The new law defines a “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.”  The broad definition of charitable fundraising platform applies to most consumer-facing websites that facilitate the receipt of online donations, with limited exceptions.[1] It also applies to websites that run multiple promotions advertising that a portion of the purchase price from the sale of goods or services will be donated to specified charities, as well as websites or platforms that voluntarily invite customers to add a donation during the check-out process, or that encourage individuals to take certain actions to trigger donations.  According to one legislative analysis, examples of charitable fundraising platforms include Amazon, Benevity, Charity Navigator, CrowdRise, eBay, Facebook, GoFundMe, Google, GuideStar (Candid), Lyft, Overstock, and PayPal.

The bill also regulates platform charities, which are charitable organizations that facilitate acts of solicitation on a charitable fundraising platform.

Key New Requirements
The bill contains a number of new requirements applicable to charitable fundraising platforms and platform charities, including the following:

1. Registration and Reporting. Charitable fundraising platforms and platforms charities must annually register and submit financial reports to the California Attorney General’s office. Additional regulations addressing the content of the registration and annual report forms and the manner and timing of the filings will be issued by the Attorney General.[2]

2. Required Disclosures. The new law will require charitable fundraising platforms to clearly disclose certain information, including: (1) a statement about who will receive the donations; (2) if applicable, a statement that a recipient charity may not receive donations or grants of recommended donations, with an explanation identifying the circumstances under which a recipient charity may not receive the funds; (3) the length of time it takes to send the donation or a grant of the recommended donation to a recipient charity; (4) the fees or other amounts (if any) deducted from or added to the donation or a grant of the recommended donation; and (5) whether the donation is tax-deductible or not. The new law permits some, but not all, of these disclosures to be provided through a conspicuous hyperlink, so long as the disclosure is conspicuous when the hyperlink is selected.

3. Written Consent of Charity Beneficiaries (and a Limited Exception). The law generally requires that a charitable fundraising platform or platform charity obtain the written consent of any recipient charity before using its name in a solicitation, but provides that such written consent is not needed if all of the following circumstances are met: (1) the platform only includes certain information about the recipient charities on the platform, as set forth in the new law or future regulations (e.g., the recipient charities’ name, address, telephone number, internet website, EIN, registration number with the California AG’s office, NTEE Code, and publicly available information from the recipient charity’s tax or information returns filed with the Internal Revenue Service or the California AG’s office); (2) the platform conspicuously discloses before persons can complete a donation that the recipient charity has not provided consent or permission for the solicitation, and has not reviewed or approved the content generated by individuals engaging in peer-to-peer charitable fundraising, when applicable; (3) the platform promptly removes any recipient charity from its list or any solicitation regarding the recipient charity upon written request by the recipient charity; and (4) the platform or platform charity does not require that a recipient charity consent to any solicitations as a condition for accepting a donation or grant of a recommended donation.

4. Soliciting or Receiving Funds Only for Charities in Good Standing. 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.

5. Segregation of Funds; Accounting of Fees. Charitable fundraising platforms and platform charities must hold charitable funds raised in a separate account or accounts from other funds belonging to the platform or platform charity, and must promptly ensure that donations and grants of recommended donations are sent to recipient charities with an accounting of any fees imposed for processing the funds.

6. Prompt Distribution of Donations/Grants. In addition to the requirement for platforms to disclose the amount of time it takes for donations to be sent to recipient charities, the Attorney General is authorized to establish regulations regarding the maximum length of time a platform or platform charity may take to send the donated funds, taking into consideration various facts and circumstances.[3] For platforms that make donations or grants based on purchases or other activity performed on the platform, the platform must send donations or grants of recommended donations to the recipient charities no less frequently than on a quarterly basis and subject to any minimum amounts, which may not exceed ten dollars ($10).  In addition, donations or grants must be sent after four consecutive quarters regardless of any established minimum amount, unless the recipient charitable organization is not eligible to receive the funds (which ineligibility must be disclosed pursuant to the statutory disclosure requirements).

Avoiding Duplicative Registration and Compliance Obligations
Recognizing that some charitable fundraising platforms could meet the definition of one or more other regulated fundraising categories — namely, commercial fundraisers (e.g., telemarketers), fundraising counsels (e.g., direct mail companies), and commercial coventurers (e.g., retail businesses advertising that the purchase or use of their goods or services will benefit a charitable organization) — the law provides the following clarifications to avoid such overlap:

1. Fundraising Counsel: If an entity meets the definition of both a fundraising counsel and a charitable fundraising platform, it will only be a charitable fundraising platform.

