In the constant and ever challenging pursuit of fundraising, it is important not to forget about compliance issues. The repercussions of not complying with the state registration requirements are grave.
In the constant and ever challenging pursuit of fundraising, it is important not to forget about compliance issues. Approximately forty (40) states require charitable organizations to register with a state regulatory agency (usually with the state’s attorney general’s office or secretary of state’s office, depending on the state) prior to engaging in any solicitations for contributions. In addition, approximately forty five (45) states require registration for professional fundraisers that solicit on behalf of charitable organizations and fundraising counsel that consult, manage, or advise charitable organizations with respect to the solicitation of contributions.
Almost all of the state statutes define “solicitation” very broadly, capturing almost any type of solicitation one might contemplate from telephone solicitations, to ticket sales for charitable events, to charitable gaming and beyond. Thus, if you are thinking about fundraising in a particular state, you should pay special attention to that state’s registration requirements in order lawfully to solicit contributions from residents of that state.
The repercussions of not complying with the state registration requirements are grave. If you solicit in a state while not first registering, you have unlawfully solicited in that state and may be subject to civil administrative penalties. States will often ask for the number of individuals your organization has solicited in the state and the amount of contributions that you have received while not being properly registered. Generally, the greater the number of individuals you have solicited and the greater the amount of contributions you have received, the more severe penalties will result.
Even the slightest penalty has repercussions. If you are subject to any civil penalties, then you will most likely have to disclose these penalties to other states when you register to solicit with them. This makes your organization subject to closer scrutiny by state regulators.
In addition to facing potentially costly penalties if you fail to register, professional fundraisers or fundraising counsel that fail to properly register are subjecting their charitable organization clients to potential civil penalties. Most states prohibit charitable organizations from using the services of an unregistered professional fundraiser or fundraising counsel. Thus, unregistered professional fundraisers and fundraising counsels are subjecting their clients to potential civil penalties because they have not complied with state registration requirements. This failure to register is not only unlawful, but is poor business. Conversely, professional fundraisers and fundraising counsels can be subject to civil administrative penalties if they perform services on behalf of unregistered charitable organizations.
All of the above information leads us to the following question: what does registration entail? For charitable organizations, registration involves submitting annual registration applications in most states along with financial statements, such as the organization’s IRS Form 990 and other state-specific forms depending on the respective states. States also require audits when the organization receives a certain threshold amount in contributions. Because registration is valid for one year, all of the required items must be submitted each year on a specific “due date.” This process is further complicated by the fact that an organization’s due date for renewing its annual registration varies from state to state. Some states base the due date on when the Form 990 is due with the IRS; others have anniversary due dates—that is, the due date becomes the date your organization initially registered with that particular state; others have due dates every quarter per year and assign organizations to one of these four dates; and other states have implemented other creative due-date determinations.
In addition to the above required information for charities registration, professional fundraisers are required to obtain bonds in various amounts depending on the state (often from $10,000 to $50,000). In addition, both professional fundraisers and fundraising counsels must submit their contracts with charitable organizations to the state regulators prior to performing any professional fundraising services under the contract. Some states also require charitable organizations to submit these contracts.
Most states allow the registration application and related documents to be filed via mail. Recently, states have been evaluating moving towards Internet filing. In fact, all Colorado applications must be filed in this way. Other states may be moving in this direction in the near future. Rhode Island requires the applications to be filed on CD-Rom.
In considering a fundraising campaign, you should determine where you want to solicit. If you want to solicit from residents of a particular state, then you should register in that state. If you are soliciting from a particular state, then you should register with that state (even if you are not soliciting residents of that state). Remember, the act of solicitation triggers the registration requirement, so the organization must register prior to conducting any solicitations.
While trying to comply with the patchwork of state statutes and rules is often times daunting and overwhelming, it is necessary in order to engage in a lawful and successful campaign. No charity, professional fundraiser, or fundraising counsel wants to be tagged as noncompliant or engaging in unlawful solicitation practices. If your organization is so tagged, then the organization will most likely be subject to additional scrutiny from state regulators.
Nathan Thomas is an attorney in the law firm of Copilevitz & Canter, LLC. The firm specializes in representing nonprofit organizations and those who work with them in the appeal for public support. You can contact him using the online form.