GEORGETOWN UNIVERSITY LAW CENTER

CONTINUING LEGAL EDUCATION

REPRESENTING & MANAGING TAX-EXEMPT ORGANIZATIONS

MAY 4 - 5, 2000

Washington, DC

STATE REGULATION OF CHARITABLE FUNDRAISING

MacKenzie Canter, III, Esq.
Copilevitz & Canter, LLC Washington, DC

STATE REGULATION OF CHARITABLE FUNDRAISING

I. General Principles: An Overview of State Registration and Regulation Issues in FAQ Format

Q. WHY DO STATES REQUIRE CHARITIES⁽¹⁾ TO REGISTER?

A. While charities enjoy a right of free speech, and therefore the opportunity to seek public support within the various states, states are allowed to regulate the activity within certain standards. States enact charitable registration laws to protect citizens from fraud or abuse and ensure accountability. These laws also benefit charities by creating a central location where the public can verify authenticity.

Q. WHEN MUST CHARITIES REGISTER?

A. A charity is required to file a registration in each state where it plans to solicit funds, i.e., prior to soliciting. As noted below, the advent of Internet appeals has raised more questions than answers in regard to "where" a charity is deemed to be soliciting.

Q. WHO HAS TO REGISTER?

A. Any charity seeking public support, or anyone making an appeal for public support on the representation that funds received will be used for an eleemosynary purpose.

Q. WHAT DOES IT TAKE TO REGISTER?

A. Generally, it requires the completion of an information form, which includes an audited financial statement, a listing of the officers and directors, and the charity's tax-exemption determination letter from the Internal Revenue Service. In some states, a copy of IRS Form 990 may suffice, in lieu of an audited financial statements.

Q. DO ALL STATES REQUIRE REGISTRATION?

A. Currently, forty-five (45) states require some type of registration. Some of the states which do not require registration are considering legislation that could mandate registration.

Q. IS REGISTRATION FOR CHARITIES REQUIRED ONLY ONCE OR IS REGISTRATION AN ONGOING PROCESS?

A. Most states require the charity to renew annually its registration. Renewal deadlines must be met in order to avoid fines or other sanctions. Most states require a renewal fee.

Q. ARE THERE EXEMPTIONS?

A. Many states provide exemptions for certain types of organizations. The most frequent exemptions are for institutions of higher education, religious organizations, and appeals made on behalf of a named individual when conducted solely by volunteers. Also exempt in some states are federally chartered veterans groups. The exemption for religious organizations varies from state to state. However, if the appeal by the religious organization is for a "secular" purpose (e.g., helping children in third world countries) many states require registration.

Q. WHAT IS THE COST OF REGISTERING?

A. Costs vary from state to state, from zero to $400. In some states there is a sliding

scale depending upon the income of the charity. Charities should expect to pay, in total, between $1,000 and $2,000 in registration fees. Other fees include legal fees and accounting fees (in connection with the preparation of an audited financial statement).

Q. HOW MANY CHARITIES ARE REGISTERED?

A. New York has forty thousand (40,000) registered charities. In California, there are more than sixty thousand (60,000). In Minnesota, there are three thousand (3,000). California officials estimate that five hundred (500) new non-profits are formed each year in that state.

Q. MUST "CHAPTERS" OF NATIONAL ORGANIZATIONS INDIVIDUALLY REGISTER?

A. It depends. If the chapters are formed as independent corporations which conduct fundraising, they must register in the states where they issue solicitations. On the other hand, if they are unincorporated and the national organization is registered and files a consolidated financial return, then the chapters may not have to register. In some states, this "group registration" is available only when the "parent" has its principal office in the state. In addition, in some states there is a minimum "threshold" solicitation amount that triggers the registration requirement.

Q. ARE SOME STATES MORE ACTIVE THAN OTHERS IN ENFORCING REGISTRATION REQUIREMENTS?

A. With some exceptions, the states in the northeast and along the Atlantic seaboard tend to be the most active. Pennsylvania and New Jersey have increased their staffs by creating auditing positions. There is an enhanced focus on "joint costs," as an audit issue. Michigan and New York are also focusing on audit issues.

Q. ARE THERE OTHER FILING REQUIREMENTS IN ADDITION TO THE REGISTRATION?

A. Yes. A professional fundraiser and, in some states, a fundraising counsel is required to file a copy of any contract it has with a charity. The charity should make sure the fundraiser is properly registered.

Q. WHAT IF AN APPEAL IS MADE VIA RADIO OR TELEVISION?

A. The charity issuing the appeal should be registered in each jurisdiction where the communication would ordinarily be expected to be received. (If a radio appeal is made from a station in Minnesota, it is not reasonable to expect the appeal to be heard in West Virginia, although this is theoretically possible.)

