributions exceed the threshold amount. Thus, the state statute may add a rule that, if a charitable organization that does not intend to solicit or receive contributions from the public in excess of $10,000 during a calendar year does actually solicit or receive contributions in excess of such amount, whether or not all such contributions are received during a calendar year, the charitable organization shall, within 30 days after the date the contributions reach $10,000, register with and report to the appropriate agency.

This exemption may be confined to organizations in which fundraising is conducted wholly by volunteers.53

A few states provide for this exemption from the entirety of their charitable solicitation act.

As another approach to excluding small solicitations, some states exempt organizations that do not intend to annually receive contributions from more than 10 persons. On a rare occasion, a solicitation by a charitable organization is exempt where up to as many as 100 persons were solicited. There may be an exemption for these solicitations when conducted by a private foundation.

(j) Solicitations for Specified Individuals

Many states exempt from the registration and reporting requirements of their charitable solicitation acts solicitations that are solely for the benefit of specified individuals.

Thus, a charitable solicitation statute may make this exemption available for persons requesting contributions for the relief of any individual specified by name at the time of the solicitation when all of the contributions collected without any deductions whatsoever are turned over to the named beneficiary for his or her use. As this phrasing indicates, this exemption is usually voided where professional fundraising assistance is used.

As discussed, this type of exemption is often in conflict with the concept of solicitations for charitable purposes.

Rarely will these solicitations be exempt from the totality of the charitable solicitation act.

(k) Political Organizations

Some states exempt political organizations from the entirety of their charitable solicitation acts. Others exempt political organizations from the registration and reporting requirements of their acts. This is one of those exemptions that need not be stated, in that fundraising for political organizations is always outside the ambit of a state's charitable solicitation act.54

(l) Veterans' Organizations

Several states exempt veterans' organizations from the registration and reporting requirements of their charitable solicitation acts.

(m) Named Organizations

Some state charitable solicitation acts provide exemption—usually only from the registration requirements—for organizations identified by name.55

This practice is evidenced in provisions granting this type of exemption to the American Red Cross, boys' clubs, named educational institutions, Boy Scouts and Girl Scouts organizations, girls' clubs, the Junior League, Young Men's and Young Women's Christian Associations, and a children's trust fund.

(n) Other Categories of Exempted Organizations

The state charitable solicitation acts contain exemptions—usually from the registration requirements—for a variety of other categories of charitable organizations. The scope of these exemptions is vast: some expressly mandate a filing requirement for the exemption, solicitations only by volunteers, no private inurement, solicitations only of members, and other limitations.

This type of exemption, albeit with some restrictions in some states, may be extended to include firefighting organizations; fraternal organizations; social groups; patriotic organizations; historical societies; civic organizations; nonprofit nurseries or other children's groups; certain organizations receiving an allocation from community chests, united funds, and the like; federally chartered organizations; law enforcement groups; community service organizations; youth organizations; labor unions; business and professional associations; senior citizen centers; grange organizations; civil defense organizations; civil rights organizations; fraternities and sororities associated with a variety of organizations; debt counseling agencies; state-based charitable trusts; persons seeking contributions and grants only from corporations and private foundations; and persons seeking grants only from private foundations.

The law in a few states provides that a noncommercial radio or television station is exempt from the state's charitable solicitation act's registration requirements. There is the occasional exemption from registration requirements for organizations that do not have an office within the jurisdiction; that solicit in the state solely by means of telephone, telegraph, direct mail, or advertising in national media; and that have a chapter or affiliate that itself has registered in the state. A rare exemption from registration requirements is available for any charitable organization located outside the state, if the organization filed the registration documents required under the charitable solicitation laws of the state in which it is located, the registration documents required under the laws of other states, and such federal forms56 as may be required by rule.

Other exemptions from the registration and/or reporting requirements may encompass any publicly supported community foundation or publicly supported community trust, state-based charitable trusts, civil defense organizations, noncommercial newspapers, or debt counseling agencies.

In a rare exemption, organizations of hunters, fishermen, and target shooters are exempt from the entirety of the charitable solicitation act.

An unusual provision may exempt from the registration and reporting requirements of a charitable solicitation act all charitable organizations that are tax exempt under federal law.57 A state may have a similar exemption (albeit only from registration), although many categories of tax-exempt charitable organizations must file proof of their tax-exempt status with the state. In several states, solicitations for federal, state, and/or local governments are exempt.

A wide range of nonprofit, tax-exempt organizations are exempt from the states' charitable solicitation acts because these entities are not charitable as that term is defined in the applicable statutes.

The foregoing exemptions are not necessarily absolute or automatic. That is, in some states, a charitable organization (but not necessarily all categories of such organizations) must first secure a determination from the state regulatory authorities as to its status as an organization exempt from some or all of the charitable solicitation act's requirements; in some states, some or all of the exemptions are precluded or revoked where a charitable organization uses the services of a professional fundraiser; and, in some states, the exemption is precluded or revoked where a charitable organization uses the services of a professional solicitor.

§ 3.6 REGULATION OF PROFESSIONAL FUNDRAISERS

The state charitable solicitation statutes often require a professional fundraiser, acting on behalf of a charitable organization that is subject to the particular statute, to register with the appropriate state agency and otherwise be in conformity with the statute. This registration must be completed before the professional fundraiser commences to act in that capacity for a charitable organization soliciting funds in the state.

The scope of this registration and of other regulatory requirements is largely governed by the reach of the definition, under a state's charitable solicitation law, of the term professional fundraiser.58

This registration is usually effective for a period of one year, with expiration of the registration set to occur on a stated date, and is renewable.

Often, these laws also impose reporting requirements for professional fundraisers. A few state charitable solicitation acts mandate annual reports. The far more common practice is annual registration.

An applicant for this registration is usually required to file with and have approved by the appropriate state officials a bond in a statutorily set sum. These bond amounts are as follows: $25,000, $20,000, $15,000, $10,000, $5,000, or $2,500. These bonds inure to the benefit of the state in reimbursement for any losses resulting from malfeasance, nonfeasance, or misfeasance in the conduct of a professional fundraiser in connection with charitable solicitation activities.59

Most of these statutes require professional fundraisers to maintain accurate books and records, and to do so for a stated period (generally, three years).

