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What Nonprofit Professionals Should Know About Charitable Solicitation Compliance

Louis Oh

Missed our charitable solicitation compliance webinar by our NeonOne partner consultant, Brock Klinger of Harbor Compliance? Not to worry. Check out the recording of the webinar below.

You can also download the slides and find more resources at our support center, here.

If you’re otherwise pressed for time, the following is a summary of the key things presented in the webinar.

What is charitable solicitation compliance?

In simple terms, meeting various IRS and state requirements to fundraise.

Things you should know about state registration.

This talk was focused specifically on state registration and here are the key points to know:

  • 41 states require nonprofits to register in order to solicit legally
  • 24 states require disclosure statements
  • Solicitation essentially includes any form of asking for donations which include collecting dues, using professional solicitors on your behalf and donation buttons on your site

Online fundraising inherently present a confounding challenge to nonprofits. Most nonprofits conduct at least some part of their fundraising online and people commonly ask if donating is accessible anywhere, should nonprofits have to register nationwide? Does this apply if donation sources are limited? The requirements were largely set before the popularization of the Internet so it’s tricky but here are a few things you should know.

  • In 2001, NASCO (the National Association of State Charity Officials) came up with a set of guidelines known as the Charleston Principles
    • The principles basically state that if you send targeted emails to people in certain state, or if ongoing, repeated, or substantial donations from residents from a given state occur, you must register in that state
    • However, the subjective qualities of the principles still make it difficult to apply and it was never codified and therefore unenforced
    • Only 19 states follow these guidelines and 22 have their own rules and criteria systems
  • Online fundraising, including email and social media, is generally considered nationwide solicitation
  • If you follow up on a donation made from another state, that also triggers the registration requirements

So what should nonprofits do?

solicitation compliance registration map

There are two main approaches.

  1. Register in all 41 states.
    This way you can fundraise nationwide without the risk of penalties. Of course, not all nonprofits have the resources to do this.
  2. Register in as many states as possible and then restrict solicitations.
    Prioritizing the most important states you would do your best to register as widely as makes sound business sense. You would have to place language on your online donation forms that say you will not take donations originating from certain states. In the case that you end up receiving donations despite this, you would not follow up. Organizations must weigh the costs of registering against the costs of losing potential donors. Remember the penalties for violations can be severe.

If you need to make decisions about selective registration, here are some things to consider.

  • Prioritize which of the 41 states you need to conduct solicitations
  • Thoroughly research the specific requirements in each state
  • You may either register or consider filing for exemption in these states
  • Remember that exemptions also require application and renewals, so while it limits fees you may need to pay, it doesn’t limit the amount of paperwork
  • Even if you qualify for exemption in a certain state by being under the revenue threshold, if you solicit you will be required to register

“We’ve been fine for years, why do this now?”

Well, the requirements have been around for some time now and many states are getting increasingly more stringent. Some now have certified public accountants (CPAs) and attorneys digging to ensure accountability. There can be several negative consequences if caught in violation of these laws such as,

  • State fines and penalties
  • Bad PR, embarrassment of the organization and related parties
  • Loss of state recognition and tax exemption
  • Revocation of solicitation rights
  • Enforcement actions and audits
  • Liability for officers and directors (e.g. in California board members are held responsible and must face personal fines and may lose tax exemptions)
  • Missed grant and donation opportunities

Avoid these situations through proactive registration.

Maintaining legal compliance is a fundraising best practice.

  • Voluntary registration will give you a pass even if you haven’t been registered for years
  • States want to encourage registration
  • Plainly, it’s a good idea to abide by standards for code of ethics and accountability
  • Charities have an ethical obligation to be compliant in all 41 applicable states
  • Studies show that disclosure statements on solicitation also leads to better rates of return as donors feel reassured by seeing signs of compliance
  • Registration is reflected in state databases which donors and grantmakers have access to in public record
  • Corporate donors often check such public records

For these reasons, your organization should treat these requirements the same way they handle 990 filing requirements or any other financial review or audit requirements. Legal compliance is essentially a license to fundraise. Here are some tips:

  • Share these facts with your team, leadership, and board of directors
  • Take the initiative to bring up the discussion: educate and advocate
  • Include registering and renewing on your list of ongoing tasks
  • Budget registration, renewals and other associated costs as annually recurring line items

The Registration Process

  1. Research

    • Check your current status before registering: compliant or in bad standing?
    • States may have different prerequisites, collect correct forms and necessary supporting documentation
  2. Apply

    • Complete applications and compile documents
    • Ensure proper delivery, sending it to the right agency/office may be different by state
    • Whenever possible, use state-specific forms as it may take longer to process otherwise
    • Costs vary by state and revenue of your organization, some may even be free
    • For organizations with revenue range of $100,000 to $500,000, it may cost $1,400-$5,000 to register to all 41 states
  3. Monitor

    • It can be a long wait, some a few weeks other possibly months
    • Regularly track the submission to make sure it was received and processed
    • Resubmitting rejected applications can be very complicated
    • This may call for significant commitment
    • It may take 2 weeks to 8 months
  4. Renew

    • Most states are annual, some are biannual
    • Keep track of these as they are usually based on your fiscal year and you may be penalized for being late
    • Renewals are similar to initial registration in terms of process
    • The difference is that there is a hard deadline for renewals
    • If you won’t be ready in-time file for an extension

For the 24 states where you must state disclosure statements inform donors where they can find more information on your nonprofit’s leadership, finances, and activities. Mind that these rules are regularly subject to change and differ state to state, so stay updated accordingly. (many states do not actively notify)

Now is the best and cheapest time to register! Proactive registration is highly encouraged.

Harbor Compliance manages every step of the process of registering. Applications for each state and every step is conducted by hand and in-house. It is not automated because each state is so different. You can track the status and important dates through their proprietary software.

FAQS

  1. How do you begin the conversation about compliance and registration if you are a new member of an organization?

    Focus first on state where you get the most contributions and pick the ones that are most important to you financially. Consider implementing a tiered approach to incrementally expanding registration.

  2. How do you handle international solicitation?

    These requirements apply to 501C organizations. If an organization based overseas solicits and raises funds in the US without legal standing, they wouldn’t be able to do so legally as they would not have the necessary documents to register. If the organization is formed in the US and receives donations from abroad, they must have legal standing applicable to those foreign nations.

  3. For organizations without their own 501C or are under another entity, does compliance transfer down?

    Registration is contingent on having your own 501C so those that are sponsored wouldn’t have those requirements. Requirements only apply to stand-alone organizations. However, the parent organization should be registered.

  4. Does the type of donation impact any of the requirements?

    The very act of asking merits registration. So if an ask occurs, anything that involves receiving something of value is soliciting. Regardless of what type of donation, registration is required.

  5. What do you do if you are applying for a grant where the grant is in your home state but the check is cut by a national office elsewhere, or if you receive something from a local branch of a multi-state company with the giving done from out of state?

    It depends on where the solicitation happens. Wherever the application is being submitted is where the registration needs to be conducted.

  6. In situations like social fundraising where someone raises funds on behalf of an organization how does compliance work?

    You need to be registered wherever the ask is being made (if it is a state where it is required).

 

Want to learn more about solicitation compliance?
Check out this blog post from James Gilmer of Harbor Compliance on the Benefits of Online Fundraising Compliance.


Keep on the lookout for more webinars at NeonCRM.

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