BDO INSTITUTE FOR NONPROFIT EXCELLENCE

WHO’S WATCHING YOU NOW?

Review of State & Other Fundraising Reporting in an Ever Changing

Regulatory Environment

June 13, 2013

Presented By: Seth Perlman

Tracy L. Boak

Perlman & Perlman, LLP

41 Madison Avenue, Suite 4000

New York, NY 10010

212-889-0575

Seth@perlmanandperlman.com

Tracy@perlmanandperlman.com

www.PerlmanandPerlman.com

WHO’S WATCHING YOU?

IRS Other Federal

Agencies

Watchdog Organizations News

Media

Legislature

States

Donors

THRESHOLD QUESTIONS

Why is fundraising regulated?

What role do the states play?

What role does the federal government play?

What about watchdogs and the media?

How extensive is fraudulent fundraising in the charitable sector?

Does registration and reporting help prevent fraud?

How has technology changed the landscape?

How will it change in the future?

TOPICS TO BE COVERED…

History of Fundraising What Activities are Regulated Role of Government Constitutional Framework Evolution of Fundraising

HISTORY OF FUNDRAISING REGULATION

In 1955, New York established the Office of Charitable Registration to administer new fund raising regulations.

Eventually over 40 other states established charity

offices modeled after New York, in response to: Growth of mass marketing technology Proliferation of charities Increased competition Increased presence and use of commercial fundraisers

PROLIFERATION OF CHARITIES

501(c)(3) Entities Registered with IRS __________________________________

1940: 12,500 1980: 320,000 1996: 654,186 2009: 1,135,626

_________________________________

As of 12/2012, 1,072,746 (973, 961 public charities and 98,785 private foundations)

WHAT ACTIVITY IS REGULATED?

SOLICITATION In short, solicitation is the affirmative act of asking for a gift or selling goods or services that will benefit a charitable organization.

GOVERNANCE

Historically, governance was within the purview of the states; starting in 2008, the new Form 990 put the IRS in the position of regulating the governance of nonprofits.

FUNDRAISING FRAUD

Two primary categories: Fundraising practices that are deceptive with

respect to: What portion of the proceeds will be used in the

charity’s programs; and The extent of a charitable contribution deduction

that a supporter is entitled to Failure to comply with donor imposed

restrictions

GOVERNMENT vs. CHARITY

Conflicting interests of charities and the government results in increasing tension.

Government Interests Ensuring assets are used for charitable purposes Providing information to donors—informed giving decisions Protecting citizens from fraud Protecting donors’ privacy

Charity Interests Disseminating information Seeking funding unburdened by government

CONSTITUTIONAL FRAMEWORK

First Amendment - General Principles: Solicitation of charitable contributions is fully protected free speech,

even when conducted by professional fundraisers with profit motives

The states have the power to compel charities and their solicitors to identify themselves to the public before they solicit

However, the First Amendment otherwise protects this activity and narrow tailoring of the laws is essential

Tension between constitutional protections and states’ interests in preventing fraud has become a central issue in state regulation of charitable solicitation

CONSTITUTIONAL FRAMEWORK

The Trilogy: Schaumburg, Munson and Riley Supreme Court struck down state and local

regulations limiting the percentage of fees that charities could pay to raise funds

Pre-solicitation disclosures of fundraising percentages held unconstitutional

The Court rejected the states’ attempts to connect high fundraising costs to fraud

CONSTITUTIONAL FRAMEWORK

Illinois ex rel. Madigan v. Telemarketing Associates, Inc. Reaffirmed that charitable solicitations are

protected by First Amendment Percentage of fundraising proceeds turned over to

a charity may not alone be the basis to prove fraud

Not offering the fundraising percentage in a solicitation does not in and of itself constitute fraud

STATE REGULATION

45 states have some sort of statutory scheme to regulate charitable solicitations and the use of nonprofit assets within their borders.

Registration and reporting requirements are imposed on charities, professional fundraising counsel, professional solicitors, and commercial co-venturers.

Each group is required to file annual registrations and/or contracts and/or financial reports and/or the IRS Form 990.

