Is Your Fundraising in Compliance with State Laws?

Article Highlights:

• Remember that charitable solicitation is a regulated activity in most states.
• Compliance 101: What are the state registration, reporting, and disclosure requirements?
• Where and why do organizations register?
• Understanding the risk of noncompliance
• Understanding the development opportunities presented with compliance
• Strategies for becoming compliant and leveraging compliance for fundraising growth

Remember that charitable solicitation is a regulated activity in most states.

Nonprofit leadership has been quick to adopt tools provided by technology platforms that facilitate improved access to new and current funding sources. These platforms create unbridled reach at a fraction of the former expense.

While all of that is terrific news, it’s important to remember that charitable solicitation is a regulated activity in most states. Because technology knows no borders, nonprofits are tasked with understanding and complying with various requirements in far-flung places.

Compliance 101: What are the state registration, reporting, and disclosure requirements?

Forty-five states have laws regulating charitable solicitation. These laws exist to protect the citizens of each state from unregistered, misleading, and downright illegal activity. The primary lever in most of those states is registration with the charity official, typically the Attorney General, Department of Consumer Protection, or the Secretary of State.

The details of registration and reporting in each state vary greatly, but there are some commonalities. In a given state, a nonprofit might expect to submit:

• A state-specific application, filed either by mail, email, or online
• Copies of corporate records, such as formation documents and federal determination status
• Current board and executive leadership
• Information regarding paid fundraisers and any legal or disciplinary action
• Most recent Form 990 tax return and financial statements
• Contact information of a local registered agent for service of process
• A filing fee, often based on the organization’s contributions or total revenues

Nonprofits are required to renew their registrations in all states, mostly on an annual basis. In these subsequent filings, organizations submit recent financial statements and report any changes in their fundraising activity, leadership, and corporate records. Most states require an annual filing fee again based on prior-year revenues.

While the financial information reported each year generally ties into the previous year’s 990, statutory deadlines are scattered throughout the year. Organizations that extend with the IRS find that they must file separate extensions in many states to stay in good standing.

Registered organizations are also required to make point-of-solicitation disclosures in as many as 25 states. These short statements inform prospective donors where to find more information about the organizations asking them to give.

Generally, nonprofits are legally required to include this information on their written and electronic solicitations while balancing the need for effective, aesthetic fundraising materials.

States also regulate the activity of professional fundraisers, fundraising counsel, commercial co-ventures (aka charitable sales promotions), and charitable gaming. These topics are out of the scope of this article, but organizations that conduct any of these activities should be aware of how these additional regulations impact their compliance strategy.

Where and why do organizations register?

Nonprofits are generally required to file registration materials in each state where they solicit, typically before solicitation begins. Of course, you’re now thinking, “What does solicitation include?” While the legal definition varies by state, solicitation broadly refers to the act of asking for contributions.

Common methods of solicitation may include sending letters and emails, making phone calls, applying for grant funding, maintaining a website with a Donate Now button, and using social media and crowdfunding platforms.

Most organizations solicit by one or more of the above methods, which may reach prospective donors in multiple states, if not all states. In other words, you should take care to ensure that you’ve complied with the registration, reporting, and disclosure requirements in each state where you plan to operate and solicit.

State requirements apply to most organizations that solicit public contributions. Limited types of organizations, such as churches, may be exempt or not required to register. However, these exemptions and exclusions must be thoroughly researched.

In many cases, if the state’s requirements or organization’s situation changes, registration must follow.

In other words, compliance applies to everyone.

But why go through the hassle?

If “compliance is the law” doesn’t persuade you, consider two other reasons why organizations choose to become compliant.

• It reassures your donors. Intelligent donors research charities when planning their giving. Compliance with state registration and disclosure requirements facilitates that process. In state databases, donors can look up your organization, learn about your programs, financial health, leadership, and fundraising activities. Help them decide to give with confidence!
• Part of your board’s fiduciary responsibility is to run a compliant, ethical organization. No doubt, your organization has well-run, publicly visible programs. Compliance with various local, state, and federal requirements demonstrates this commitment even more fully.

Understanding the risk of noncompliance

States have the ability to enforce penalties, fines, and even legal action on noncompliant charities. In addition to monetary penalties, states publicly list noncompliant charities. You can imagine the public relations issues and legal expenses!

California takes enforcement a step further. They consider penalties to be a waste of charitable assets and may hold directors personally liable for payment. While your organization should have proper insurance coverage for its diverse activities, most General Liability and Directors and Officers Liability insurance policies do not cover the cost of compliance infractions.

Many private foundations, government grantmakers, and corporate sponsors also require proof of state registration as part of their due diligence. Failure to maintain current registrations can lead to lost funding in the thousands of dollars or more.

Understanding the development opportunities presented with compliance

With these risks in mind, adopting a proactive view of fundraising compliance will mean your development team has the ability to solicit by lawful means in every state where the proper registrations are maintained.

It’s important to note here that most states do not penalize organizations that register in good faith. Keep in mind that in some states, the registration process can take several months. Be sure to factor this in before planning any major fundraising events or development campaigns.

You’ll also earn enhanced credibility with donors, which translates into increased funding. When all is said and done, your organization can pivot what seems like an administrative drain into an actual return on investment!

Strategies for becoming compliant and leveraging compliance for fundraising growth

Nonprofits are left with a couple of strategies for becoming compliant. Larger organizations that have widespread operations, development activity, and budget may find that nationwide registration is more cost-effective, and drives greater results, than constantly researching ever-changing state requirements and determining how they impact their solicitation activities.

Smaller groups have an additional step. Registration is still generally required, but those groups must take extra care to confine their solicitations only in places where they are registered, exempt, or otherwise not required to file. This may include additional disclosure language on the organization’s solicitation materials and website.

Each organization must choose its own compliance strategy, but some high-level steps can help focus the conversation, regardless of your organization’s mission or size.

1. Identify your “fundraising footprint.”  Where does your nonprofit operate, solicit, or receive funding support from? In the near future, where does your organization plan to start soliciting?
2. In the places you plan to start soliciting, where has your organization taken steps to comply, and where has it not? Develop a plan to become compliant in the states where you’ve identified gaps. Include a budget and a tactical plan to manage state registrations, either in house or by leveraging professional assistance.
3. Once registered, monitor the results. At the bare minimum, your organization will have complied with state charitable solicitation requirements. Beyond that, your development team may be able to report increased contributions from their expanded activities.
4. Like any strategy, it’s important to revisit your compliance strategy periodically. As your organization grows and changes, monitor where your organization may have additional registration or other requirements. Then, take action!

The subject of compliance may feel overwhelming, but your organization can minimize risk and maximize gain through a proactive approach. Ultimately, becoming compliant requires top-to-bottom organizational buy-in, so it’s important to start a conversation with your board and leadership. Seek any additional resources you need to make a decision, but at the end of the day, make the right choice!

By choosing compliance, you demonstrate your commitment to operating fully within the public’s eye, for which your donors will reward you.

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• Your Nonprofit Got its Grant. Now What?
• Nonprofit Fundraising: Are You Choosing the Right Grants?
• 9 Principles to Make Your Nonprofit Fundraising Effective — and Fun!

 

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