Q. HOW DO STATES VIEW INTERNET APPEALS MADE FROM THE CHARITY'S WEB SITE?

A. Clearly the charity should be registered - at a minimum - in the state where the site is operated. It is probably best to "error on the conservative side" and register in all states where the appeal may be received. This issue is still evolving, as discussed below.

Q. IF CHARITY CONDUCTS ITS FUNDRAISING SOLELY VIA DIRECT MAIL, IN WHICH STATES SHOULD IT REGISTER?

A. That charity must register in any jurisdiction into which its appeal for public support is sent.

Q. DO STATES REQUIRE REGISTRATION AS A CONDITION TO PARTICIPATING IN STATE EMPLOYEE WORK PLACE CAMPAIGNS?

A. Yes, many states require registration.

Q. AT WHAT POINT SHOULD CHARITIES SEEK PROFESSIONAL ADVICE OR DIRECTION?

A. As soon as the planning is completed, seek competent advice. If a charity intends to conduct its own campaign it will need advice and guidance on the registration and disclosure requirements. In this area, an ounce of prevention is worth a ton of cure. It is far more expensive to "undo" mistakes.

Q. WHAT IS A REGISTERED AGENT? WHY DO SOME STATES REQUIRE APPOINTMENT OF A REGISTERED AGENT AS PART OF THE REGISTRATION PROCESS?

A. A registered agent is the person legally designated by an organization to receive any legal documents generated in that state. An enforcement action involves serving notice on the defendant organization. By requiring an organization to appoint a registered agent, the state ensures it has a means to notify the organization or, if necessary, serve a summons on it.

Q. WHY DO SOME STATES REQUIRE CERTIFICATES OF AUTHORITY TO DO BUSINESS IN ADDITION TO THE CHARITABLE REGISTRATION?

A. States require certificates of authority from foreign corporations which transact business in the state. Some states have interpreted this requirement to apply to charities as well as "for profit" organizations. The certificate of authority, in addition to charitable registration, may be required even if the charity has no "physical presence" in the state.

Q. WHAT ABOUT THE UNIFORM REGISTRATION FORM?

A. Most states now accept a uniform registration form which has been under development for several years. However, many also require an addendum if the uniform form is used. The result is the need to file two forms instead of one. We find that using the state form (i.e., as opposed to the uniform form) results in less paperwork and saves time.

Q. WHAT IS A PROFESSIONAL FUNDRAISER?

A. A professional fundraiser is generally defined a person who for compensation solicits financial support on behalf of a charity.

Q. IF A CHARITY HIRES A TELEMARKETER OR A DIRECT MAIL COMPANY, IS THAT ORGANIZATION ALSO REQUIRED TO REGISTER?

A. Forty-five (45) states require professional fundraisers to register. Telemarketers are always defined as professional fundraisers because they directly contact the public. In contrast, many direct marketing companies act in the capacity of fundraising counsel, i.e., they do not directly contact the public. If a charity has a contract with a professional fundraiser, the contract generally must be filed. The contract will be open to public inspection.

Q. WHAT IS A FUNDRAISING COUNSEL?

A. The general definition of a fundraising counsel (or fundraising consultant) is a person that assists in planning, managing, or supervising a fundraising campaign, but does not directly solicit the public or have custody or control of funds raised by the campaign. Many direct mail agencies fall into this category.

Q. MUST FUNDRAISING COUNSEL REGISTER?

A. In many states registration is required. However, few states require bonds. The registration is less onerous than that required of a professional fundraiser.

Q. WHO ADMINISTERS STATE REGISTRATIONS?

A. Registrations usually are administered by the Secretary of State or the Attorney General. In some states, consumer protection agencies are in charge of registrations. It varies from state to state.

Q. DO REGISTRATION REQUIREMENTS COVER ONLY FINANCIAL AND CORPORATE INFORMATION?

A. No. Registrations may mandate many other items, such as specific provisions in contracts with professional fundraisers. Additionally, some states specify oral and/or written disclosures which must be made whenever a solicitation is made.

Q. WHICH STATES HAVE DISCLOSURE REQUIREMENTS?

A. Approximately two-thirds of the states have some form of disclosure requirement in connection with solicitations.

Q. WHAT IS MEANT BY "COMMERCIAL CO-VENTURE"?

A. A commercial co-venture is generally defined to be an arrangement between a charity and a business firm, which involves the promotion of a product of service in connection with a representation that part of the sale proceeds will benefit the charity.