2. Commercial Fundraiser:
If an entity meets the definition of both a commercial fundraiser and a charitable fundraising platform, it will only be a commercial fundraiser when the entity, for compensation, performs any of the following acts of solicitation:
(i) Direct mail solicitation, excluding electronic mail or messages;
(ii) Estate gift or estate planning solicitation;
(iii) In-person solicitation through a fundraising event, door-to-door or other public spaces, or a vending machine or similar equipment that does not use a person to perform the solicitation;
(iv) Noncash solicitation;
(v) Nonincidental acts of solicitation that are not internet based, including solicitation through print, radio, or television;
(vi) Solicitation involving receiving something of value, or a chance to win something of value, in connection with a donation; or
(vii) Telephone solicitation.

3. Commercial Coventurer: An entity that meets the definition of both a commercial coventurer and a charitable fundraising platform by listing one or more recipient charities to receive donations or grants of recommended donations made by the platform based on purchases made or other activity performed by persons who use the platform will be only a commercial coventurer when the acts of solicitation through an internet website, service, or other platform to persons in the state are for six or fewer recipient charities per calendar year.[4] Entities that undertake charitable sales promotions or other activities that trigger donations on the internet for seven or more recipient charities per calendar year will be a charitable fundraising platform.

During the annual conference of the National Association of Attorney General (NAAG) and the National Association of State Charity Officials (NASCO) held on October 13, 2021, NASCO President, Yael Fuchs, noted that while she could not advise whether any specific states were planning to introduce similar legislation to AB 488, NASCO does have a Crowdfunding Working Group that has been following the California bill closely, and that the various state agencies are watching to see whether and how California’s law enhances regulatory oversight of online fundraising activities.

The new law goes into effect on January 1, 2023.  Beginning on January 1, 2022, the Attorney General is authorized to establish rules and regulations necessary to administer the new law.

[1] Exceptions include a charity’s own website, vendors that solely provide technical or supportive services to such platforms (e.g., domain hosting services or payment processing services), and sponsoring organizations of donor-advised funds that do not list or name recipient charities for solicitation purposes on its platform to individuals other than its donor-advisors. Additional clarifications for determining when an entity is a charitable fundraising platform when it meets more than one regulated fundraiser category is discussed later in this article.

[2] The law also signals that the Attorney General may issue regulations that would increase reporting efficiency by allowing partnering charitable fundraising platforms or platform charities to submit an annual report on behalf of other charitable fundraising platforms in a consolidated fashion.

[3] The considerations affecting the maximum length of time for funds to be distributed to recipient charities include the acts of solicitation being performed, the number of donations made through the platform, who the donations are made to (e.g., the platform, platform charity, recipient charities, or peer-to-peer fundraisers), whether the recipient charity has provided consent for a solicitation, whether further verification information is requested to prevent fraud, and whether donations are sent to alternate recipient charities.

[4] California does not require commercial coventurers to register with the state if they enter into a written agreement with each beneficiary charity signed by two charity officers, distribute funds to the charity every 90 days throughout the promotion, and, and provide an accounting with each payment.

The post California Enacts New Law to Regulate Charitable Fundraising Platforms first appeared on Perlman Sandbox.

Colleges/Universities
State regulators discussed issues faced by colleges and universities in 2020. Jim Sheehan, Chief of the New York Attorney General’s Charities Bureau, stated that financial hardship faced especially by small liberal arts colleges outside metro areas has led to an increase interest in mergers as a possible solution. He mentioned that his office has witnessed situations where a merger is the only way to save the mission of a financially distressed nonprofit college or university and, in this and similar circumstances where a merger is lawful, his office is generally supportive of this activity.

In addition, regulators are reviewing how colleges or universities forced to close due to the financial strain caused by COVID-19 might implement a teach-out plan for current students (a teach-out plan is an arrangement whereby a college or university provides current students with the opportunity to complete their course of study when the institution closes). Other common issues faced by colleges/universities in 2020 of interest to state regulators include (1) determining the circumstances when it may be appropriate to utilize a larger percentage of a college or university’s endowment fund; (2) whether a financially distressed college or university should borrow from a third party or liquidate otherwise illiquid assets; and (3) under what circumstances a college or university can remove donor-imposed restrictions on charitable contributions.

The NY Charities Bureau plans to issue guidance on the use of endowment funds for institutions facing financial challenges during COVID-19. Massachusetts has already released similar guidance.

Tanya Ibanez, Senior Assistant Attorney General in the California Attorney General’s Office of Charitable Trusts, mentioned that the California Attorney General is looking closely at for-profit schools converting to non-profit organizations.

