U.S. State Solicitation Regulations Are Both Fierce and Far Reaching
by Shuey Fogel
With such as significant portion of donations to Israel’s charities coming from the United States, changes in American legislation can have a profound impact on Israeli nonprofit organizations.
For this reason, I happily agreed to co-host (along with Charlie Kalech of J-Town Productions) Laura Solomon, an attorney based in Philadelphia who specializes in nonprofits. Laura was a powerhouse, leaving me and the other attendees racing to take notes fast enough.
Most revealing was what Ms. Solomon had to say about individual States’ severe rules governing fundraising registration, specifically the broad definition of those required to register and the consequences of failing to do so.
Below are my notes from the event. Please remember that many of the things mentioned only scratch the surface and proper council should be consulted before acting on anything.
Background to U.S.A. State solicitation requirements
Nonprofits are subservient to two forms of regulations, Federal and State. While the focus since 9/11 has been more on the Federal level – Patriot Act, Sarbones-Oxley 990 changes, etc – recent rulings in the State level are forcing charities to pay close attention to the additional guidelines (and penalties) emanating from this sphere, as well.
Federal law regulates how organizations use and report funds. In contrast, State law regulates how funds are raised, which States call Solicitation (and what us normal folk call Fundraising).
As far as States are concerned, Solicitation is anything that leads to a request for a donation or collects data. And yes, organizations are held accountable to this broad definition. Any solicitation requires registration and annual reporting in the State where the nonprofit is soliciting donors. (Though Laura estimates that only 20% of charities register with the State where they solicit.)
The recent push is a result of the tremendous pressure that States are under – even more than the Federal government – to shrink their vast deficits. Within the States, it is most often than not the Attorney Generals who are spearheading the efforts to examine tax exemptions and compliance by nonprofit organizations.
40 out of 51 states, including Washington D.C., regulate solicitation of charitable funds.
Laura stressed that the filing requirements can be quite tricky. Unfortunately, there is no master registration form that applies to all 51 jurisdictions. However, there are instruments that try to ease filing requirements. The Unified Registration Statement (URS) claims to offer one form for 37 participating States. Though, the site notes that even participating States may require supplemental forms.
Ms. Solomon stressed that it is best to ensure that the in-house employee or external firm tasked with organizing the solicitation registration have a propensity for detail, with a law degree being very helpful if not critical.
Who needs to register?
An important point to remember is that even if the charity is using a fiscal agent (a.k.a. intermediary) the benefiting charity still needs to register at the State level. The exception to this would be when a fiscal agent or fiscal sponsor lists the benefiting project in its own filings with the State. In such a case, it could be possible that the benefiting charity would then be exempt from submitting its own paperwork.
Along the same lines, independent solicitors (individuals or companies) that are hired by a nonprofit to fundraise must also register. Failure to do so will affect the recipient charity.
In contrast, grassroots volunteers or community-based (unpaid) “fundraisers” do not have to register. However, charities are ultimately responsible for the conduct of the volunteers and must register if volunteers are collecting donations on behalf of the organization. Laura suggested that charities should have a written agreement with their volunteers to create a paper-trail that can prove or deny any official connection / responsibility between the volunteer and the nonprofit.
Most relevant for Israeli charities is the need for foreign nonprofits to register, as well. Much like a fiscal agent, it is also possible that a “Friends of” organization in the States can list it’s Israeli nonprofit as a benefiting charity, thus, enabling them to avoid registration. Again, please consult with legal counsel to determine if and how this can be done.
Consequences of failing to register
The fines for noncompliance are pretty steep, with 5 to 10 thousand dollars being the norm. It could very well be that the decision whether or not to register in a particular State might just boil down to simple math: $125. to register vs. $5,000. if fined. But of course, the ultimate decision resides with the charity and its licensed advisers.
Non-registration can have operational side-effects, as well. Laura reported that foundations are starting to require proof of registration when potential recipients apply for grants.
Points of interest
- Most States prohibit fundraisers from receiving a percentage of the money they raise.
- Merely having a website might not be considered Solicitation. However, a “donate” button can change this perception.
- While slightly out of date, the Charleston Principles listed on NASCONET provides a great working definition of Solicitation.
Do you have experience with State solicitation that you think others can learn from?
Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex and ever-changing, please refer all questions to qualified and licensed professionals. Read the full disclaimer.
Shuey Fogel is a nonprofit professional turned banking specialist. He is currently Director of Solutions for Nonprofits for an Israeli Bank. Shuey shares relevant conversations, articles, and experiences on his blog, nonprofitbanker.com.