Q. IF A CHARITY ENTERS INTO A COMMERCIAL CO-VENTURE AGREEMENT WITH A COMMERCIAL INTEREST, IS REGISTRATION REQUIRED?

A. The law involving commercial co-ventures is emerging and evolving. Registrations must be filed in Alabama, Maine, Massachusetts and Washington. The laws of Tennessee and Utah are broad enough to require registration. Under the laws of other states, a copy of the contract between the organization and the commercial co- venturer is required to contain a number of specific provisions. (In Connecticut, the contract must be filed.) The commercial entity is deemed to be a fiduciary, subject to accountability to any state in which the appeal is made, irrespective of whether registration is required.

Q. ARE THE STATES DEVELOPING A UNIFORM APPROACH TO REGISTRATION AND REPORTING?

A. An effort is being made, as noted above. Many states have agreed to accept a uniform registration form. The problem, however, has been that many of these jurisdictions require state specific addenda to complete the registration. Obviously, such addenda undermine the concept of uniform registration. It is uncertain whether this effort will result in a uniform system of registration, given that state laws vary widely.

Q. WHY IS BONDING REQUIRED? WHAT IS A SURETY BOND?

A. Bonding is required from professional fundraisers and, in some states, fundraising counsel. The theory is to ensure funds are available to reimburse victims of fraud or other malfeasance. Essentially, a surety bond is a form of insurance to guarantee the professional fundraiser's "good behavior." For a nationwide registration, the cost of bonds is one of the most expensive aspects of the professional fundraiser's registrations.

Q. WHY MUST SOLICITATION NOTICES BE FILED IN ADDITION TO THE FUNDRAISING REGISTRATION?

A. Some states require solicitation notices to be filed to alert them to upcoming activity from the professional fundraiser or charity. Solicitation notices are one more way that states use to keep tabs on charitable solicitations in their states. The filing of contracts which contain dates of performance serves a similar function.

II. The Brave New World of Internet Fundraising: New Wine in Old Skins?

Jurisdictional concepts (e.g., "minimum contacts") are stretched to the breaking point when in cyberspace an appeal is "everywhere" in "real time." Is it possible to refrain from "entering" a state (domestic or foreign) when the world wide web is seamless? How does a charity avoid making an appeal to residents of a certain state?

III. States Try a "Back-Door" Approach to "Reasonable Fund-Raising Costs": Enhanced Focus on "Joint Cost" Allocations and New SOP 98-2.

IV. Current Developments in Litigation

• American Charities for Reasonable Fundraising Regulations, Inc. et al., v. Pinellas County, USDC (MD FL) CA 99-109045A (November 12, 1998).

The court rejected arguments that Pinellas County's charitable solicitations ordinance duplicates state regulations and unconstitutionally restrains commerce and free speech.

Pinellas County (which includes St. Petersburg) regulates solicitations by requiring that charities and fundraising professionals register annually and provide financial data and fundraising materials.

The ordinance covers all forms of charitable solicitations, whether in person, or by mail, telephone, or by the Internet. Where the appeal originates is irrelevant.

The complaint alleged that the ordinance "constitutes an overbroad, unreasonable restriction of free-speech activity and of free trade commerce." The ordinance covers firms who have no operations in Pinellas County, who may have no knowledge of the ordinance, and who may not be able to control where the appeal is received.

Because all charities that solicit in Florida must provide the state with information "substantially similar" to that required by Pinellas County, the complaint alleged the ordinance was unduly burdensome.

The court rejected all these arguments, holding the ordinance was constitutionally valid.

The court also rejected the assertion that the ordinance's burden on professional fund raisers was "clearly excessive" in relation to the benefits to the county.

The plaintiff has appealed the case to the 11^th Circuit Court of Appeals. A decision is expected in the near future.

• American Charities for Reasonable Fundraising, et al. v. Shiffrin, USDC (CT) No. 3:98 cv 1050 (March 31, 1999).

Plaintiff American Charities is a membership organization whose members consist of charities, nonprofit "umbrella" organizations, and other fundraising organizations. Plaintiff Bill of Rights Foundation ("BRF") is a nonprofit organization that alleges it was chilled from fundraising in Connecticut out of fear of inadvertent violation of the Connecticut Unfair Trade Practices Act and the state sweepstakes law. The plaintiffs moved for an injunction to enjoin Connecticut from using these two statutes to regulate fundraising. The plaintiffs argued these statutes are unconstitutionally vague and unconstitutionally "chill" plaintiffs' First Amendment rights.

The Court ruled that plaintiff American Charities lacks standing to bring suit under 42 USC §1983 and plaintiff BRF has failed to state a cognizable allegation of First Amendment chill sufficient to confer standing.