§ 3.7 REGULATION OF PROFESSIONAL SOLICITORS

Usually, the states' charitable solicitation acts require professional solicitors to register in accordance with and otherwise comply with the statute. These laws often also impose a variety of reporting, disclosure, and other requirements. Thus, many states require annual (or sometimes other) reports from professional solicitors; the more common practice is annual registration. Some states require both.

The statutory bonding requirements for professional solicitors are as follows: $50,000, $25,000, $20,000, $15,000, $10,000, or $5,000.

The scope of these regulatory requirements is largely governed by the reach of the definition, under a state's charitable solicitations law, of the term professional solicitor.60 The wide variation in these definitions is frequently confusing.

§ 3.8 REGULATION OF COMMERCIAL COVENTURERS

Several states have some form of law relating to the regulation of commercial coventuring; many of these states use the concept of the charitable sales promotion. A charitable sales promotion or commercial coventure is a promotion by a for-profit (commercial) business pursuant to which, during a stated period of time, a portion (usually identified as a percentage, perhaps with a cap) of the sales price of a good sold or service provided will be contributed to one or more charitable organizations. (The charitable deduction is available for the donating company, not the consumer.) Recently, this type of fundraising has been portrayed as embedded giving. These forms of regulation emphasize disclosure of information about the promotion to the public; other requirements are registration of commercial coventurers, a contract with the charitable organization and commercial coventurer, formal consent from the charity, and/or a report from the commercial coventurer.

A bond for commercial coventurers may be required; the bond amount is likely to be set at $10,000.

§ 3.9 LIMITATIONS ON FUNDRAISING COSTS

One of the most controversial issues in the field of fundraising for charitable purposes is the matter of fundraising costs. While there is general agreement that charitable fundraising costs should be reasonable, there is much disagreement and misunderstanding as to what in fact is a reasonable fundraising expense. There also is disagreement about how to determine the reasonableness of fundraising costs. Ascertainment of the reasonableness of a fundraising cost depends on a variety of facts and circumstances.61

Many of the states long tried to prevent charitable organizations with (allegedly) “high,” “unreasonable,” or “excessive” fundraising costs from soliciting contributions within their jurisdictions. The traditional mechanism for doing this was denial of permission to solicit in the state if a charity's fundraising costs exceeded a particular percentage of total contributions or revenues received. This percentage ceiling came in two forms: (1) an absolute limitation (i.e., one without a means of proving reasonableness, irrespective of a particular percentage) and (2) a rebuttable limitation (where the prohibition on fundraising could be overcome by a showing that the fundraising expenses were in fact reasonable, notwithstanding the percentage that may have been produced). It is now settled, however, that this mechanism is unconstitutional as a violation of the rights of free speech of soliciting charitable organizations.62

Consequently, the states have been forced to repeal these percentage limitations, although the practice is dying hard. As an illustration, the law of a state once prohibited registration by a charitable organization, professional fundraiser, or professional solicitor where the charity would receive less than 90 percent of the receipts of a solicitation. According to a representative of the state's tax commission, which at that time administered the state's charitable solicitation act, the provision had not yet been removed from the statute by the state legislature, and was therefore still being enforced. This was the case even though the state attorney general's office had written an opinion stating that the provision was unconstitutional. Another state had a provision that a fundraising cost of a charitable organization that is in excess of 30 percent of total revenue was presumed to be unreasonable; a charitable organization with an unreasonable fundraising cost could not register in the state. That rule was repealed.

The law of another state provided that a charitable organization registered under its solicitation statute could not expend an “unreasonable” amount of its gross contributions for fundraising. An amount in excess of 25 percent of total contributions was presumed to be unreasonable, and the secretary of state was empowered to—using unstated criteria—approve higher costs. This provision was subsequently removed from the state's charitable solicitation statute.

An unsuccessful attempt involved shifting the limitation away from the charitable organization and placing it on the amount of compensation received by the professional solicitor. Thus, one state had a provision prohibiting a professional solicitor from receiving more than 25 percent of the total amount received in a solicitation. This rule has since been removed from the solicitation act; during the time it was part of the statute, the state regulators conceded that the law was unconstitutional and not being enforced. The law of another state provided that a charitable organization could not pay a professional solicitor an amount in excess of 15 percent of the contributions received. This law also asserted a rebuttable presumption in connection with the fundraising costs of charitable organizations, which placed a general limitation on fundraising costs of 35 percent, albeit with an opportunity for higher expenses in the event of “special facts and circumstances.” This provision was not enforced and has since been eliminated.

The law of another state provided that a charitable organization may not pay a professional solicitor more than 25 percent of contributions received and that a charitable organization may not have fundraising expenses in excess of 50 percent of contributions received, again with an opportunity for the allowance of higher expenses in the case of special circumstances. During the time before the provision was removed, the state regulators were uncertain as to whether or how to enforce it. The law of another state provided that a charitable organization could not pay a professional solicitor for services in connection with the solicitation of contributions in excess of a “reasonable percent” of gifts raised. This law also authorized the state's secretary of state to pass judgment on the contract between a charitable organization and a professional solicitor, and to force renegotiation of the agreement or perhaps disallow it where the contract would “involve an excessively high fundraising cost.” These rules are no longer in the law, and the state regulators evinced little interest in enforcing them while they were.

Rules aimed at imposing ceilings on the compensation paid to professional solicitors are not proving easy to eradicate. One of them was struck down as unconstitutional in 199463 and another was rendered ineffectual in 1995.64 Yet, as discussed next, provisions in the states' charitable solicitation acts involving percentages remain plentiful.

Many states require a statement about any percentage compensation in the contract between the charitable organization and the professional fundraiser and/or professional solicitor. One rule in this regard provides that the contract must state the “guaranteed minimum percentage of the gross receipts from contributions which will be remitted to the charitable organization” and the “percentage of the gross revenue for which the solicitor shall be compensated.” One state requires that a contract between a charitable organization and a professional fundraiser be filed with the state where there is percentage-based compensation.

