Current Trends and Issues in Charitable Regulation

Regulators
Conference panels presented by various state regulators covered ongoing trends and issues. Public trust of the charitable sector was a topic of general concern, based on surveys indicating a decrease in the trust in the nonprofit sector.  The regulators noted that they play an important role in enhancing trust by providing meaningful oversight of the sector.

Noteworthy topics included the importance of Board governance and oversight, particularly in monitoring the organization’s finances. The panelists noted a rise in for-profit entities soliciting in-kind disaster relief, particularly those that do not have a nonprofit partner. This trend has been largely observed in connection with the rise of natural disasters and the war in Ukraine.   Regulators are also troubled by the balloon and bust of opioid-crisis relief organizations. This is threatening given the importance these organizations play in their local communities. Such failures have been attributed to their overly rapid growth.

Several state regulators noted an increase in mergers and acquisitions filings of hospitals. Approval of these transactions generally turns on the question of whether the transaction is in the best interest of the community. As for charity care, regulators noted that nonprofit hospitals have a duty to provide subsidized care to patients in need, something they say they have seen too little of.

A notable increase of fraud, committed in the name of charities or directed at charities, is also of concern. It is reported that there has been a rise of bad actors using the name and information of known and respected charities to commit fraud.  One typical scheme is the impersonation of regulators claiming that registration fees are past due. Charities that receive such calls are admonished to use best efforts to confirm the identity of caller.

NASCO puts out an annual report detailing trends on state regulation and enforcement.

Nonprofit Sector and Practitioner Panelists
In the afternoon, other stakeholders in the charitable sector spoke on the trends they have observed during the past year. Jan Masaoka, CEO of the California Association of Nonprofits, discussed the Association’s concerns with donor-advised funds (DAFs) arising from the delay in time between donor benefit (i.e., the donor’s tax-deduction) and the donation reaching its target community. Erin Bradrick, Principal of NEO Law Group, spoke on the growth of fiscal sponsorships and the lack of sector education and oversight that exists. She observed that Decentralized Autonomous Organizations (DAOs) have the theoretical ability to seek 501(c)(3) status without having a governing body (the core distinguishing characteristic of DAOs).  Ms. Bradrick also noted an upward trend in the politicization of issues directly tied to key nonprofit areas, which have created a tension between state and federal law., naming the recent cannabis and abortion access laws as prime examples.

NFT and Cryptocurrency
Sara Hall, Chief Legal Officer and General Counsel of ALSAC, Andrea Kramer, Partner of McDermott, Will & Emory, Ruth Madrigal, Principal of the Exempt Organizations Group at KPMG, and Beth Short, Director of Outreach and Education, Charitable Law Section of the Ohio Attorney General’s Office, discussed cryptocurrencies, NFTs, and other emerging forms of donation.  The panel noted that these forms are not suitable for all organizations, as there is significant risk and several complex issues to consider in accepting donations of cryptocurrency.

It was noted that organizations that decide to accept NFT or cryptocurrency donations should ensure they have a detailed donation acceptance policy and procedure in place.  The policy should include how the organization will protect the security of the crypto wallets through which they accept the donation, how to appraise the cryptocurrency or NFT, and whether to use an intermediary service like a Donor Advised Fund (DAF). Including the development department on any decision on acceptance of these donations is critical.

Now and Next in Charitable Giving
In her keynote address, Dr. Una Osili, Associate Dean for Research and International Programs at the Indiana University Lilly Family School of Philanthropy, made a deep dive into the data to identify donor trends. Among those Dr. Osili highlighted are that giving is at an all-time high, that individuals remain the largest group of donors, and that fewer households are donating. She also pointed to a downturn in religious donations, historically the largest generator of donations, and an upturn in donations to racial identity and environmental groups. Donors are moving from a trend of making passive donations to getting more involved in the causes they support through active engagement and education.

Dr. Osili ended by sharing some of her key findings, notably that giving is the great equalizer. Adjusted for gross income, charitable giving is the same across all groups. Technology, specifically crowdfunding websites and social media, has become one of the strongest vehicles for attracting donations, making up 40% of all giving. Finally, charities should start thinking of the value of donating one’s testimonial and network of connection, not just time and gifts. For more information, visit the Indiana University website at Generosity for Life.

Establishing a Healthy Board
Dr. Gerri King, President of Human Dynamics Associates, taught board mediation and communication techniques. Her talk centered on the five states of group development: Forming, Storming, Norming, Performing and Adjourning. Dr. King explained that at each stage, there are unique challenges affecting Board dynamics, and that any change to the make-up of the Board can be a setback.

Dr. King emphasized the importance of creating a no blame, no gossip environment among the team and the organization, noting that although it sounds simple, it can be intensely difficult to achieve. The benefits, as she noted, are indispensable., creating higher accountability, cohesion, trust and efficiency.

Update on the California Charitable Fundraising Platform Law
Brian Armstrong, Deputy Attorney General of the California Attorney General’s Office, discussed Assembly Bill 488, which is set to take effect on January 1, 2023. This is the first law in the U.S. specifically designed to regulate online charitable fundraising platforms, including through a new registration and reporting requirement, specific required public disclosures, and other provisions designed to safeguard charitable donations received through these platforms.

The proposed regulation is currently in the “review of public comments” stage. Armstrong indicated that a second, 15-day period for public comments will open up again once the review is complete, but did not specify when that would be.  During the follow-up Q&A, our team learned that the registration portion of the law is not likely to go into effect on January 1, 2023. Still pending would be final regulations and the development of the new registration forms. However, the AG’s office intends to begin enforcement of those portions of the law which are not dependent upon the passage of final regulations (e.g., the disclosure requirements).

Charitable fundraising platforms and platform charities should take time to carefully review their current platform disclosures (including disclosures made throughout the user/donor flow, as well as the platform Terms of Use) and ensure they are in compliance with these new requirements.  For more details on the legislation, please read California Enacts New Law to Regulate Charitable Fundraising Platforms by firm partner Karen Wu.

The post Takeaways from the 2022 NAAG/NASCO Conference first appeared on Perlman Sandbox.

Bequests in wills and trusts can be a considerable source of income for charitable organizations.  Such organizations and their counsel, while remaining sensitive to the concerns of donors’ families, are well advised to pursue and protect their interests in any estate or trust proceeding involving a charitable bequest.  I describe here some important considerations on how best to protect the charitable interests in trusts and estates.

Review the instrument, such as the will or trust document, which provides for a bequest or payment to a charity.¹
If a charity learns that it has an interest in an estate or trust, someone should review the actual instrument in which such interest is set forth.  This should include ascertaining the amount or nature of the interest (including whether it is an outright payment of a specific amount, or a portion of the residuary), as well as any restriction imposed on the charitable gift being provided.  The charity and its counsel should not simply rely on a representation by counsel for the estate or trust, but ask to at least review the relevant language in the instrument.

If a specific amount is being given to a charity, it should make sure that the full amount is received. 
Outright payments should ordinarily be paid in full, and not subject to reductions for fees or taxes, which are not ordinarily the responsibility of charities that receive outright bequests or payments.  If a charity is asked to sign a receipt and release in order to receive the payment, it should make sure it receives the full amount.²

If a charitable gift or bequest is subject to a restriction (such as requiring it to be used for a particular purpose, and/or putting the monies into an endowment), the charity should determine that it is prepared to honor the restriction before accepting the gift. 
If for any reason a charity determines that a restriction is onerous (such as for a use which would be difficult to carry out) or inappropriate (such as for a purpose which is not part of its mission or is otherwise problematic), it should not accept the gift or bequest.  A charity should be prepared to honor scrupulously any restriction which is imposed, including any naming or honor which it is required to bestow.