• American Target Advertising, Inc. v. Giani, USCA 10^th Cir., No. 98-4158 (January 13, 2000).

This challenge was to the registration, filing fees, and bonding procedures of the Utah Charitable Registration Act. Utah won on the issue of the $250 initial filing fee. Based upon the affidavit of the Director of the Division of Consumer Affairs, the court determined the filing fee was reasonably related to the cost of administration of the Act. Utah also won on the issue as to whether the registration process created a burden on interstate commerce. The court found that the registration and filing fees were not a form of tax, but, rather, a reasonable licensing requirement.

However, the court sustained the plaintiff, American Target Advertising (a fund-raising consultant), on other key issues. The court found that the provision in the Act which allowed the Director to request "such other information as she might reasonably require" gave too much discretion and, thus, created a form of prior restraint. Such a provision is easily abused and could be used to deny or withhold registration for an indefinite period of time.

The court struck down the bond requirement. The plaintiff alleged it created a barrier, given the prohibitive cost of securing bonds. The court found that the bond was, in effect, analogous to a victim relief fund for those who might be injured as a result of a violation of the Act. The court stated that any interest in victim relief could be addressed by other methods which were less onerous.

Finally, the court found the Act unconstitutional because it failed to specify a period within which a registration application must be accepted or denied by Utah.

• Illinois v. The World Church of the Creator, Cir. Ct. of Cook County (IL) No. 99-CH-10124 (February 8, 2000).

The Illinois Solicitation for Charity Act defined "charitable organization" as "[a]ny benevolent, philanthropic, patriotic, or eleemosynary person or one purporting to be such who solicits and collects funds for charitable purposes..." The Court found the definition of "charitable organization" in the Act did not sufficiently guide the Attorney General in determining which organizations are subject to the Act. The terms used to define "charitable organization" were themselves undefined and so generic as to fail to provide adequate notice as to which entities were subject to the Act, and, thus, required to register.

The Act provided no guidance to or constraint on the Attorney General's discretion in initiating prosecutions under the Act. This discretion, in the absence of any statutory constraints defining "charitable organization" or "purporting to be a charitable organization" or "charitable purposes," was found to threaten First Amendment rights, particularly in light of severe sanction provided by the Act, i.e., being permanently enjoined from soliciting fund in Illinois. The Court found the Act was unconstitutionally vague and, therefore, violative of the defendants' First and Fourteenth Amendment rights of free speech and due process.

• Muscular Dystrophy Family Foundations, Inc., et al. v. Modisett, USDC (SD IN) No. IP-99-0992-C-D/F (March 21, 2000).

The federal district court struck down Indiana Code §23-7-8-2(i), finding the statute in violation of the First Amendment. (Copilevitz & Canter, LLC represented the plaintiff.)

The court assumed that Indiana constitutionally could mandate professional fundraisers to disclose their identity and relationship to the charity. However, in considering if a statute is narrowly drawn, a court must consider if it is "designed to serve [the State's] interes[t] without unnecessarily interfering with First Amendment freedoms.'" The court found the state's requirement that disclosures be made at the beginning of the professional solicitor's telephone call was not sufficiently narrowly tailored to further the State's asserted interests. The State's interest of informing the potential donor would be served equally by directing that the disclosures be made before requesting a donation, as opposed to at the outset of the call per se. This latter option better would protect the professional fundraiser's First Amendment rights, permitting him or her to talk about the charity for which (s)he is soliciting before being compelled to "rattle off a string of statements" that likely will "chill" the call.

Caveat

This Outline is not intended, nor is it provided, as specific legal service, but rather, only as a general discussion of concepts and principles. Please consult with the author or another attorney before utilizing any techniques stated herein. Of necessity, this material has not addressed all issues, principles, exceptions, and exclusions which may apply to a specific transaction.

About the Authors:

MacKenzie Canter, III earned his B.A. at Randolph-Macon College, M.A. at The George Washington University, M.Div. at Yale University (in conjunction with Oxford University), and J.D. at The University of Virginia Law School. Copilevitz & Canter, LLC, with offices in Kansas City and Washington, DC, represents over 130 tax-exempt organizations, as well as many professional fundraisers and fundraising counsel. Mr. Canter has written many articles in the area of tax-exempt organizations law. He is the co-editor for federal tax issues of Philanthropy Monthly. He is a lecturer to state societies of certified public accountants for their CPE programs in tax law. He is a member of the bars of Virginia, Maryland, District of Columbia, and Missouri.

END NOTES:

1. "Charities" is used to refer to any organization (e.g. school, museum, church, etc.) which solicits the public for contributions. The definition for state purposes is broader than IRC §501(c)(3).