Some states utilize the percentage approach in setting disclosure. Of these, a few require that the solicitor disclose, at the point of solicitation, the funds that the charity will receive, stated as a percentage, and a state will occasionally require this type of disclosure following a request by the prospective donor for the information. A state may require a disclosure of this nature upon the request of anyone or require a charitable organization's fundraising cost percentage to be stated in its registration statement. In a few states, solicitation literature used by a charitable organization must include a statement that, upon request, financial and other information about the soliciting charity may be obtained directly from the state.65

A rare rule prohibits a professional fundraiser from receiving compensation from a charitable organization if the compensation depends wholly or partly on the number or value of charitable contributions that result from the effort of the fundraiser.

§ 3.10 AVAILABILITY OF RECORDS

The information filed in accordance with a state's charitable solicitation act, whether contained in an application for registration, annual report, contract, or other document, is a matter of public record. This requirement encompasses information filed by charitable organizations, professional fundraisers, professional solicitors, and commercial coventurers. The fact that these records are public is usually stated in the statute.

For example, the law may provide that statements, reports, professional fundraising counsel contracts or professional solicitor contracts, and all other documents and information required to be filed shall become government records in the department or agency and be open to the general public for inspection at such times and under such conditions as may be prescribed.

This type of provision is frequently buttressed by a record-keeping requirement. In almost all instances, this record-keeping obligation is imposed on the soliciting charitable organization; however, in some states, the requirement is confined to professional fundraisers, professional solicitors, and/or commercial coventurers.

Many of these laws require that the information be maintained, by the regulators and/or the regulated, for a stated period, usually three years. Where the records must be maintained by a regulated entity (such as the soliciting charitable organization or professional fundraiser), the law often requires that the information be open to inspection at all reasonable times by the appropriate officials of the state. Most of these laws require a charitable organization, and/or related professional fundraisers, professional solicitors, and commercial coventurers, to keep “true and complete” records to ensure compliance with the laws requiring disclosure of information and the availability of records.

§ 3.11 CONTRACTS

Many of the state charitable solicitation acts require that the relationship between a charitable organization and a professional fundraiser, and/or between a charitable organization and a professional solicitor, be evidenced in a written agreement. This contract must be filed with the state soon after the document is executed.

A few of the states with laws pertaining to commercial coventurers have a like requirement with respect to contracts entered into between charitable organizations and business enterprises.

The states that make these requirements applicable to charitable organizations and professional fundraisers, but not to charitable organizations and professional solicitors, are often the states that define a professional solicitor as one who is an employee of a professional fundraiser.66

Several state charitable solicitation acts contain rules that mandate certain provisions in a contract between a charitable organization and a professional fundraiser, professional solicitor, and/or commercial coventurer.67 The law may require that any one of these three types of contracts must contain (1) a concise and accurate statement of the charitable organization's right to cancel; (2) a concise and accurate statement of the period during which the contract may be canceled; (3) the address to which the notice of cancellation is to be sent; (4) the address of the secretary of state, to whom a duplicate of the notice of cancellation is to be sent; and (5) a statement of the financial arrangement between the parties.

§ 3.12 REGISTERED AGENT REQUIREMENTS

A state charitable solicitation act often contemplates that a charitable organization, professional fundraiser, and/or professional solicitor will appoint a registered agent in the state where contributions are being solicited. A registered agent is a person who, as agent for the entity, is the formal point of contact for anyone who is required to or desires to communicate with the entity. In general, organizations (particularly corporations) are required by law to maintain a registered agent in the state or states in which they are formed and headquartered, and in any other state in which they are doing business. A registered agent can be an individual who is a resident of the state, a corporation that is authorized by the state to function as a registered agent for corporations, or (in some states) a lawyer who is a member of the bar of that state.

Thus, where a charitable organization, professional fundraiser, or professional solicitor is incorporated under the law of a state or has its principal place of activity or business in a particular state (a domestic state), it is required to appoint a registered agent in conformity with the requirements of that state.

Where a charitable organization, professional fundraiser, or professional solicitor has its principal place of activity or business in a state other than that in which the charitable solicitation is being conducted (a foreign state), however, it likely will not have appointed a registered agent in that state.68 In this situation, the charitable solicitation act in several states provides that, where the foreign charitable organization, professional fundraiser, and/or professional solicitor participates in a charitable solicitation in the state, the administrator of the act is deemed, by virtue of the solicitation activity, to have been irrevocably appointed as its agent for purposes of service of process and similar functions.

Occasionally, rules of this nature are applicable with respect to commercial coventuring.

§ 3.13 PROHIBITED ACTS

Nearly all of the state charitable solicitation acts contain a list of one or more types of conduct—often termed prohibited acts—that may not be lawfully engaged in by a charitable organization (and perhaps a professional fundraiser, professional solicitor, and/or commercial coventurer).

These prohibited acts may entail some or all of the following:

  • A person may not, for the purpose of soliciting charitable contributions, use the name of another person (except that of an officer, director, or trustee of the charitable organization by or for which contributions are solicited) without the consent of the other person.69 This prohibition extends to the use of an individual's name on stationery or in an advertisement or brochure, or as one who has contributed to, sponsored, or endorsed the organization.
  • A person may not, for the purpose of soliciting contributions, use a name, symbol, or statement so closely related or similar to that used by another charitable organization or government agency that it would tend to confuse or mislead the public.70
  • A person may not use or exploit the fact of registration with the state to lead the public to believe that the registration in any manner constitutes an endorsement or approval by the state.
  • A person may not misrepresent to or mislead anyone, by any manner, means, practice, or device, to believe that the organization on behalf of which the solicitation is being conducted is a charitable organization or that the proceeds of the solicitation will be used for charitable purposes, where that is not the case.
  • A person may not represent that the solicitation is for or on behalf of a charitable organization or otherwise induce contributions from the public without proper authorization from the charitable organization.71

Some states prohibit a professional solicitor from soliciting for a charitable organization unless the solicitor has a written and otherwise valid authorization from the organization, has the authorization in his or her possession when making solicitations, and displays the authorization upon request to the person being solicited, police officers, or agents of the state.

§ 3.14 REGULATORY PROHIBITIONS

Some states have provisions in their charitable solicitation acts that go beyond the usual regulation of the process of raising funds for charitable purposes.