If the beneficiary of a will or trust is named in the residuary (that is, the assets in a deceased person’s estate after all gifts are bequeathed and debts, taxes, administrative costs, probate fees and court costs are paid), the residuary beneficiary will be impacted by those fees and expenses.  It should therefore consider the conduct of the executor(s) or trustee(s) and the reasonableness of the fees and expenses of administering the estate or trust before signing off on an accounting by the fiduciary. 
An executor’s management of estate assets might improperly reduce the total value of the estate or trust (such as through imprudent investments or inappropriate expenditures).  The legal fees charged by the attorney representing the estate or trust could also impact the estate’s beneficiaries.  In both scenarios, assuming the charity has an interest in the residuary (as a recipient of an outright bequest should not be impacted by these considerations), charitable organizations have a right to challenge the accounting submitted by the executor (whether it is a judicial accounting submitted to the court or an informal accounting submitted to the interested parties.)

A will or trust instrument might be challenged by a family member who would benefit from the instrument being declared invalid.
When an individual chooses to leave substantial sums to charity in his or her will or trust instrument, such a bequest is often made to the detriment of the decedent’s family.  A relative of a decedent who is a “distributee” (that is, who would inherit from an estate by virtue of the relationship with the decedent in the absence of a will or trust), has legal standing to challenge the validity of the instrument.  The rules governing intestacy in New York are set forth in New York Estates, Powers and Trusts Law (EPTL) §4-1.1. Similar statutes exist in other states. The estate of a decedent who dies without a will is distributed among the distributees in a manner and order prescribed by the applicable state statute.

There are a variety of reasons why a will or trust might be challenged. 
They could include: (a) the lack of testamentary capacity of a decedent; (b) undue influence exerted on a decedent; or (c) an improperly prepared or witnessed instrument.  The technical rules on properly preparing and witnessing a will or trust are governed by state law.

Testamentary capacity and undue influence are related concepts which often form a basis for challenging the validity of a will or trust instrument. 
The testamentary capacity of the decedent can sometimes be a crucial issue, particularly when a decedent has executed multiple wills or trust instruments, has executed a codicil to a will or an amendment to a trust, has revoked a will, or has executed a document at a point in time where cognitive ability might be called into question. Since any amendments might prejudice the interest of at least one party to the original instrument, it is common for the party whose interests are impaired to raise concerns regarding the capacity of the testator or grantor.

When the testamentary capacity of a decedent is challenged, questions might be raised as to whether a beneficiary exerted undue influence to induce the allegedly vulnerable decedent to transfer or bequeath money to that beneficiary.  Charitable organizations can face both sides of these issues of capacity and undue influence, depending on whether their interests are best served by an earlier or the most recent instrument.

The circumstances with respect to a dispute involving an estate or trust, including whether a charity supports or opposes the disputed instrument, will impact the manner in which the attorney might best represent a charity.
If, for example, the charity supports the validity of the will or trust, the defense will ordinarily be led by counsel for the executor or trustee, and the charity’s attorney can minimize expenses by cooperating with or supplementing the actions of the estate or trust counsel.  If, on the other hand, a charity challenges a will or trust which might supersede a prior instrument in which the charity had a greater interest, its counsel would often have to play a more active role, perhaps in cooperation with other similarly aggrieved parties.

In New York, the Attorney General is a necessary party in proceedings where a charity has a residuary interest.
In New York and any other state where the Attorney General might have such authority, cooperation and coordination with the AG’s office in instances of disputes or questions can often enhance the likelihood that a charity will achieve a more favorable result. This could include a charity joining the Attorney General in defending or challenging a will or trust in which the charity has an interest, or disputing excessive legal fees or expenses or imprudent conduct by fiduciaries. The result can be achieved through either litigation or settlement.

Conclusion: Charitable organizations should be aware of the various issues that can arise in estate and trust matters, many of which can potentially affect the benefit ultimately received by charitable beneficiaries.
Organizations should work with their legal counsel to conduct appropriate due diligence and ensure that the organization’s interests have been protected before consenting to probate of a will or to the fees and expenses reflected in an accounting.

The post Protecting Charitable Interests in Trusts and Estates first appeared on Perlman Sandbox.

Virtual currency is gaining mainstream attention with each passing day. Nonprofits such as the American Red Cross, UNICEF, and American Cancer Society leverage platforms including The Giving Block and other services to accept a wide range of virtual currencies, as part of their overall fundraising strategies.

At our firm, we continue to work with nonprofit clients as they consider whether and how to fundraise using cryptocurrency. Here are a few questions we have been asked and other questions charities should be asking of potential fundraising platform partners.

Frequently Asked Questions

Should we accept virtual currency?

For many organizations, this is an easy answer – yes. There are few risks to accepting donations of virtual currency, especially if nonprofits immediately liquidate those donations.  Donors of virtual currency typically skew younger, possibly opening up a new demographic of supporters for the organization. The board should consider including virtual currency in its Gift Acceptance Policy, a document every organization should have to guide its board, executives, and staff in their development work.

Should we immediately liquidate donations of virtual currency, or hold onto them?

This is more difficult to answer, as it is based on how much risk the organization can tolerate. Virtual currency is highly volatile – its value can skyrocket or plummet within a matter of hours or days, making it a risky asset to hold onto. Whether to hold onto virtual currency is a decision that should be made with the input of a nonprofit’s board and executive team. If virtual currency is held as part of the organization’s investments, or if a donor asks the organization to hold the virtual currency as an endowment or long-term investment, the organization should consider how that fits within the organization’s overall investment strategy and portfolio, and the applicability of state laws governing the prudent management of institutional funds/assets.

One concern is volatility – few organizations want to see their donations halve in value. For many organizations, the potential upside isn’t worth the potential risk.

A second concern is regulatory risk. As the Chinese central bank, SEC, FINCEN, IRS, and other domestic and international regulators grapple with how to regulate virtual currency, the liquidity and accessibility of virtual currency markets is up in the air. Even major players like Coinbase and Ripple have been subject to or threatened by regulatory action.

Charities are often cautious when holding virtual currency, concerned that the regulatory environment could shift in a way that devalues or freezes their holdings. If a nonprofit is using a virtual currency account on a platform that is subject to an SEC action, for instance, the platform might be forced to freeze transactions until such time as the SEC allows it to continue operations.

Organizations that are highly diversified and have the financial cushion to absorb a zeroing out of their virtual currency donations, taking into account the diversification of risk across the organization’s entire investment portfolio,  might be comfortable with the risks of virtual currency. The potential upside of assets like Bitcoin are hard to ignore – despite volatility, Bitcoin’s value has been on a consistent march upward. Other coins, like Ethereum, have not been far behind. If your organization is willing to take the risk, and has considered the prudent investment regulatory considerations, you can create a wallet at a prominent, legally-compliant platform, and park your virtual currency there and “Hold On for Dear Life” (HODL, as some in crypto-world like to say).

Fortunately, the major virtual currency fundraising platforms allow immediate liquidation of donations. Again, this is the option chosen by most nonprofit organizations. As I mentioned above, nonprofits should include virtual currency in their Gift Acceptance Policy and Investment Policy to help guide their development professionals as they consider whether and how to accept virtual currency donations.

How do we treat virtual currency for accounting purposes?

Despite continued regulatory action in other parts of the crypto market, IRS rules around donations of virtual currency have been relatively stable. Since 2014, the IRS has been clear that virtual currency should be treated as property. A taxpayer donating virtual currency they have held for more than a year may deduct the fair market value of the currency at the time of its donation, similar to other forms of property, such as publicly-traded stocks. This provides a tax benefit to donors who invested in virtual currency in its infancy – they can support their favorite charities without being taxed on the gains they’ve enjoyed on paper.

This consistent treatment from the IRS means that charities can rest assured that they can accept virtual currency in the same way that they can accept donations of appreciated stock or other forms of property. The accounting department or external accountants should be able to handle booking donations of virtual currency without much trouble. A caveat is that, in a nonbinding FAQ, the IRS has said that nonprofits must fill out Form 8282 whenever the nonprofit sells, exchanges, or otherwise disposes of its virtual currency. This is a departure from the IRS’s treatment of virtual currency as akin to stocks, which a nonprofit can sell without filing Form 8282. While not insurmountable, nonprofits and their fundraising platforms should discuss how to operationalize capturing the information required for filing Form 8282.