CHARITABLE ORGANIZATIONS

Primarily Section 501(c)(3) and (c)(4) organizations Also may include other nonprofit organizations as

defined by state law tax exemption and deductibility is a function of federal tax

law while the nonprofit status is a creature of state law

May even include for profit organizations key issue is asking for money using a charitable appeal

40 States plus DC require registration prior to commencement of solicitations

PROFESSIONAL SOLICITORS (a/k/a Professional Fundraisers or Commercial Fundraisers)

Directly solicit the general public on behalf of a charitable organization for a fee

May have custody/control of the contributions received

Many states also require a pre-solicitation disclosure of

professional status prior to making the request for a gift

Required to register in 44 states, post a surety bond and file contracts with their nonprofit clients

PROFESSIONAL FUNDRAISING COUNSELS (a/k/a Fundraising Consultants)

Help plan, manage, advise on, consult or produce and design solicitations to the general public for a fee

Do not make the solicitations

Generally, may not have custody or control of contributions

Required to register in 32 states and post bonds in a

few

COMMERCIAL CO-VENTURERS

An entity that, as part of a sales promotion, uses the charity’s name to sell its products or services (at its usual retail price) and makes a charitable donation based on the sales

Registration and/or filing of contract required in: Alabama,

Hawaii, Maine, Massachusetts, Mississippi and South Carolina (+ maybe California)

17 other states regulate the activity but do not require

registration Require written contract and, in some cases, charity to file copy Require specific disclosure of the amount of the donation to potential

buyers (either as a dollar amount of percentage of sales)

STATE REQUIREMENTS

Annual Filings: Charities:

State-specific Registration Forms IRS Form 990s Financial Statements (may need to be compiled, reviewed or audited)

Professionals/Commercial Co-Venturers State-specific Registration Forms Contracts Campaign Financial Reports Bonds

Fees Public Filings Record Retention Requirements

REGISTRATION EXEMPTIONS

Vary from state to state, but most common include: Churches and in most states - Religious Organizations Organizations raising less than a specified dollar amount

(most common is $25,000) Educational Institutions Organizations for which solicitations limited to

membership Volunteers soliciting for the benefit of a named individual Political organizations Hospitals

SOLICITATION DISCLOSURES

Several states require specific disclosures by charities and professional solicitors Sometimes, regardless of whether registration is required Others, only if registered

Many states require professional solicitors to identify themselves as such in any oral solicitations

Written solicitations: Verbatim disclosure requirements Typically, identification of where financial information about the

charity can be found

OTHER “HOT TOPICS”

Gifts in Kind: vehicle donations; medical supplies; clothing

Joint Cost Allocation Reviews Commercial Activity/UBIT Use of (c)(4) Organizations for Political Purposes Property Tax Exemptions Application of Consumer Protection Statutes to

Charitable Solicitations

IRS

Acknowledgement of 501(c)(3) Status (Form 1023) Stricter Scrutiny

Annual Reporting (Form 990) Greater emphasis on annual requirement Revocation of 990-N filers

Role in Governance Part VI of 990

Disclosure of Information to States and from States

IRS REGULATION OF GOVERNANCE

“The IRS has a clear, unambiguous role to play in

governance … [w]here an organization has adopted good governance practices, we can reasonably expect that it poses less risk that it will misuse its tax-exempt status or its charitable assets.…”

-Sarah Hall Ingram, Commissioner,

Tax Exempt Division, 2009

OTHER GOVERNMENT REGULATORY AGENGIES

Postal Service Federal Trade Commission United States Treasury (Anti-Terrorism) U.S. Senate Finance Committee U.S. House Ways and Means Committee U.S. House Committee on Oversight and

Government Reform State Trade Commissions County and Municipal Registration Offices

WATCHDOG ORGANIZATIONS AND THE MEDIA

BBB Wise Giving Alliance

Charity Navigator

CharityWatch (f/k/a The American Institute of Philanthropy)

Guidestar - Philanthropedia

News Media

Print, Television, Internet

List of Watchdog Groups 2013

www.americanfund.info http://charitymetrics.weebly.com www.charitywatch.org www.givewell.org http://greatnonprofits.org www.myphilanthropedia.org www.standardsforexcellenceinstitute.org

And of course: www.give.org (BBB Wise Giving) www.guidestar.org www.charitynavigator.com

And some with a religious focus: www.ministrywatch.com

(part of Wall Watchers) www.ncdc.org/fundraising www.ecfa.org

EVOLUTION OF FUNDRAISING THE INTERNET

Jurisdictional questions affecting nonprofit online activities:

Whether a state court has the power to adjudicate claims against an organization for its conduct on the internet

The extent of statutory authority of state or federal regulatory agencies

Charleston Principles

Federal Tax Issues

EVOLUTION OF FUNDRAISING CAUSE-RELATED MARKETING

Definition: A commercial marketing partnership between a business and a nonprofit entity to market an image, product or service linked to a social cause or issue, for mutual benefit.

Many state regulations to protect against potential consumer fraud or deception and to ensure that the funds raised are used for the charitable purposes as advertised.

New York Attorney General Best Practices

EVOLUTION OF FUNDRAISING OTHER METHODS

Mobile Giving Social Media Other Web-based Transaction Tools:

Auctions Event Templates Virtual Thrift Stores Virtual Shopping Malls Fundraising Software “Networking” Sites for Charities and Grant Makers Peer to Peer Sites Digital “direct mailing” through email and sms messaging