In many states, it is expressly unlawful for a charitable organization to solicit and/or expend funds raised for purposes that are not charitable or for purposes not referenced in the application submitted as part of the registration process.

Most of the states have disclosure rules as part of their charitable solicitation acts, as a condition to a lawful fundraising effort. A few states have point-of-solicitation disclosure requirements imposed on charitable organizations, and several states have such requirements with respect to solicitations by professional solicitors.

Many states have rules concerning the solicitation of tickets to be used at promotional or fundraising events.

In some states, the law imposes specific requirements on the boards of directors of soliciting charitable organizations. Directors of charitable entities may be expressly obligated to supervise the organizations' fundraising activities. A charitable solicitation law may prohibit certain conflicts of interest at the board level in the fundraising setting. One of these laws requires a charity to “substantiate a valid governing structure.” A state law has directions to the board as to investment management activities, another places limitations on the ability of a charitable organization to indemnify its directors, and under one law, a charitable organization cannot solicit funds in the state if its directors have been convicted of certain crimes.

§ 3.15 DISCLOSURE STATEMENTS AND LEGENDS

Some states' charitable solicitation laws require a charitable organization engaged in fundraising in the jurisdiction to, in furtherance of a consumer protection objective, disclose the availability of certain information to prospective contributors.

For example, in several states, a prospective donor must be given a disclosure statement, which includes the name of the charitable organization, the address and telephone number where a request for a copy of the organization's financial statement should be directed, and a statement that relevant documents and information filed under the state's law are available from the state's regulatory office.

Some of these state laws require a legend that must be utilized in a charitable solicitation. As an illustration, one of these laws requires the following on all written solicitations and on written confirmations, receipts, or reminders subsequent to an oral solicitation:

A copy of the official registration and financial information may be obtained from the Pennsylvania Department of State by calling toll-free, within Pennsylvania, 1 (800) 732-0999. Registration does not imply endorsement.

One state requires charitable organizations to print their state registration number on solicitation materials.

These requirements impose burdens on charitable organizations that solicit contributions on a multistate basis. One organization devised an all-purpose legend that reads as follows:

You may obtain a copy of ______'s [the organization's name] financial report by writing to it at ______ [organization's address]. For your information, ______ registers with agencies in many states. Some of them will supply you with the financial and registration information they have on file.

Residents of the following states may request information from the offices indicated (the toll-free numbers are for use only within the respective states): Florida—Div. of Consumer Services, Charitable Solicitations, The Capitol, Tallahassee, FL 32339; Maryland—Office of the Secretary of State, Statehouse, Annapolis, MD 21401, 1-800-825-4510; New York—Office of Charities Registration, 162 Washington St., Albany, NY 12231; Pennsylvania—Department of State, Bureau of Charitable Organizations, Harrisburg, PA 17120, 1-800-732-0999; Virginia—Division of Consumer Affairs, P.O. Box 1163, Richmond, VA 23209, 1-800-552-9963; Washington—Office of the Secretary of State, Charitable Solicitation Division, Olympia, WA 98504, 1-800-332-4483; West Virginia—Secretary of State, State Capitol, Charleston, WV 25305. Registration with a state agency does not imply the state's endorsement. MICS _____.72

§ 3.16 RECIPROCAL AGREEMENTS

As the foregoing indicates, the requirements of the state charitable solicitation acts can vary widely, as can the regulations, rules, and forms promulgated to accompany and expand these laws, and the enforcement activities with respect to them. This makes it difficult and expensive for a charitable organization soliciting contributions on a nationwide basis to lawfully comply with all of the varying requirements. Some states have attempted to remedy this situation by pursuing methods to bring their laws, and interpretations and enforcement of them, into some conformity with other states' requirements.

For the most part, state regulators have the inherent authority (where revision of the statutory law is not necessary) to promulgate regulations, rules, forms, and enforcement policies that are comparable to similar requirements in other states. Nonetheless, some states' charitable solicitation acts contain a provision that, if earnestly followed, could somewhat alleviate this lack of uniformity. This provision authorizes the appropriate state official to enter into reciprocal agreements with his or her counterparts in other states to exchange information about charitable organizations, professional fundraisers, and professional solicitors; accept filings made by these persons in the other states where the information required is substantially similar; and grant exemptions to organizations that are granted exemption under the other state's statute where the laws are substantially similar.

§ 3.17 SOLICITATION NOTICE REQUIREMENTS

One of the contemporary trends in the development of state charitable solicitation acts is the growing number and stringency of requirements applicable to professional solicitors. The emphasis has been on increased reporting and other forms of disclosure to a governmental agency, to the charitable organization involved, and/or to the solicited public, particularly by means of a solicitation notice.

A typical requirement obligates a professional solicitor to file a solicitation notice with the regulatory body within 20 days prior to the commencement of a solicitation. This solicitation notice, which must be under oath, must include a description of the solicitation event or campaign, the location and telephone number from which the solicitation is to be conducted, the names and residence addresses of all employees, agents, or other persons who are to solicit during the campaign, and the account number and location of all bank accounts where receipts from the campaign are to be deposited. Copies of campaign solicitation literature, including the text of solicitations to be made orally, must be attached to the solicitation notice. The charitable organization on whose behalf the solicitor is acting must certify that the solicitation notice and accompanying material are “true and complete.”

In other states, the solicitation notice may require additional items of information, such as whether the solicitor will at any time have custody of the contributions received, a “full and fair” description of the charitable program for which the solicitation is being conducted, the fundraising methods to be used, the dates when the solicitation will commence and terminate, and information concerning any investigation or litigation regarding the professional solicitor's solicitation activities within the previous six years. Some states also require that a copy of the contract between the charitable organization and the professional solicitor be attached to the solicitation notice.

Using a somewhat similar approach, a few states require a professional solicitor to provide the charitable organization involved with an accounting after the conclusion of a solicitation.

Some states require a solicitor to carry a solicitation card that contains certain information and to display the card to prospective donors.