Questions to Ask a Fundraising Platform

Now that we have considered some of the frequent questions nonprofits ask their advisers, let’s consider questions nonprofits should ask a prospective fundraising platform as part of their due diligence.

Are you registered as a professional fundraiser?

Fundraising is regulated in most states, with each state using its own regulatory regime. Individuals and organizations that support charities are often subject to laws regulating charitable solicitation (here’s an excellent overview from my colleague Tracy Boak). Charities are affected by these regulations and are obliged to make sure they only partner with organizations that are properly registered and licensed, if required.

Many fundraising platforms (both traditional and those dealing with virtual currency) take the position that they are not professional fundraisers, due to the way they structure their platforms and services, e.g., because they don’t affirmatively solicit donations on behalf of any charity and don’t take custody of donations. Regardless, a platform should be able to tell you why it isn’t subject to fundraising registration requirements. By asking the question, nonprofits can rest assured their fundraising platform partner is on top of its compliance obligations.

Are you registered as a Money Service Business or Money Transmitter?

Money Service Business (MSB) and Money Transmitter (MT) regulations are implemented at the federal and state levels. Their purpose is to weed out fraud and money laundering in the money transmission business. Generally speaking, MSB and MT laws create licensing structures that require licensed entities to do some due diligence on their customers, including “KYC” (know your customer) and “AML” (anti-money laundering) requirements.

Since 2013, the Financial Crimes Enforcement Network (FinCEN) has applied money transmitter regulations to some entities within the virtual currency ecosystem. According to FinCEN, if a person or organization accepts money or another instrument with monetary value from one person and transmits it to another person, that person may be classified as a money transmitter under federal regulations. (A comprehensive rundown of FinCEN’s guidance is found here). This means that any entity that accepts virtual currency from one party and transmits it to another party could be considered a money transmitter subject to the federal rules. The same rules apply if the entity accepts virtual currency, converts it to fiat currency (i.e., U.S. dollars), and transmits the fiat currency to another person or entity.

FinCEN does provide some exceptions, including those entities that only provide network access or serve as payment processors, exceptions which largely do not apply to crypto-fundraising. Whether a person or entity will be treated as a money transmitter is a facts-and-circumstances determination, but FINCEN clearly intends to define money transmission broadly and interpret its exceptions narrowly (see the discussion on pages 12-22 of the guidance linked above).

Nonprofits considering crypto-fundraising options should ask the potential partner whether it is registered as a money transmitter. If not, ask how they ensure that their services aren’t used inappropriately – do they work with a partner that is a licensed entity? Who does their KYC and AML compliance work?

Do you accept anonymous donations?

Anonymous donations are nothing new – charities have received anonymous donations large and small since long before the birth of cryptocurrency. But many charities are wary of the “dark side” of cryptocurrency and its reputation (rightly or wrongly earned) for facilitating illicit activity. Nonprofits should check with their potential fundraising platform to confirm whether they allow anonymous donations. If so, ask whether the donations are anonymous to the platform, or only to the charity. If the donation is anonymous to the platform, ask whether and how the platform ensures the anonymous donations aren’t connected with illicit activity. The answer may be that the platform does not, or cannot, do anything else to ascertain the identity of donors who wish to remain anonymous. If that is the case, the nonprofit should consider whether it is comfortable with the risks of accepting anonymous donations.

Those risks are generally the same as accepting any other high-value anonymous donation – that a donation of virtual currency could be traced back to illicit activity or a potential clawback, if the virtual currency that is donated doesn’t belong to the donor.  One difference with anonymous donations of cash or other types of property is that the virtual currency environment is highly transparent, even if it may be highly anonymized. Bitcoin transactions are viewable on the blockchain, even if the participants in the transactions may remain anonymous.

Do you issue donation receipts? Do you fill out Form 8282? Will we get a donor list?

One of the core tasks in charitable fundraising is issuing receipts to donors. Donors need to keep those receipts on file, in case they want to claim a charitable deduction. Many platforms will create automatic receipts. Nonprofits should confirm that the receipts issued by its platform partners are compliant with IRS requirements, and ask for copies for your records.

Nonprofits should also ensure that the fundraising platform will provide you with a list of your donors, to make sure you can build out your donor base.

The post What Nonprofits Should Be Asking About Virtual Currency Regulation and Fundraising first appeared on Perlman Sandbox.

You may have heard a LOT about “NFTs”, or non-fungible tokens, recently. The buzz around NFTs reached a crescendo on March 11, when Beeple’s digital artwork with a unique NFT sold in a Christie’s digital auction for over $69 million.  Basketball fans are trading digital highlights in NFT form in an online marketplace. Charmin is even getting in on the NFT-craze, selling unique toilet-paper inspired digital artwork to raise money for Direct Relief.

Given the amount of money swirling around NFTs and the digital art world, nonprofits and their benefactors have started to consider how to leverage the new technology for charitable ends. With any new technology come questions and in this article I will try to cover some considerations for nonprofits that are getting into the NFT-craze.

The Basics – What Are NFTs?
NFTs (non-fungible tokens) are a fully-digital method of proving ownership of an asset. Most assets associated with NFTs are digital assets, but NFTs could be implemented with physical assets as well. In the same way that a unique piece of art might come with a certificate of authenticity and history of ownership, NFTs use a technology that was originally developed in connection with virtual currency (called blockchain) to record and track ownership. Blockchain uses cryptography to validate transactions, making the system relatively secure. Blockchains can be private or public, depending on the use case, and NFTs are mostly stored on a public-based blockchain associated with the cryptocurrency Ethereum.

Almost anything digital can be ascribed an NFT. A tweet can be given an NFT and sold. The rights to music can be sold using an NFT.  Uses for NFTs, and the underlying blockchain, are seemingly endless – anything that involves tracking custody, ownership, or use could make use of NFTs and blockchain.  Whether or not businesses and consumers will want to buy, sell, and store an asset’s ownership records digitally on the blockchain is a different question – while cryptocurrency and blockchain supporters have been touting the technologies for over a decade, blockchain and NFTs have only gone mainstream publicly in the past few months.

Some people question the value of some NFT assets – who really wants to own the rights to an NBA highlight that is available on YouTube for free? Apparently a lot of people (at the time of writing, a Lebron James dunk is listed at $250,000 – it is a very good dunk). The original Mona Lisa painting is extremely valuable, whose worth isn’t decreased by additional prints being sold or versions being viewable for free online. Ownership is key to the asset’s value, whether we’re talking about a physical painting or a digital highlight.

NFTs and Charities – Similar to Auctions of Traditional Art
When an NFT is auctioned to benefit charity, it is deeply analogous to a traditional art auction (a topic I discussed in another post). If the artist or collector who donates a piece of digital art for sale at a charity auction wants to receive a charitable deduction, they may need to get an appraisal. The charity will need to be careful to keep records related to the donation and valuation of the asset. Prospective bidders should be told what the value of the item is, assuming a reasonable value can be determined. And winning bidders must be given a receipt which describes how much of the amount paid exceeds the fair market value of the item, if any.

Valuation of NFT-assets will be an extremely nuanced part of the charity auction process because the market for NFTs is so new and valuations fluctuate wildly. As an example, last year Beeple “dropped” artwork on an NFT marketplace that was resold. Between October 30 2020 and January 9, 2021, a piece that sold for $1 was resold 10 times and increased in value to $7000. Any artist, donor, or charity that places a valuation on donated digital artwork or other NFT-assets should consult with experts to document the valuation appropriately and ensure that everything is properly recorded and filed.

