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Fundraising: What U.S. laws apply?

By Elizabeth Schmidt
June 30, 2020

Donation box beside a jar of cookies
Photo by alexandra lammerink on Unsplash

We’re republishing some of the most popular posts from the GuideStar Blog, a Candid Blog predecessor. The author has updated this post.

Fundraising for nonprofit organizations has been likened to driving across the country with the caveat that gas must be purchased a single gallon at a time.1 The danger is that the destination will fade in importance while the driver searches for the next gas station. A secondary danger is that a few unscrupulous souls will find dishonest ways to fuel their vehicles. Fortunately, most drivers (and nonprofit organizations) remain honest and follow the rules. This article spells out some of these rules for donors who hope to avoid being duped by fundraising scams and for nonprofits that plan to follow both the letter and the spirit of the law.

Basic rule

The most basic rule of fundraising is that the donors must actually give away funds. They cannot receive goods and services in return for their gifts, nor can they obtain dividends on their investment. Donors can receive recognition and small tokens of appreciation, but if they receive a monetary return for the donation, they will lose their tax deduction, and the nonprofit organization could lose its tax exemption.

Registration laws

Most nonprofits and donors are aware of this basic rule, but many are unaware that most states and large cities have adopted charitable solicitation laws designed to protect donors, the general public, and charities themselves from fraud. Generally, these laws require charities and their fundraisers to register with the state or city, describe their fundraising activities, file financial documents, and pay a fee that covers the administrative expenses of monitoring charities. Nonprofits that need to know what each state requires should examine the survey of state laws that the National Association of State Charity Officials (NASCO) published in May 2020. Nonprofits can also bookmark the  Multi-State Filer Project web site. That site includes the Uniform Registration Statement, which is accepted in 37 jurisdictions (36 states and the District of Columbia). It also includes all supplemental forms that these states require as well as information on the 3 states that require registration but do not accept the Uniform Registration Form.

It is wise to take this requirement seriously. One of the reasons the Donald J. Trump Foundation got in trouble with the state of New York is that it raised money within the state without ever registering with the state.

Registration in the digital era

The registration rules were written in the era of telephone solicitation and are not as clear-cut when it comes to the Internet and social media. NASCO  has promulgated the Charleston Principles, which make recommendations as to when charities should register for online fundraising. The Charleston Principles are not laws, however, unless a state legislature has adopted them. Nonprofit organizations should check with their legal advisors and with charity officials in their states (see links to the charity officials’ sites) to determine how to handle the issue of registration for Internet fundraising. The California Guide for Online Charitable Giving can also be helpful.

Solicitations cannot be fraudulent

Even if charities are registered, it can be difficult for donors to know whether their gifts are actually reaching the charity and being used for a good cause. States originally tried to ensure this result by mandating that a certain percentage of the funds raised go to the organization’s charitable activities, but the Supreme Court held these rules unconstitutional because fundraising appeals are protected free speech (Schaumburg v. Citizens for a Better Environment, 444 U.S. 620 [1980], Secretary of State of Md. v. Joseph H. Munson Co.,467 U.S.947 [1984], and Riley v. National Federation of Blind of N.C., Inc., 487 U.S.781 [1988]).

States can, however, insist that the charity or its fundraiser tell the truth when soliciting funds. In fact, the Supreme Court ruled unanimously that states can bring fraud suits against fundraisers who misrepresent the way the money is being spent ( Madigan v. Telemarketing Associates, Inc., 538 U.S. 600 [2000]). Thus, donors can and should ask careful questions of a charity requesting funds, with the knowledge that the organization has an ethical and a legal duty to answer these questions truthfully.

Charities must also be careful that their messages are completely truthful and understandable, because anything short of that can deceive donors. The PayPal Giving Fund, for example, entered into a settlement with 23 states in 2020, agreeing to be more forthcoming about its practices when redirecting funds to charities that its donors have recommended.

FTC telemarketing sales rule

The Federal Trade Commission (FTC) also regulates charitable solicitations. It challenges fraudulent solicitations, and regulates the solicitations themselves.  Like for-profit sales people, charitable solicitors must disclose the name of the organization and state that the purpose of the call is to ask for a charitable contribution. They must honor all requests to be placed on a “do not call” list, and they must always tell the truth and avoid misleading statements.

In 2015 the FTC and the attorneys general in all 50 states and the District of Columbia sued four sham cancer charities for fraudulent behavior. Within a year, the charities had been shut down and the people running the charities ordered to pay hefty fines.

Conclusion

In the nonprofit world, fundraising is as inevitable as death and taxes in the for-profit world. If only a small percentage of fundraisers are unscrupulous, the general public can lose trust in the entire sector. Thus, charitable organizations must register with all applicable states and follow the charitable solicitation rules in order to help maintain trust in the sector. Potential donors can protect themselves—and others—by asking thoughtful questions and reporting unscrupulous behavior to state charity officials and the FTC. There will always be some unscrupulous operators trying to siphon funds from the unsuspecting, but an educated and proactive charitable community can minimize their success.

1Tom Tierney, founder and chairman of The Bridgespan Group, has made this analogy. “Imagine if a typical CEO spent 2+ days a week with bankers, Wall Street analysts and venture capitalists. Now imagine that it took over 100 different sources to capitalize his business, and that none of them would ever commit to more than a single year's funding. It would be like trying to drive from San Francisco to Boston on a gallon of gas at a time. You’d never be able to plan the fastest or most direct route and would always be looking for the next gas station.” See “The Prophet of Nonprofits” and “Taking a Deeper Look at Philanthropy,” The Gathering, 11-02-2002.

Tags: Nonprofit law and regulations; Fundraising