§ 3.18 FIDUCIARY RELATIONSHIPS

Another relatively recent category of provision to emerge in state charitable solicitation acts is the one adopted by a few states, which statutorily (as opposed to by means of the common law) makes professional fundraisers and/or professional solicitors fiduciaries with respect to the charitable organization involved.73 This designation, among other outcomes, increases the legal liability of these persons. A typical provision of this nature states that every person soliciting, collecting, or expending contributions for charitable purposes, and every officer, director, trustee, and employee of any such person concerned with the solicitation, collection, or expenditure of such contributions, is deemed to be a fiduciary and acting in a fiduciary capacity.

§ 3.19 POWERS OF ATTORNEY GENERAL

Frequently, a state charitable solicitation statute invests the state's attorney general (or, occasionally, some other official) with specific powers in connection with administration and enforcement of the statute.74 Usually, the attorney general is authorized to investigate the operations or conduct of charitable organizations, professional fundraisers, and professional solicitors who are subject to the statute, and to issue orders having the same force and effect as a subpoena. The attorney general is often expressly empowered to initiate an action in court to enjoin, preliminarily or permanently, a charitable organization, professional fundraiser, professional solicitor, or other person who engages in a method, act, or practice in violation of the statute or a rule or regulation promulgated in connection with the statute; or employs or uses in a solicitation of charitable contributions a device, scheme, or artifice to defraud, or to obtain money or property by means of any false pretense, deception, representation, or promise.

Occasionally, the attorney general is collaterally granted some or all of this authority with respect to individuals or organizations masquerading as charitable organizations or as charitable organizations entitled to an exemption from the statutory requirements. Thus, the statute may empower the state's attorney general to institute legal action against a charitable organization or person which or who operates under the guise or pretense of being an organization or person exempted by the act and is not in fact an organization or person entitled to such an exemption.

These state statutes usually include the obligatory provision that they may not be construed to limit or restrict the exercise of powers or performance of duties of the attorney general that he or she otherwise is authorized to exercise or perform under any other provision of law. The charitable solicitation act is likely to explicate this principle, by providing that the attorney general must enforce the due application of funds given or appropriated to public charities within the state and prevent breaches of trust in the administration thereof.

§ 3.20 MISCELLANEOUS PROVISIONS

In several states, a solicitor is required to place contributions in an account at a financial institution; in most of these states, the account must be solely in the name of the charitable organizations involved.

In some states, charitable organizations and/or professional solicitors are required to timely send confirmations or receipts of contributions to the donors. The law may provide an opportunity for a donor to subsequently cancel a contribution. In a few states, the solicitation of contributions in the state is deemed to be doing business in the state.

The laws in some states mandate a public education program as to charitable giving and fundraising abuses.

In most states, the regulatory officials are expressly granted the authority to promulgate rules and regulations to accompany the particular state's charitable solicitation act.

In some states, the law provides that county or municipal units of government may adopt other and/or more stringent requirements regarding the solicitation of charitable contributions and, expressly or impliedly, that these requirements will not be preempted by the state law. This rule is sometimes referred to as the municipal option.

In a few states, a provision makes it clear that the charitable solicitation law may not be construed to restrict the exercise of authority generally accorded to the state's attorney general.

Occasionally, the regulators must make an annual report to the governor and the legislature on the activities with respect to charitable solicitations in the state. In a few states, the regulators must maintain a registry of charitable organizations or professional solicitors.

The law may authorize a commission or council to serve, in an advisory capacity and/or otherwise, as part of the administration of the state's charitable solicitation act.

In a few states, there are limitations as to use of the telephone for charitable solicitation purposes, particularly where the callers are compensated. One jurisdiction flatly prohibits the practice.75 Others state the hours during which the calls may be made, either by a charitable organization, a professional fundraiser, or a professional solicitor. The law may prohibit a gift solicitation by telephone where there is harassment, intimidation, or torment.

§ 3.21 SANCTIONS

The means of enforcing a state charitable solicitation act are plentiful. The principal enforcement mechanisms, which come into play upon the occurrence of one or more violations of the act, are the following: authorization of the revocation, cancellation, or denial of a registration; authorization of an investigation by the appropriate governmental officials; authorization of injunctive proceedings; authorization of the levying of fines and other penalties; and authorization of the imposition of criminal penalties (including imprisonment). Many states characterize violations of these statutes as misdemeanors, with specific penalties referenced elsewhere in the state's code of laws. One state mandates loss of tax-exempt status as a sanction, while some states affirmatively recognize private actions.

In some states, a violation of the state's charitable solicitation act simultaneously constitutes a violation of the state's unfair trade practices or deceptive practices law.

In all of the jurisdictions, a person may be found to have committed a fraud against the public, in the setting of the solicitation of charitable gifts.76

§ 3.22 UNIFIED REGISTRATION

The National Association of State Charities Officials and the National Association of Attorneys General developed a project to standardize, simplify, and economize the process of registration pursuant to the states' charitable solicitation laws. This project is manifested in the Unified Registration Statement (URS). The URS is part of a larger effort by these organizations to consolidate the information and data requirements of all states requiring registration by charitable organizations engaged in fundraising.

The URS effort consists of three phases: (1) compilation of an inventory of registration information demands from all of the states, (2) production of a format (or form) that incorporates all or most of these demands, and (3) encouragement of the states to accept this standardized format as an alternative to their own forms. This project is ongoing; at present, 36 states are participating in it. A number of states, however, request additional information, entailing supplementary forms.77

The URS project addresses registration only. Once registered, even under this uniform approach, a fundraising charitable organization is on its own in connection with annual reporting. Nonetheless, a project is under way to produce a format for annual reporting with the states in the fundraising context.