NFTS and Charities – New Platforms and New Problems
When Beeple’s Christie’s auction concluded, the winner paid in cryptocurrency, typical of many of the NFT marketplaces that use the Ethereum-based cryptocurrency Ether. NBA Top Shot, in contrast, will let you sign up with a credit card. As donors and charities work through the various platforms to decide with whom they want to partner to host an NFT auction, they need to consider what methods of payment are available and who their target audience will be. If the pool of potential bidders is Beeple-crazed crypto-enthusiasts, an NFT platform that requires Ether will probably work just fine. If, on the other hand, a charity wants to engage its traditional donor-base, it may want to find an auction platform that can receive traditional payments.

If the auction invites bids in cryptocurrency, the charity also needs to think through whether to hold that currency or convert it into fiat currency immediately upon receipt. Many charities, in the wake of the cryptocurrency boom of 2017, developed policies related to holding cryptocurrency – typically, the currencies were liquidated immediately upon receipt. Charities should consider crypto as a highly volatile asset, with potentially huge upsides and downsides. Most charities hold minimal amounts of crypto and only as part of a comprehensive, diversified investment strategy.

If the charity expects an auction to generate a lot of interest and a lot of funding, the charity needs to do some due diligence on the platform with whom they plan to work. With the interest in NFTs surging, so are the numbers of outlets that claim to support NFT marketplaces. If a charity wants to partner with a relatively new platform, the charity should vet the platform to make sure it is capable of performing – that it can host the auction, accept the payments, and deliver the winnings to the charity. Charities should make sure their agreement with the platform is crystal clear in terms of fees, timing, and the risk of loss if something should happen to an asset. Charities need to work with the platforms to make sure disclosures to bidders and donors are very clear on how the auction or donation will work – some states have begun to consider required disclosures for fundraising platforms, which can serve as a guide for charities and platforms.

Finally, some platforms that are operating in the NFT, blockchain, and cryptocurrency spaces may be subject to regulation as money transmitters, payment processors, or financial institutions. If a charity plans to store its assets with a platform that provides payment processing services, the charity should confirm that the platform is appropriately registered or is exempt from regulation.

Art Charities and NFTs
Similar to the concerns outlined above about vetting platforms, if an art-based charity wishes to accept a donation of NFT artwork to retain as part of its collection, the charity needs to work through the many issues around accepting and storing NFT artwork. Review the terms and conditions of any third-party platform involved in hosting or displaying the artwork. Work with the artist or collector to confirm details around the transfer, valuation, receipt, and the costs associated with the transfer on the network. Many of the tax rules governing NFT-art donations will be identical to those applicable to donations of physical art.

International Concerns
One of the appealing aspects of NFTs and blockchain is that transactions are borderless and frictionless. A digital marketplace based in ether cryptocurrency can receive payment without worrying about converting currency; there are no costs for shipping and the purchases can be delivered instantaneously. A charity that is considering receiving digital payments, selling digital goods, or transferring digital assets using NFTs or cryptocurrency has to be conscious of the risks associated with international transfers. The U.S. Department of the Treasury’s Office of Foreign Asset Control has published some guidance for charities working internationally, both in the context of specific countries as well as more generally. Charities should be cognizant of the risk posed by receiving large payments from or sending payments to individuals or organizations that are overseas and may only be known as a username or Ethereum address. Charities should work with their advisors to ensure they are taking reasonable precautions to avoid the legal and reputational trouble that could arise if the charity does business with disreputable donors or recipients. Additionally, the platforms dealing in NFTs and online fundraising may also have “Know Your Customer” requirements – charities should check with the platform that they are compliant with any applicable rules.

Other Compliance
Whether a nonprofit holds an auction online or in person, selling digital or physical art, there are traditional fundraising compliance considerations that will apply. Depending on the state in which the nonprofit is operating, the nonprofit may be required to register (my colleague Tracy Boak has a great article discussing charitable fundraising regulation). Depending on the nature of the items sold and where buyers are located, there may be sales tax considerations. Charities should check with their advisers to confirm they have considered all legal aspects of online fundraising compliance.

The post NFTs and Charities – What’s New and What Isn’t? first appeared on Perlman Sandbox.

On February 8^th, California Assemblywoman Jacqui Irwin introduced Assembly Bill 488, which would establish a new statutory framework for the ever-evolving world of online charitable fundraising platforms.[1]

The proposed  bill for “charitable fundraising platforms” and “platform charities” would require:
(1) “charitable fundraising platforms” and “platform charities” to register and provide reports to the California Attorney General’s office;
(2) conspicuous disclosures to prevent a likelihood of deception, confusion, or misunderstanding;
(3) the platform or platform charity to obtain written consent of any recipient charitable organization before using its name in a solicitation unless specific requirements are met; and
(4) the funds raised to be held in a separate bank account, and donations and grants of recommended donations to be sent promptly to recipient charities, along with an accounting of any fees imposed for processing the funds.

Key Definitions
The bill defines “charitable fundraising platform” as “any person, corporation, unincorporated association or other legal entity that uses the internet to provide an internet website, service, or other platform to persons in this state, and performs, permits, or otherwise enables acts of solicitation to occur.”  Charitable fundraising platforms would likely include companies such as GoFundMe, Facebook, Amazon, Tiltify, Pledgeling, and the many other technology platforms that enable charitable giving.

“Platform charity” is defined as a trustee or charitable corporation that facilitates acts of solicitation on a charitable fundraising platform.  Platform charities would likely include well-known organizations like PayPal Giving Fund and Network for Good, as well as the many other charities that serve as the intermediary and legal recipient of all donations raised through fundraising platforms.

Disclosure Requirements
If passed, the new law will require charitable fundraising platforms and platform charities to provide all of the following key disclosures to potential donors.

• A statement about who will receive the donations (e.g., that the recipient is the charitable fundraising platform, the platform charity, the recipient charitable organization, or the person engaging in peer-to-peer charitable fundraising).
• If applicable, a statement that a recipient charitable organization may not receive donations or grants of recommended donations, with an explanation identifying the circumstances under which a recipient charitable organization may not receive the funds. (Note: This disclosure relates to the “variance power” that is well-recognized in other contexts, such as donor-advised funds and fiscal sponsorships)
• The maximum length of time it takes to send the donation or a grant of the recommended donation to a recipient charitable organization with an explanation as to the length of time.
• The fees or other amounts (if any) deducted from or added to the donation or a grant of the recommended donation that are charged or retained by the charitable fundraising platform, platform charity, or any other partnering vendor, other than digital payment processing fees.[2]
• Whether the donation is tax-deductible or not.

Written Consent
While current California law requires that a charitable fundraising platform or platform charity obtain the written consent of any recipient charitable organization before using its name in a solicitation, the proposed law would provide that such written consent is not required if all of the following circumstances are met:

• The charitable fundraising platform or platform charity only references the recipient charitable organization’s name, address, telephone number, internet website (including through a hyperlink), employer identification number (EIN), corporation or organization number, or registration number with the Attorney General’s Registry of Charitable Trusts, classification in the National Taxonomy of Exempt Entities (NTEE) system, or other information set forth in rules or regulations established under Section 12599.10, if any. (Note that, as drafted, a recipient charity’s mission statement taken from its Form 990 cannot be included, unless written consent is obtained from that charity or the AG adopts rules to permit it. The inability to include a mission statement could potentially lead to unintended confusion by donors who are intending to support one charity and inadvertently designate their gift to benefit a different charity with a similar name but different mission)
• The charitable fundraising platform or platform charity conspicuously discloses before persons can complete a donation (or select or change a recipient charitable organization) that the recipient charitable organization has not provided consent or permission for the solicitation, and has not reviewed or approved the content generated by persons engaging in peer-to-peer charitable fundraising, when applicable. (Possible concerns remain about how this disclosure must be worded, and whether it could hamper giving by appearing to be like a “warning label”, notwithstanding the consent that may exist between a platform and a platform charity)
• The charitable fundraising platform or platform charity promptly removes any recipient charitable organization from its list or any solicitation regarding the recipient charitable organization upon written request by the recipient charitable organization.
• The charitable fundraising platform or platform charity does not require that a recipient charitable organization consent to any solicitations as a condition for accepting a donation or grant of a recommended donation.

Good Standing
Pursuant to the bill, a charitable fundraising platform or platform charity may only facilitate solicitations or the receipt of donations for the benefit of charitable organizations in good standing.  “Good standing” means the platform charity or other recipient charity’s tax-exempt status has not been revoked by the Internal Revenue Service, or the California Franchise Tax Board, or is not prohibited from soliciting or operating in California by the Attorney General.

Intersection with Other Fundraiser Registration Requirements
Over the last two decades, charitable fundraising platforms have been in a regulatory gray area, as the charitable solicitation laws were established decades before the Internet was around.  The existing regulatory framework in California and other states covers professional fundraisers (e.g., telemarketers), fundraising counsels (e.g., direct mail companies), and commercial co-venturers (e.g., retail businesses advertising that sales or use of their goods or services will benefit a charitable organization).  Many states require contracts between a regulated fundraiser and a charity to be submitted or at least disclosed, and separate campaign reports to be filed per contract (some forms even require two original notarized charity signatures!).

Most fundraisers that fall into the existing regulated categories do not support the fundraising efforts of hundreds or thousands of charities simultaneously, so compliance, while somewhat burdensome, is generally manageable.  Most new fundraising platforms, however, aim to assist hundreds or thousands of charities in broadening their fundraising reach through new innovative methods of giving.  If a platform provider is required to file hundreds or thousands of contracts and campaign reports, these reporting burdens would most likely hamper innovation and, ultimately, severely limit donations to thousands of charities, large and small.

The proposed regulations for charitable fundraising platforms provide a streamlined approach that is more appropriately suited to the way in which charitable fundraising platforms work.  The bill recognizes the potential overlap between the new “charitable fundraising platform” category and the three existing fundraiser categories, and explicitly carves out “charitable fundraising platforms” from the definition of commercial fundraiser, fundraising counsel and commercial co-venturer “when the acts of solicitation for charitable purposes occur solely through an internet service, website, or other platform provided by the charitable fundraising platform.”

While many charitable fundraising platforms will not need to comply with inconsistent or duplicative requirements applicable to the other regulated fundraiser categories, the limited scope of the carveout could still cause many fundraising platforms to remain subject to the additional regulatory requirements of other fundraiser categories.  For example, what if a platform sends an email about a specific campaign conducted on the platform to individuals who have signed up to receive communications?  What about a social media post?  Exactly how these definitional carveouts are finalized and implemented will significantly affect the amount of the compliance obligations applicable to charitable fundraising platforms.[3]

The passage of Assembly Bill 488 will not resolve the ambiguity in other states’ charitable solicitation laws and their applicability to charitable fundraising platforms. However, given the various states’ interest in providing oversight to these new technology-driven fundraising platforms, there is a good chance that other states may follow suit in adopting similar legislation.

Stakeholder Engagement
Assemblywoman Irwin and the California Attorney General’s office have been actively engaging with various stakeholders in the community in the development of this legislation (which has included associations of nonprofits and fundraisers, including The Nonprofit Alliance and the California Association of Nonprofits, as well as various fundraising platforms and platform charities) to ensure that innovation in charitable giving is encouraged within a framework of oversight and transparency.

In Conclusion…
The new bill is, in many respects, a much-needed update to the existing fundraising regulatory framework that more appropriately reflects the nature of charitable fundraising and giving in the age of the Internet.  However, the final codification of the legislation could have significant regulatory implications on the charitable fundraising community, so our firm is paying close attention to the bill as it makes its way through the legislative process.

[1] Since 2018, Assemblywoman Irwin has introduced several bills that would govern charitable fundraising platforms, including Assembly Bills 2556 (2018), 1539 (2019), and 2208 (2020). Among the comments submitted as part of the legislative process for Assembly Bill 2208, the National Association of State Charity Officials submitted a statement of support: “The National Association of State Charities Officials (NASCO) is an association of state offices (attorneys general, secretaries of state and other offices) charged with the regulation and oversight of charitable organizations and charitable solicitation in the United States. As state regulators, we have witnessed the impact of the internet on charitable fundraising over the past 20 years. Charitable fundraising is no longer limited to solicitations through telephone, direct mail, or even a charity’s own website. Fundraising through third party websites, social media apps, and live video streaming have become the norm. The sheer volume of charitable solicitations made through online fundraising has exploded; most recently, for solicitations concerning the COVID-19 and the civil rights crises. This issue is so important that NASCO has formed a working group to look at the breadth of charitable giving through the internet, the regulatory and enforcement challenges this presents, and the need for states to address it [… ]  NASCO believes that these issues require a legislative solution to protect charities and the public, and to provide the platforms with a regulatory scheme that fit their business model. Assembly Bill 2208 represents a thoughtful and comprehensive approach to address these problems.”

[2] While transparency around fees assessed is critically important in promoting trust in fundraising and avoiding deceptive solicitation violations, there may be constitutional implications depending on exactly how this disclosure requirement is ultimately codified. In a series of four cases from 1980 (Schaumburg) to 2003 (Madigan), the U.S. Supreme Court consistently held that regulation based upon fees paid to fundraisers violate First Amendment rights.  In particular, Riley v. National Federation of the Blind of North Carolina, 487 U.S. 781 (1988), invalidated a requirement that fundraisers disclose at the point of solicitation the percentage of funds they raised in the past year which went to the charity.  The Court found such “compelled speech” to improperly burden protected speech (i.e., a fundraising solicitation). 487 U.S. at 798. This mandatory financial disclosure requirement was found to be overbroad and not justified by the state’s interests in informing donors or prohibiting fraud. The Court determined that “the compelled disclosure will almost certainly hamper the legitimate efforts of professional fundraisers to raise money for the charities they represent.” 487 U.S. at 799. Since then, most state charitable solicitation laws require fundraisers to disclose their fees upon request of any donor. Given the online nature of charitable fundraising platforms, a balance may need to be struck between the constitutional concerns of compelled speech and the need for transparency in an online context. One option is to permit such fees to be disclosed within a conspicuous hyperlink.  The bill, as introduced, permits certain of the required disclosures to be included in a conspicuous hyperlink, but this fee disclosure is currently not among them.

[3] Consider that a professional fundraiser that registers in 40 states and has national contracts with 100 charities would have to file up to 8,000 separate filings each year! (That number is based on one contract/solicitation notice and one campaign report per contract per state x 40 states per year) While the exact reporting that will be required under Assembly Bill 488 and related regulations to be established by the California Attorney General’s office is still to be determined, I anticipate it will be a much more streamlined reporting process that will not require separate per-charity filings. The bill does not require each charity contract to be filed either, as is required of other types of fundraisers, although contracts must be available for inspection by the Attorney General. To minimize the compliance burdens of the current regulatory framework, one solution that has been adopted is for a fundraising platform that registers as a professional fundraiser to partner with a single platform charity so that there is only one professional fundraiser relationship – the relationship between the fundraising platform and the platform charity.

The post California Proposes Law to Regulate Online Fundraising Platforms first appeared on Perlman Sandbox.

In the run up to this year’s presidential election, author Shea Serrano published A Difficult Conversation, a guide to addressing the growing gap between the people who support Donald Trump and the people who do not. Priced at $0, it is a pay-what-you-want piece of art that, if you are familiar with Mr. Serrano’s Twitter feed, surprised no one. What is surprising is how much people voluntarily paid for the free e-book – at least $98,160.84 to date. In response, Mr. Serrano and his wife decided to donate all of the proceeds to the causes they believe in.

Mr. Serrano’s unexpected philanthropy fits a new pattern, for him and other social media celebrities. Celebrity philanthropy is not limited to the large televised “Live Aid” style fundraisers to raise awareness and funds for important causes.  While that model still exists, social media has created new avenues for small scale, targeted relief amplified by passionate digital followers.  In the early days of the COVID-19 pandemic,  influencers made cash payments to those impacted by shuttered businesses and missed paychecks. This new trend is getting increasing attention, including from at least one former President.