Crowdfunding
State regulators are still considering carefully how to regulate crowdfunding platforms. Ms. Ibanez briefly discussed the California Attorney General’s support of California Assembly Bill 2208, which recently died in committee. Generally, the bill required charitable fundraising platforms to register and file annual reports with the California Attorney General’s Registry of Charitable Trusts before soliciting, permitting, or enabling solicitations in California. Ms. Ibanez said that she anticipates that a similar bill will be introduced in the California legislature’s next legislative session.

In the context of discussing regulation of crowdfunding, Leslie Friedlander, Assistant Attorney General in the Texas Attorney General’s Office, reminded listeners of the recent PayPal Giving Fund settlement entered into between PayPal Giving Fund and twenty-two (22) state attorneys general. A summary of that settlement and its implications, PayPal Giving Fund Enters Multi-State Settlement, was written by my colleague Karen Wu.  Ms. Friedlander also teased upcoming donor-facing guidance on crowdfunding to be released by NAAG/NASCO in the near future. The FTC has released guidance for donors on giving through an online giving portal.

Form 990 Reporting
State charity regulators are taking advantage of the increased availability and searchability of data about charitable organizations, particularly data filed with the IRS on Form 990, to find organizations that may warrant closer is scrutiny.

Mr. Sheehan explained that organizations which disclose governance weaknesses on Form 990, Part VI, are more likely to have other governance problems such as weak internal controls that can lead to serious problems of interest to regulators. He recommended that, in addition to Part VI, tax practitioners should pay particular attention to Form 990 Schedules J (Compensation Information), L (Transactions with Interested Persons) and O (Supplemental Information). Organizations should ensure information on these schedules is complete, correct, and that an organization does not simply copy and paste information on these schedules from year to year.

Ms. Ibanez added that two additional areas of interest to regulators are the percentage of total contributions received as gifts-in-kind and joint cost allocations. She mentioned that if, for example, an organization receives 70%-80% of total contributions as gifts-in-kind then that organization is likely on the California Attorney General’s radar for a potential audit to determine whether those gifts are being properly valued.

Donor-Advised Funds
Speakers also discussed issues that regulators are grappling with when it comes to contributions made to and from donor advised funds.

Carol Washington, Manager of the Minnesota Attorney General Charities Division, shared how her office recently engaged with the Minnesota Council of Nonprofits to discuss areas of mutual public policy focus with respect to donor advised funds. The Minnesota Council of Nonprofits prepared an extensive white paper on the operation of donor advised funds, including policy recommendations on how the state might regulate donor advised funds to improve transparency and ensure that the original donor’s intent is respected.

Board Engagement During COVID-19
In answer to a question about the need for increased board engagement during COVID-19, Eunice Nakamura, General Counsel, Susan G. Komen, emphasized the importance of the board meeting early and often and encouraging board members to be proactive in discussing strategies that can be implemented and actions that can be taken now that will help the organization to weather this crisis now and into the future. Courtney Aladro, Chief of the Non-Profit Organizations Division of the Massachusetts Attorney General’s Office, mentioned that another way boards have increased engagement during COVID-19 is to create specific committees focused on issues raised by the pandemic.

Incentive-Based Executive Compensation
Ms. Aladro was asked for her thoughts on organizations that approve incentive-based compensation in order to reward nonprofit executives for staying with the organization through the difficult circumstances presented by the COVID-19 pandemic. She explained that, even assuming the compensation was reasonable, a regulator might still raise questions about such an arrangement if, for example, the organization has offered such incentive-based compensation but at the same time has made the decision to lay-off lower paid workers in order to keep the organization afloat.

Virtual/Online Events
Sara Hall, Chief Legal Officer at St. Jude Children’s Research Hospital, discussed some very practical lessons her team has learned switching from in-person to virtual fundraising events. These include: (1) obtaining all trademark clearances (for event names, hashtags, etc.) and music licenses for the event; (2) vetting and engaging a vendor with experience facilitating multi-channel, multi-platform content; (3) projecting attendance (Ms. Hall mentioned that this is particularly difficult with virtual events since there is generally no translation from in-person events); and (4) being aware of that spammers and fake websites may pop-up prior and during the event. It is important to be ready to address these issues during the event in real time.

With respect to digital engagement, Ms. Hall reminded listeners not to forget about required disclosures when engaging an influencer as part of a virtual fundraising event. For more on that subject read Influencer Philanthropy and Social Media – What are the Rules, What are Best Practices? by my colleague Jeremy Coffey.

Online Fundraising – Charleston Principles
Brian Armstrong, Deputy Attorney General at the California Department of Justice, discussed regulation of online fundraising. He pointed listeners to the Charleston Principles (which he said is generally consistent with personal jurisdiction case law) to determine when registration may be required due to online activity. For more on this topic, please see Karen Wu’s excellent article recently published in The Nonprofit Quarterly.