§ 3.23 OTHER LAWS

In addition to the panoply of state charitable solicitation acts, charitable organizations soliciting gift support from the public may have to face other state statutory or other regulatory requirements. These include:

  • A state's nonprofit corporation act, which has registration and annual reporting requirements for foreign (out-of-state) corporations that are doing business within the state. It is not clear whether, as a matter of general law, the solicitation of charitable contributions in a foreign state constitutes doing business in the state.78 Some states provide, by statute, that fundraising is the conduct of business activities in their jurisdictions. If the solicitation of charitable contributions were declared, as a matter of general law, a business transaction in the states, the compliance consequences would be enormous, considering the fact that nearly every state has a nonprofit corporation act. This type of a requirement would cause a charitable organization that is soliciting contributions in every state to register and report more than 90 times each year, not taking into account federal and local law requirements!
  • A state insurance law, which may embody a requirement that a charitable organization writing charitable gift annuity contracts obtain a permit to do so and subsequently file annual statements.
  • A state's blue sky statute regulating securities offerings, which may be applicable to offers to sell and to sales of interests in, and the operation of, pooled income funds. These laws may also apply with respect to charitable remainder annuity trusts and unitrusts.79
  • A state's law prohibiting fraudulent advertising or other fraudulent or deceptive practices.80
  • A state's version of the Uniform Supervision of Trustees for Charitable Purposes Act, which requires a charitable trust to file with the state attorney general a copy of its governing instrument, an inventory of the charitable assets, and an annual report. Of similar scope and effect are the state laws that invest the state attorney general with plenary investigative power over charitable organizations.
  • State law concerning charitable contribution deductions and eligibility for tax-exempt status as a charitable entity.81

As this chapter indicates, the states' charitable solicitation acts—despite some overall common features—are rather disparate. The breadth and depth of these laws testify to the failure of efforts during many years to make them more uniform, for the purpose of easing compliance with and administrating them. State law regulation of charitable soliciting continues to expand, and indications are rather clear that the states will continue to go their separate ways in this arena, rebuffing the attempts of those who would integrate and streamline this regulatory scheme.

§ 3.24 PROSPECT OF LAW CHANGES

The Senate Finance Committee, in the course of preparing federal tax legislation to further regulate the charitable sector, asked the Independent Sector to submit its recommendations as to law changes. The Independent Sector in turn convened a Panel on the Nonprofit Sector, which submitted comments as to the proposed legislation in mid-2005. Draft recommendations were submitted to the Panel from its work groups on September 22, 1995. One set of these draft recommendations pertained to the charitable solicitation process.82

These draft recommendations observe that most public charities must solicit funds from the public in support of their programs. Charitable solicitation activities vary greatly from charity to charity, depending on factors such as the size and stage of an organization, the needs and resources within the community involved, and the judgment of an organization's governing board as to how best to fund its charitable activities in the short and long term. There also is recognition of the fact that charities may rely on for-profit professional fundraisers and consultants for assistance.

In stating the problem to which these recommendations relate, there is the further observation that state regulators, and to a lesser extent the IRS and the Federal Trade Commission (FTC), have long been concerned about fraudulent solicitations and about professional solicitors who raise charitable funds primarily for their own benefit. They are also concerned that, when charities pay large fees to professional fundraisers, they may receive only a small percentage of the total amount raised. Recognizing that there are legitimate reasons why a charity may conduct a costly solicitation campaign that results in little net revenue, such as the value of an event in increasing the visibility of the organization or the difficulty in raising funds for unpopular causes, this analysis notes that regulators and others fear that high solicitation costs signal an improper benefit conferred on a for-profit fundraiser or an abuse of charities and/or the public. Also, there is concern about fiscal loss to government, as donors take a full deduction for contributions, although only a small portion of them may be used for charitable purposes.

State charity registration and annual reporting forms are neither uniform nor filed electronically, making it difficult for charities to comply with the applicable requirements properly and for state officials to enforce the laws. Charitable organizations that solicit in multiple jurisdictions or on the Internet find compliance with state and local charitable solicitation laws increasingly confusing and costly.

The following recommendations were proposed:

  • Congress should require states to create a single-point electronic uniform filing system for charitable solicitation registration and annual reporting, and provide the requisite funding. This system should be designed so that central filings, the content of which should be determined by the states in consultation with the FTC and the charitable sector, would automatically satisfy the requirements of all states in which the charity solicits funds.
  • States should continue in their traditional role as the primary regulators of charitable solicitation activities. Current state and federal laws prohibiting fraudulent solicitation should be vigorously enforced and, where necessary, strengthened.
  • The IRS should firmly enforce the current law prohibitions against private inurement and substantial private benefit in the context of charitable solicitations.
  • Charitable organizations should actively encourage state legislatures to adopt the Model Charitable Solicitations Act or other legislation designed to effectively protect donors and to deter and punish charitable solicitation abuses.
  • The charitable sector should encourage the National Association of Attorneys General and the National Conference of Commissioners on Uniform State Laws to work together to update the Model Charitable Solicitations Act to address Internet and other current fundraising vehicles and practices.

As to the first of these recommendations, the draft expressed the view that Congress should not specify the content of the registration and reporting requirements, leaving development of the substance of these requirements to the states, working with the FTC, within a reasonable time frame. Periodic revisions to the registration and reporting requirements should be similarly recommended by the states. Only if states are unable to agree on uniform reporting requirements within this reasonable time frame should federal legislation imposing uniformity be considered.

The legislation that subsequently passed the 109th Congress (2005–2006)83 did not address any of the foregoing recommendations. These recommendations have not been subsequently considered by Congress.