While charities continue to directly raise funds from their current donors, they are finding new supporters through partnerships with these “influencers” , i.e. the individuals who have a large active following of enthusiastic fans on social media.  Influencers have been working with charities for some time, and we’ve long known that consumers respond to them, in much the same way that celebrities shape consumer opinion in the for-profit world. What’s new is the way in which some influencers establish a relationship with their followers and charities; instead of entering into partnerships up front, social media and e-commerce allows influencers to raise large amounts of cash and distribute it to charities and directly to individuals without any extra infrastructure.

With innovations come new questions. In the case of influencer philanthropy, those questions tend to center on compliance. Influencers, and the charities they support, must take into account the social media platforms rules as well as local, state, and federal laws. In this article, I highlight some of the possible issues and considerations. I examine a few different fundraising strategies I’ve noticed. In each case, the considerations for charities may differ from those of influencers.  Some methods are straightforward, requiring little if any compliance considerations for influencers and charities. Methods involving partnerships with for-profit companies or cash giveaways by influencers can have tax and other compliance consequences.

Summary of Influencer Fundraising Models

There are a few ways that influencers try to do good. As described above, sometimes they publicize gifts after-the-fact, creating a halo effect for the influencer as well as spotlighting the charities or causes benefiting from the influencer’s gifts. For these after-the-fact gifts, there’s no pre-existing agreement between an influencer and the charity.  In fact, the charities or the individuals receiving gifts might not know that a gift is coming until they receive a check (or Venmo or CashApp or PayPal).

Another model that has emerged recently is the direct cash disbursement which is advertised in advance to the influencer’s followers. While these types of disbursements aren’t new, they became prominent in the early stage of the pandemic. Influencers told their followers that they had cash to give away– all followers had to do for a chance to receive some cash was comment on the influencer’s post and follow other Instagram accounts that had paid for the privilege of being part of the promotion. The influencer would, in turn, receive a payment from a social media marketing firm that set up the campaign.

A third method involves influencers asking their followers to send cash which the influencer will then distribute. The recipients of the cash vary – sometimes the funds are given to organizations, in other cases the money is given to individuals that the influencer deems worthy of support. At times the influencer will be specific about the organization or person that is the intended recipient, but many times the beneficiary is open-ended.

A fourth method involves for-profit charitable partnerships. For example, a dog-themed Instagram account raises awareness for a local shelter by telling their followers about a charitable sales promotion where the purchase of a particular dog food triggers a donation to the shelter. The influencer may be compensated by the for-profit, the nonprofit, or may receive no compensation at all, depending on the arrangement. Alternatively, an influencer might try to sell one of their own products (a book, for instance) and include a promise to donate some proceeds to charity.

Finally, some influencers simply attempt to drive traffic to individual fundraising campaigns that are already underway. One of Twitter’s most popular canine evaluation accounts, @dog_rates, highlights one or two fundraisers every Friday to support a dog and its humans. The influencer selects one campaign to highlight, driving small dollar donations from the account’s 8.8 million followers.

Compliance Issues

For each of the models described above, there are a few overarching compliance issues that influencers and charities need to consider. There may be tax consequences from their fundraising, for influencers, charities, or their donors. They must also review the terms and conditions for the sites on which they’re fundraising.

Platforms

The platforms’ rules are the first thing to review before launching a new fundraiser. Facebook, Twitter, and Instagram each publish specific rules governing promotions and fundraisers. In each case, some of each platform’s general guidelines will also apply to influencer fundraisers, such as the rules encouraging authenticity and discouraging fraud.

Federal Trade Commission

In addition to the platforms, the Federal Trade Commission (FTC) has published guidelines on the appropriate disclosures for influencer behavior. While targeted primarily at influencers working with for-profit brands, the disclosure guidelines are helpful for all influencers interacting with US users. These recommendations include:

• Tell users if you will receive any kind of financial, employment, personal, or other benefit in connection with a post
• Ensure that disclosures are prominent
• Use clear, simple language
• Be honest

These types of disclosures are especially important if an influencer’s post involves any possible compensation for the influencer. For instance, if the influencer is selling an item and promises that a portion of the proceeds will go to charity, they should be clear how much will be donated (a percentage or flat amount per sale), how long the promotion runs, which charity will receive the donation(s), and if there’s a minimum guaranteed donation. If the influencer is being paid to help drive dollars or attention to a charity or fundraiser, they should include a disclosure to that effect so their followers understand their motivation.

Taxes

Influencers, charities, and individuals each need to consider the tax consequences of online fundraisers. Whenever influencers collect donations from their followers, they may need to report those donations as income. There are exceptions where the influencer is acting as the agent for the recipient, but the default rule is generally that income is taxable. If the influencer makes a donation directly to an individual rather than to a charity, the individual should be able to treat the income as a gift (and therefore not taxable) but should check with a professional to confirm. There may be ways to structure a campaign to ensure the recipient doesn’t have a big tax bill if the fundraiser is especially successful.

Next, some donors want to know if their donation is tax-deductible. Although small donors aren’t typically taking their tax bill into consideration when they decide to send $10 to an influencer, the influencer collecting donations should clarify whether donors will be eligible for a tax deduction. There are multiple ways to structure campaigns that may permit donations to be tax-deductible.

State Registrations

If an influencer is receiving any kind of compensation in exchange for raising money for a charity, they may have to register to solicit with one or more states. They could be considered either a professional fundraiser or a commercial co-venturer, depending on the arrangement. Each state treats paid fundraisers differently, so the influencer must be careful to check with counsel who understand what filing requirements apply.

Best Practices

Regardless of what rules apply, best practices for any kind of fundraiser are diligence and transparency. Influencers can be diligent by planning out their posts and fundraisers. The first step is to research the charity that the influencer seeks to support. As multiple organizations may have confusingly similar names, checking will help to avoid directing someone to the wrong organization! Unless the influencer has first-hand knowledge of the charity, they should also review the charity’s most recent financial filings to make sure it is healthy and can legally use the funds the influencer plans to raise.

The influencer should get in touch If they have identified a charity they want to support. The charity may agree to collaborate to increase the influencer’s reach or, at the least, capitalize on the attention the influencer will bring. The charity may also want to set some guidelines, either through a formal agreement or just through discussions, to make sure the influencer doesn’t do or say anything that would harm the charity’s reputation or tax status.

Finally, the influencer should value transparency by explaining exactly what they plan to do with the money they raise, including the timing for distribution, the intended recipients, and what is yet unknown.  It’s possible that the influencer won’t know in advance who will receive the cash they raise, but that’s not necessarily a problem. If the influencer sets some criteria, that at least should be shared with their followers.

The post Influencer Philanthropy and Social Media – What are the Rules, What are Best Practices? first appeared on Perlman Sandbox.

Are you looking for answers to legal questions that arise in cause marketing and corporate partnerships?  If so, look no further!

Last year, Selfishgiving.com founder and blogger  Joe Waters and I distributed a five-question survey to businesses and nonprofits regularly engaged in cause marketing and corporate partnerships, asking them to share their top legal compliance questions and challenges.  After reviewing the survey responses, we decided to create a series of blog posts to address the most common corporate partnership legal compliance questions covering four issue categories: (1) Advertising Disclosures; (2) Registration and Reporting Requirements; (3) Contracts; and (4) Unrelated Business Income Tax (UBIT).   I hope you will find these FAQs useful in helping to navigate the legal and regulatory issues that arise as your company or charity engages in corporate partnerships.

Click on the FAQ headers below to read the answers to each question, which are posted on SelfishGiving.com, and sign up for Joe’s informative and entertaining weekly email newsletter, which has all the latest trends and strategic advice about cause marketing and corporate partnerships!