The post The 2020 NAAG/NASCO Virtual Conference – Noteworthy Issues for Nonprofits first appeared on Perlman Sandbox.

Twenty-five states require fundraising counsel to register prior to providing services. The state’s interest is to protect charitable assets for their intended use and to ensure that donations contributed by state residents are not misapplied through fraud or other means.

Who Qualifies as a Fundraising Counsel?

A fundraising counsel (“FRC”) is generally a person or entity paid to plan, manage, advise, counsel, consult, or prepare materials for, or with respect to, a charitable solicitation. A fundraising counsel does not solicit contributions or have custody of solicited funds.  Most often, an FRC is paid a fixed fee or rate rather than a percentage of contributions collected. Consultants providing services that fit within the definition of a fundraising counsel, but who also solicit contributions, have custody of funds, or are compensated on a percentage basis may be considered “professional fundraisers” under some state laws. Professional fundraisers are subject to greater regulatory obligations, including obtaining bonds and filing detailed reports after each solicitation campaign.

Typically, an FRC provides strategic planning services with the goal of improving a charity’s fundraising activities in order to increase donations. States define “fundraising counsel” broadly, however, and thus FRC services include a variety of activities, such as the following:

• A company hired to design and manage a direct mail campaign
• A company hired to manage an annual fundraising gala
• An individual hired to design a digital fundraising strategy
• A firm hired to develop a major gift or capital campaign strategy
• An individual hired to prepare fundraising materials, including providing advice on how best to use the materials to maximize fundraising results
• An individual hired to coach an organization’s development staff or volunteers who are conducting peer-to-peer fundraising campaigns
• An online fundraising platform that is paid by a charity to help optimize its fundraising efforts. (This might include providing customized advice on how to better use the platform’s tools to maximize the charity’s fundraising success. Since each state has adopted slightly different definitions of “fundraising counsel,” states may reach varying conclusions on a platform’s classification.)

Where Do Fundraising Counsels Need To Register?

The key question in determining whether a fundraising counsel must register is whether sufficient contacts exist between the fundraising counsel and the state such that it is not fundamentally unfair for the state to subject the fundraising counsel to its registration and reporting requirements. The fundraising counsel must purposefully avail itself of the privilege of conducting activities within the state. Several Supreme Court cases have addressed whether a fundraising counsel has enough contact with a state to be subject to its regulatory jurisdiction. Interpretation of these cases suggests the following takeaways:

• Fundraising counsel should register in the state where they are domiciled;
• Fundraising counsel should register in the state where the charity is located;
• Fundraising counsel that advise charities with respect to solicitation in particular counties, states or regions or that, in some other way, target a particular state with its fundraising counsel activities should register in the targeted states. For example, a fundraising counsel that, as part of managing a direct mail campaign, recommends specific donor mailing lists, should register in the states where the direct mail recipients reside.

Online fundraising platforms are often structured to avoid classification as a fundraising counsel. Common reasons for falling outside the fundraising counsel definition are either that the online platform is directed at providing technology rather than consulting services, or the platform does provide fundraising counsel services but is also collecting a percentage of funds raised, thereby triggering categorization as a professional fundraiser.

Determining whether an online fundraising platform is classified as fundraising counsel, and if so, where it should register, requires a nuanced analysis that takes into consideration published guidelines for state regulation of online fundraising. A concise analysis of this issue is contained in my colleague Karen Wu’s Nonprofit Times article A Moving Target: The regulation of online fundraising platforms

Fundraising Counsel Contracts

In addition to the registration requirements, state charitable solicitation statutes require that contracts between a charity and a fundraising counsel include certain provisions. Common contract provisions required by state statute including the following:

• Legal name/address of the charity
• Statement of the charitable purpose for which the solicitation campaign is being conducted
• A clear statement of the fees to be paid to the fundraising counsel
• The effective/termination dates of the contract
• A statement that the fundraising counsel will not have control or custody of funds
• A statement that the charity exercises control and approval over the content, volume and/or frequency of any solicitation
• California and New York require lengthy cancellation provisions designed to allow the charity cancel the contract within 10-15 days of signing without penalty
• Several states require the contract to be signed by two authorized officials of the charity

The services fundraising counsel provide can be of great value to nonprofit organizations. Understanding the regulatory framework governing fundraising counsels will help you avoid missteps that can lead to actions by state regulators, including fines and penalties. It is incumbent on both the fundraising counsel and its charity clients to take the steps that ensure compliance under state charitable solicitation laws seriously. If in doubt, it’s always a good idea to seek counsel.

The post Advising Nonprofits on their Fundraising Strategy? You May Need to Register first appeared on Perlman Sandbox.