NOTES

  1. 1.  To a lesser extent, the boundaries of these laws are also somewhat set by the scope of the terms solicit (see § 3.2(c)) and contribution (see § 3.2(e)).
  2. 2.  See § 2.1.
  3. 3.  See Tax-Exempt Organizations, Part Three; Charitable Giving, § 2.2.
  4. 4.  IRC §§ 501(c)(3), 509(a)(1) (IRC § 170(b)(1)(A)(i)-(vi)), and 509(a)(2)-(4).
  5. 5.  IRC § 501(c)(4). See Tax-Exempt Organizations, Chapter 13.
  6. 6.  Id., Chapter 17.
  7. 7.  A problem with this type of statutory exclusion is that it invites the argument that the excluded solicitations would be embraced by the statute absent the special exception.
  8. 8.  E.g., Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, 52 T.C.M. 51 (1986).
  9. 9.  For a discussion as to whether an organization that exists solely for the benefit of its membership can qualify as a charitable organization, see Commonwealth v. Association of Community Organizations for Reform Now, 463 A.2d 406 (Pa. 1983). Also, Packel v. Frantz Advertising, Inc., 353 A.2d 492 (Pa. 1976).
  10. 10. See § 3.2(a).
  11. 11. A discussion of these points appears in Packel v. Frantz Advertising, Inc., 353 A.2d 492 (Pa. 1976).
  12. 12. See § 3.2(a).
  13. 13. See § 3.2(b).
  14. 14. State v. Blakney, 361 N.E. 2d 567, 568 (Ohio 1975).
  15. 15. Id. Likewise Brown v. Marine Club, Inc., 365 N.E. 2d 1277 (Ohio 1976).
  16. 16. As to the latter, see § 3.2(e).
  17. 17. See § 5.5.
  18. 18. See Charitable Giving, § 7.18.
  19. 19. See §§ 3.2(i), 4.7.
  20. 20. See § 3.2(d).
  21. 21. Commissioner v. Duberstein, 363 U.S. 278, 285 (1960), quoting from Commissioner v. LoBue, 351 U.S. 243, 246 (1956).
  22. 22. United States v. American Bar Endowment, 477 U.S. 105, 116–117 (1986).
  23. 23. Robertson v. United States, 343 U.S. 711, 714 (1952).
  24. 24. United States v. American Bar Endowment, 477 U.S. 105, 118 (1986).
  25. 25. Hernandez v. Commissioner, 490 U.S. 680, 692 (1989).
  26. 26. Id.
  27. 27. See Charitable Giving, § 2.1.
  28. 28. Attorney General v. International Marathons, Inc., 467 N.E. 2d 51 (Mass. 1984).
  29. 29. See § 3.5(i).
  30. 30. See §§ 3.5, 4.8.
  31. 31. See § 3.3.
  32. 32. See § 3.5.
  33. 33. See § 3.2(h).
  34. 34. See § 7.11(a).
  35. 35. See §§ 3.2(a), 3.5.
  36. 36. A registration regime does not require the same level of constitutional law protection as does a licensing regime. E.g., Illinois ex rel. Madigan v. Telemarketing Associates, Inc., 538 U.S. 600 (2003); Dayton Area Visually Impaired Persons, Inc. v. Fisher, 70 F.3d 1474 (6th Cir. 1995). Cases pertaining to a license requirement include Thomas v. Chicago Park District, 534 U.S. 316 (2002); Forsyth County v. Nationalist Movement, 505 U.S. 123 (1992).
  37. 37. In most instances, this classification will be as an organization that is tax exempt under IRC § 501(a) because it is described in IRC § 501(c)(3). In general, see § 3.2(b).
  38. 38. See §§ 3.2(g), 3.2(h).
  39. 39. See § 4.6.
  40. 40. See § 4.19.
  41. 41. See § 4.2 for a discussion of the constitutionality of this type of fee arrangement.
  42. 42. See § 4.4.
  43. 43. See § 3.7.
  44. 44. The development of this unified registration statement is a welcome one. This advance toward simplicity and uniformity is somewhat marred by the additional supplemental statements and varying annual reports.
  45. 45. See § 3.5.
  46. 46. See § 3.7.
  47. 47. A court upheld a state statute requiring religious institutions to apply for an exemption from the state's charitable solicitation act, rejecting the contention that the application scheme constituted an impermissible prior restraint on speech (Free the Fathers, Inc. v. State of Tennessee, 2008 WL 360612 (Tenn. Ct. App. 2008)).
  48. 48. Because of constitutional law constraints and as a practical matter, the law does not normally attempt a definition of the term church. See Tax-Exempt Organizations, § 10.1. If an organization is regarded as a church or closely related organization for federal income tax purposes (IRC § 170(b)(1)(A)(i)), it presumably is treated the same for state fundraising regulation purposes.
  49. 49. IRC § 508(c)(1)(A), which also applies with respect to integrated auxiliaries of churches, and conventions or associations of churches.
  50. 50. Foundations functioning on behalf of educational institutions that are operated by state governments are expressly recognized by the federal tax law, as concerns public charity and charitable donee classifications (IRC § 170(b)(1)(A)(iv)). See Tax-Exempt Organizations, § 12.3(b)(v). Foundations functioning on behalf of other educational institutions are also public charities, often publicly supported ones (IRC §§ 170(b)(1)(A)(vi) (IRC § 509(a)(1)) and 509(a)(2)). See Tax-Exempt Organizations, § 12.3(b)(i), (iv). Some of these foundations in the second category are supporting organizations (IRC § 509(a)(3)), although they may meet a test as to public support. See Tax-Exempt Organizations, § 12.3(c).
  51. 51. As to this point, an analogy may be made to the federal securities laws, which differentiate between regulated sales of securities to the public and somewhat unregulated private offerings of securities.
  52. 52. One court held that a state's charitable solicitation act was inapplicable to private foundations, for the reason that the “obvious intent” of the statute is “to regulate those charitable organizations, who solicit or accept contributions from persons or corporations outside the charitable entity” (Estate of Campbell v. Lepley, 532 P.2d 1374, 1375 (Okla. 1975)) (emphasis added).
  53. 53. This type of provision has been applied in the courts (e.g., Salvation Mission Army Workers Holy Orthodox Christian Church v. Commonwealth, 383 A.2d 995 (Pa. 1978); Blenski v. State, 245 N.W.2d 906 (Wis. 1976)).
  54. 54. See § 6.15.
  55. 55. These provisions are of dubious legality (see § 4.5).
  56. 56. Principally, the federal annual information return (Form 990). In general, see § 5.9, Chapter 7.
  57. 57. This exemption, which of course exempts all or nearly all charitable entities, is available for all organizations that are tax exempt by reason of IRC § 501(c)(3).
  58. 58. See § 4.2(g).
  59. 59. A state may have an alternative to the use of bonds, in that a certificate of deposit, letter of credit, or U.S. obligation can be filed in lieu of a bond. This approach allows investment assets to be pledged while not disturbing the underlying investment. It eliminates the expense of premiums, and reduces the time and expense associated with renewals of bonds.
  60. 60. See § 3.2(h).
  61. 61. See § 4.1.
  62. 62. See § 4.3.
  63. 63. Kentucky State Police Professional Association v. Gorman, 870 F. Supp. 166 (E.D. Ky. 1994).
  64. 64. National Federation of Nonprofits v. Lungren (N.D. Cal., order issued Mar. 29, 1995).
  65. 65. See § 4.15.
  66. 66. See § 3.2(h).
  67. 67. These requirements are discussed in § 8.6.
  68. 68. This is because this type of charitable solicitation is not usually regarded as doing business within a state (see infra note 78).
  69. 69. This type of rule has been upheld in the courts (e.g., Lewis v. Congress of Racial Equality, 274 S.E.2d 287 (S.C. 1981); Blenski v. State, 245 N.W. 2d 906 (Wis. 1976); People v. Caldwell, 290 N.E.2d 279 (Ill. 1982)). In Blenski, the court stated that the “crime of unauthorized use of names is directed at protecting the public against being misled and not protecting the person whose name is used. This purpose does not require that liability for this crime be imposed for each individual person whose name is used, particularly where … the unauthorized uses are simultaneously committed” (at 911).
  70. 70. This type of provision has been upheld in the courts (e.g., American Gold Star Mothers, Inc. v. Gold Star Mothers, Inc., 191 F.2d 488 (D.C. Cir. 1951); People ex rel. Brown v. Illinois State Troopers Lodge No. 41, 286 N.E.2d 524 (Ill. 1972)). An illustration of the misapplication of this type of rule by regulatory authorities appears in City of Evanston v. Evanston Fire Fighters Association, Local 742, International Association of Fire Fighters, AFL-CIO-CLC, 545 N.E.2d 252, 262–266 (Ill. 1989).
  71. 71. In general, see § 9.5.
  72. 72. This proposed multistate legend was prepared by Robert S. Tigner, General Counsel, Association of Direct Response Fundraising Counsel. His contribution is gratefully acknowledged.
  73. 73. A fiduciary is a person who has special responsibilities in connection with the administration, investment, and distribution of property that belongs to someone else; this range of duties is termed fiduciary responsibility.
  74. 74. An excellent discussion of the role of an attorney general in overseeing charitable organizations appears in City of Evanston v. Evanston Fire Fighters Association, Local 742, International Association of Fire Fighters, AFL-CIO-CLC, 545 N.E. 2d 252, 256–262 (Ill. 1989).
  75. 75. This type of restriction, however, is unconstitutional (see § 4.5).
  76. 76. E.g., Commonwealth v. Events International, Inc., 585 A.2d 1146 (Pa. 1991); People ex rel. Scott v. Gorman, 421 N.E.2d 228 (Ill. 1981); People ex rel. Scott v. Police Hall of Fame, Inc., 376 N.E.2d 665 (Ill. 1978). In general, Suhrke, “What Can Be Done about Fund Raising ‘Fraud’?,” XXVI Phil. Monthly (No. 6) 5 (1993).
  77. 77. Details about this project and the forms are available at www.nonprofits.org/library/gov/urs.
  78. 78. One court observed that “[i]t is doubtful … whether the solicitation of funds for a charitable purpose is, to use the statutory words, the ‘carrying on, conducting or transaction of business’” (Lefkowitz v. Burden, 254 N.Y.S.2d 943, 944–945 (1964)). A subsequent court opinion, however, suggested that the solicitation of funds constitutes doing business in a state (Commonwealth v. Events International, Inc., 585 A. 2d 1146, 1151 (Pa. 1991)).