Part 1: Advertising Disclosures

1. Are cause marketing advertising disclosure “best practices”  required by law? Some of our corporate partners think they are just “suggestions.”
2. What if a company insists on structuring a campaign where the donation is based on a percentage of its profits, rather than a percentage of the purchase price?
3. Have any companies gotten into trouble with regulators for failing to include certain information in their cause marketing advertisements?
4. Advertising disclosure problems only present a real legal risk to the corporate partner, not the charity, right?
5. Can the company simply state on the hang-tag or store signage, “10% of the purchase price will be donated to ABC Charity, see www.company.com/ABCCharity for details,” and then include the website URL where the minimum guarantee and/or donation cap can be found?

Part 2: Registration and Reporting Requirements

Company FAQ

1. Our company is conducting its first ever cause marketing campaign. I heard that we may need to file state registrations. How do I know if I need to register, what does it entail, and how long will it take?  Note: The answer to this includes a chart on the state registration and reporting requirements applicable to companies acting as commercial co-venturers.
2. I operate a small e-commerce business in Massachusetts that sells clothing online, and would like to run a promotion in which the company will donate $5 to a local, nonprofit homeless shelter for every special edition T-shirt sold through our website. Does my company need to register nationally? What, if anything, does the nonprofit need to do?  Note: The answer explains how to determine the parties’ fundraising compliance obligations specifically in the context of an online cause marketing promotion.
3. Our company’s cause marketing campaign launched last week and we just found out we are supposed to register in certain states as a commercial co-venturer! Are we going to face fines or other penalties?

Charity FAQ

1. Our charity was asked to be the beneficiary of a company’s charitable sales promotion, but we’ve never engaged in a cause marketing campaign before. What do we need to be aware of before we proceed with this opportunity?
2. Our nonprofit is already registered nationally, and discloses all of its CCV partners as part of our annual charitable solicitation registration renewals, so we should be set with our CCV-related compliance, right?  Note: The answer includes a chart on the state reporting requirements applicable to charities that have entered into a CCV agreement.
3. Our charity was approached by a start-up company that wants to conduct a cause marketing campaign to benefit our organization. When we told them they may need to register with certain states and obtain bonds, they were concerned about the cost and burden of compliance. We don’t want to lose the opportunity to build a partnership with this company. What can we do?

Part 3: Contracts

1. We are entering into a cause marketing promotion in which our charity will receive a portion of the proceeds from the sale of each Sellco product. SellCo sent us a draft contract to sign. It seems to describe the promotion the way we discussed it. Should we go ahead and sign it?
2. What provisions should be included in our cause marketing agreement? Note: The answer includes a 15-point cause marketing contract checklist!
3. Is there a way to streamline the preparation of cause marketing agreements so they are compliant with all 50 states’ laws as well as for online sales?
4. Our corporate partner wants to enter into a multi-year relationship that includes a significant financial commitment, and will involve numerous customer activations.  Only the details for the first activation have been solidified. How do we draft an agreement to cover this type of arrangement?

Part 4: Unrelated Business Income Tax (UBIT)

1.  My organization, Charity Corp., has a corporate partner, Cool Products Co., that is conducting a charitable sales promotion in which it will advertise that it is donating a portion of the purchase price from sales of a particular product to Charity Corp.  Cool Products has asked to promote their sales campaign to our members and donors through email and social media. I heard that charities aren’t allowed to promote these types of campaigns because it might subject the charity to a tax called UBIT.  What is UBIT, and why and when is it a potential problem? How do we avoid creating taxable income?
2. How can our organization appropriately communicate about a corporate partnership to our donors/members/social followers without crossing  the line into marketing for the corporate partner?
3. The UBIT rules make our corporate partnerships team feel constrained in our partner cultivation strategy. What options does our organization have to provide value to our corporate partners?

The post Key Legal Issues in Corporate Partnerships first appeared on Perlman Sandbox.

In response to the dilemma faced by many charities during the 2008 recession, which had limited operating income, but large sums in endowments, 47 states adopted some form of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) which, amongst other things, allows charities to draw on the principal of endowment funds under certain circumstances.

Under New York’s version of the uniform law, the New York Prudent Management of Institutional Funds Act (NYPMIFA), institutions can, under certain circumstances, spend endowment funds below their original gift amount (“historic dollar value”) without court approval or Attorney General review, if the institution’s board of directors concludes that such spending is prudent. More specifically, NYPMIFA requires that boards, when deciding whether to appropriate from an endowment fund, must act “in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances,” and must consider, if relevant, the following factors:

1. the duration and preservation of the endowment fund;
2. the purposes of the institution and the endowment fund;
3. general economic conditions;
4. the possible effect of inflation or deflation;
5. the expected total return from income and the appreciation of investments;
6. other resources of the institution;
7. where appropriate and circumstances would otherwise warrant, alternatives to expenditure of the endowment fund, giving due consideration to the effect that such alternatives may have on the institution; and
8. the investment policy of the institution.

There are situations where an institution cannot spend below historic value without court approval, including when donors specifically explicitly prohibit this type of spending in the gift instrument.

Lastly, an institution may lift or modify a donor-imposed restriction on the management, investment, or purpose of an institutional fund if the fund is less than $100,000 in value and has been in existence for more than 20 years. If an institution determines that such a restriction is unlawful, impracticable, impossible to achieve, or wasteful, the institution may release or modify the restriction, in whole or part, without court approval, after giving written notice to the Attorney General, who then has 90 days to object. If the Attorney General does not notify the institution within 90 days, the institution may proceed with the release or modification.

The post Charities’ Response to COVID-19: A Guide to Using Endowment Funds for Emergency Purposes first appeared on Perlman Sandbox.

1. Can my 501(c)(3) charitable organization conduct an emergency hardship assistance program, even if such assistance was not part of the stated purposes of my organization when it applied for tax-exempt status with the IRS?

With respect to federal tax law considerations, 501(c)(3) organizations do not have to obtain pre-approval from the IRS to provide emergency hardship or disaster relief assistance, including fundraising to make grants for such purpose.  However, if a public charity carries on emergency hardship and disaster relief assistance as one of its three largest programs, it will need to describe those services in the organization’s annual Form 990 filed with the IRS. The organization may also need to report grants and other assistance given to organizations or individuals within and outside the U.S., and noncash contributions received, such as donations of food or other supplies to distribute to families in need.

With respect to state law considerations, organizations should review their statement of legal purposes, as documented in their certificate of incorporation filed with the state in which they are incorporated.  Some organizations draft their statement of purpose very broadly to include any charitable purposes and activities that are permissible under section 501(c)(3) of the Internal Revenue Code (which would include operation of a disaster or emergency hardship assistance program).  However, some organizations draft their statement of purposes narrowly.  If the organization’s legal purposes are drafted narrowly, and would not include the operation of a disaster or emergency hardship assistance program, the organization may need to amend the purposes in its certificate of incorporation to conduct the program.  In addition, organizations should use donations that were previously received for a different charitable purpose for those specified purposes only, and only apply new donations solicited for purposes that include disaster or emergency hardship assistance for that purpose.

2. Can my organization solicit donations to support specific individuals or families in need?

An emergency hardship or disaster relief assistance program cannot be designed to serve any particular individuals, but rather, must be designed to assist a “charitable class.” An assistance program serves a “charitable class” if the group of eligible beneficiaries is either: (1) large enough that the potential beneficiaries cannot be individually identified, or (2) sufficiently indefinite such that the entire community benefits from the charitable assistance.

If the group of eligible beneficiaries is limited to a smaller group, an assistance program will still be considered to benefit a charitable class if the group of beneficiaries is indefinite. For the group of beneficiaries to be indefinite, the program should be open-ended such that the total number of potential members making up the charitable class cannot be counted or identified. For example, if a financial assistance program is designed to benefit families of alumni from a particular college in connection with a current disaster or emergency as well as future disasters and emergencies, the program would be viewed as serving an indefinite charitable class.

3. What kind of documentation must my organization maintain as part of an emergency assistance program?

In general, organizations must maintain adequate records to show that the organization’s assistance, whether in the form of tangible goods, services, or cash assistance, furthered charitable purposes, and that the recipients are needy or distressed.

Organizations providing emergency short-term assistance (e.g., hot food, clothing) to individuals in need of immediate assistance with basic necessities are not required to undertake a needs assessment. The organization should document the criteria for disbursing assistance (e.g., sudden loss of home and/or belongings), date/place of distribution, estimated number of individuals assisted, the charitable purpose intended to be accomplished, and the cost of the aid.

For longer-term assistance, organizations must maintain more detailed records to demonstrate that the organization has conducted an appropriate needs assessment which confirms that the individuals or families are financially in need. Being in financial need does not require individuals to be totally destitute; it is sufficient if they simply lack the resources to obtain basic necessities. An organization’s decision to provide financial assistance should be based on a reasonable determination that the individual’s financial resources, such as available cash, expenses, other financial obligations, assets that can be disposed of without causing further personal hardship, and anticipated cash flow (income, insurance proceeds, etc.), will be insufficient to provide for timely coverage of his/her existing obligations and basic needs.  Longer term financial assistance may include assistance with rent, mortgage payments or car loans to prevent loss of a primary home, utilities payments, and childcare and tuition costs for children.

Documentation relating to long-term assistance should generally include:

• a complete description of the assistance provided,
• costs associated with providing the assistance,
• the purpose for which the aid was given,
• the charity’s objective criteria for disbursing assistance under each program,
• how the recipients were selected,
• the name, address, and amount distributed to each recipient,
• any relationship between a recipient and officers, directors, or key employees of, orsubstantial contributors to, the charitable organization, and,
• the composition of the selection committee approving the assistance.

4. How do we determine the appropriate amount of assistance to provide to families as part of our financial assistance program?

An organization’s decision about how much to distribute to individuals and families in need must be based on an objective evaluation of the individual’s needs at the time the grant is made.  The amount needed to relieve financial hardship and distress should be based on all the facts and circumstances of the individual’s situation and the charity’s resources.  Making an individual whole on account of a disaster or emergency hardship does not, necessarily, further charitable purposes. IRS guidance cautions that an outright transfer of funds based solely on an individual’s involvement in a disaster or without regard to meeting the individual’s particular distress or financial needs would result in private benefit, which is impermissible. Similarly, grants to replace lost income rather than to meet basic living needs would generally be viewed as serving personal and private interests, which is also impermissible.  Adequate documentation should be maintained to justify that the individual grants are appropriate in amount and further charitable purposes.

5. Will recipients of financial hardship funds need to pay taxes on the amounts received from a 501(c)(3) tax-exempt organization?

Financial assistance that a 501(c)(3) tax-exempt organization gives to individuals or families in need for emergency hardship situations are excludible from the recipient’s gross income as a gift under Section 102 of the Internal Revenue Code.

6. Can a public charity, private foundation, or donor-advised fund established by a company provide disaster or emergency hardship assistance to the company’s employees and their families as a result of COVID-19?

Companies can provide disaster or emergency hardship assistance to employees and their families in connection with the COVID-19 outbreak through these charitable vehicles, but as further discussed below, need to structure their programs in ways that do not provide impermissible private benefit to the employer.

Employer-sponsored public charities, which typically receive broad financial report from the general public and are subject to greater transparency requirements, may provide disaster or emergency hardship assistance to their employees and their family members, as long as a related employee does not exercise excessive control over the organization.  Typically, a significant portion of the board of such employer-sponsored public charities are individuals who are not in a position to exercise substantial influence over the affairs of the employer.

Employer-sponsored donor-advised-funds (DAFs) and private foundations are only allowed to provide assistance to employees and their family members if they’ve been affected by a “qualified disaster.” COVID-19 was officially declared a “qualified disaster” on March 13, 2020, so employer-sponsored DAFs and private foundations can provide payments to employees and their family members as long as there are safeguards in place to make sure the payments are for charitable purposes.

Employer-sponsored assistance programs should follow the program requirements discussed above (e.g., support of a charitable class, selection of recipients based on an objective determination of need, and adequate documentation of recipients’ need for assistance). In addition, the selection of beneficiaries must be made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous. The selection committee is considered “independent” if a majority of the members of the committee are not in a position to exercise substantial influence over the affairs of the employer.  Pursuant to statutory restrictions applicable to donor-advised funds, no payment may be made from the DAF to or for the benefit of any director, officer, or trustee of the sponsoring public charity, or members of the fund’s selection committee.

Additional information about providing disaster relief assistance through charitable organizations, including employer-sponsored assistance programs, is available in IRS Publication 3833.

The information provided does not constitute legal advice, and is not intended to substitute for legal counsel.

The post Establishing a COVID-19 Charitable Assistance Program first appeared on Perlman Sandbox.

PPGF, the charitable arm of PayPal, Inc., is a 501(c)(3) tax-exempt nonprofit that allows donors to contribute funds online to PPGF and select a charity that will ultimately receive the benefit of their contribution. Donors’ contributions are aggregated and distributed to the donors’ chosen charities.

The state regulators’ concerns focused on PPGF’s disclosure and grantee vetting practices. Specifically, their concerns included whether PPGF adequately disclosed to donors that (1) donations made through the PPGF website were made to PPGF rather than the intended charity selected by the donor, (2) that PPGF could reassign a donation by exercising its “variance power” when the selected charity did not pass PPGF’s vetting process, and (3) the length of time for donors’ donations to reach the intended charities.  While PPGF does not collect fees from donors or charities for this service, charities receive contributions more quickly if they maintain a PayPal account, a fact that the regulators claim had not been adequately disclosed.

The agreed upon reforms focus on modifying the disclosures to ensure that donors know: (1) that they are donating to PPGF rather than the selected charity, (2) that PPGF has the ability to reassign funds to a similar charity and the circumstances when PPGF may reassign funds, including a clear explanation of any vetting processes, (3) the fees associated with use of the platform (or the absence of fees), (4) the expected time frame for the selected charity to receive the grant, and (5) the implications of being an enrolled charity vs. an unenrolled charity[1]. PPGF also agreed to notify donors when it redirects a donor’s charitable contribution to an organization other than the one selected by the donor.

Of particular note is PPGF’s commitment to make many of these disclosures “unavoidable and prominent,” which means that “the information is not included in an optional pop up window or on another page accessed by a link on the original page. It also means that the information must be located on a page that each and every donor must access prior to donating to PPGF and in a position on that page that is in immediate proximity to a necessary field or button used by each and every donor.” PPGF’s agreement to notify donors when their donation is redirected to another organization may also set a new industry-leading standard of transparency among online platforms that utilize an intermediary charity to facilitate donations to various causes.

As part of the settlement, PPGF has donated $200,000 to the National Association of Attorneys General (“NAAG”) to help defray costs associated with charity regulators’ enforcement activities, and to provide training and education to those regulators.

The states participating in the settlement include the attorneys general of Arkansas, Colorado, Connecticut, the District of Columbia, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, and Wisconsin, as well as the Secretary of State of North Carolina.

State charity regulators’ concerns regarding transparency by online fundraising platforms are not new. Several years ago, the National Association of State Charity Officials (“NASCO”) posted tips on internet and social media fundraising to help charities and fundraising platforms understand their rights and obligations, and to help donors make informed giving decisions.  The guidance included tips directed at fundraising platforms, encouraging them to prominently disclose key information about the platform to better educate charities and donors using the platform.

In 2016, NASCO formed a Crowdfunding Working Group comprised of charity regulators from various states. Members of the working group collaborate to learn from each other how the states handle issues relating to fundraising via third party websites and social media.

Given the significant regulatory focus on donor disclosures in online fundraising platforms, companies operating such platforms should review their current website disclosures to ensure that key information is prominently disclosed to donors to help them make informed decisions when making charitable contributions through the platform.

[1] Charities that maintain a PayPal account are considered “enrolled charities.”

The post PayPal Giving Fund Enters Multi-State Settlement to Ensure Transparency to Donors first appeared on Perlman Sandbox.