    Clearly, a charitable organization organized in one state and maintaining an office or similar physical presence in another state is doing business in the latter state. The general rule is that merely mailing charitable solicitation material into a state is not doing business in that state, although a contrary approach can be established by statute or regulation. In many states, the determination as to whether an organization is doing business in a state is under the jurisdiction of the secretary of state, whereas the registration and reporting requirements of a charitable solicitation act are administered by the attorney general. In some states (such as California), a determination that a charitable organization is doing business in the state leads to a requirement that the organization file for and receive a ruling as to its tax-exempt status in the state (or else be subject to state taxation). Thus, fundraising in a state can entail an obligation on the part of the charitable organization to file with three separate agencies in the state.

  79. 79. E.g., Horner and Makens, “Securities Regulation of Fundraising Activities of Religious and Other Nonprofit Organizations,” XXVII Stetson L. Rev. (No. 2) 473 (Fall 1997).
  80. 80. E.g., Missouri ex rel. Nixon v. RCT Development Association, 290 S.W. 3d 756 (Mo. Ct. App. 2009) (applying a state's merchandising practices act (a consumer protection law) to enjoin a charitable fundraising scheme); People v. Gellard, 68 N.E.2d 600 (N.Y. 1946). A challenge to a state's use of an unfair trade practices act and state sweepstakes law to regulate charitable fundraising failed, with the court finding that the plaintiffs lacked standing to bring the suit (American Charities for Reasonable Fundraising Regulation, Inc. v. Shiffrin, 46 F. Supp. 2d 143 (D. Conn. 1999)).

    The state of Minnesota, in mid-1999, charged a charity located in Louisiana and its fundraising company with the use of deceptive tactics in raising money, by telephone, for terminally ill children (Williams, “Minn. Sues Charity, Solicitors Over Telephone Appeals,” XI Chron. of Phil. (No. 14) 29 (May 6, 1999)).

  81. 81. In addition to these state requirements, there are hundreds of county and city ordinances, as noted supra note 1. The constitutionality of these ordinances is a subject that is attracting increasing attention. Two of these ordinances, portions of which were struck down as being unconstitutional, are discussed in Chapter 4 (see the analyses of the Gospel Missions of America case).

    One of the obvious aspects of these ordinances is the enormous administrative and financial burden they place on charities that raise funds statewide, regionally, and certainly nationally. A court has, however, rejected the argument that the costs of compliance with these ordinances is an unconstitutional form of direct or indirect regulation of interstate commerce; it also held that the substantial benefit to the county involved outweighs any compliance difficulties. Further, a free speech argument (see § 5.8) failed; the court myopically wrote: “The County also correctly points out that localities are well within their power to regulate charitable solicitation within their territorial boundaries” (American Charities for Reasonable Fundraising Regulation, Inc. v. Pinellas County, 32 F. Supp. 2d 1308, 1325 (M.D. Fla. 1998)). But see, however, § 4.13(c).

  82. 82. These recommendations are reproduced at Bureau of National Affairs, Daily Tax Report (no. 185) (Sep. 26, 2005).
  83. 83. Pension Protection Act of 2006 (Pub. L. No. 109-280).
..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset