At a recent annual gathering of state regulators who focus on charitable organizations, participants shared tips with one another on effective enforcement of consumer protection laws and offered insights to nonprofit executives and advisors into how they operate. One of the major takeaways from this conference was that state charity regulators have concern about nonprofits' compliance with applicable state laws governing charity activity. 

While there has been much discussion among the state charity officials about the lack of resources to support their oversight efforts, recent actions show that states will aggressively pursue charities and those entities that misrepresent the support they plan to provide to charities. Very recently, the New York Attorney General's office fined a company $700,000 in a settlement of an enforcement action in which the company was collecting used clothing in bins throughout the state and allegedly representing that the activity was for the benefit of two charities. The Attorney General indicated that the two nonprofits merely licensed to the company the right to use their names and logos for a small fee. In another enforcement action, a company that operates running races advertised that a portion of race registration fees would benefit a chapter of Big Brothers Big Sisters in Tennessee without obtaining prior written consent from the charity to make such representation. The state of Tennessee fined that company $10,000 for using the charity's name to induce individuals to register for the race without the charity's consent. 

Association executives are often surprised to learn that their organizations and affiliated foundations may be covered both by state charitable solicitation laws and rules governing promotions that involve a charitable giving component. These laws do not limit their reach to traditional charities; rather, most of the applicable states' laws regulate solicitation activities that many associations engage in. 

Charitable Solicitation Registration and Reporting 

Charitable solicitation activities are regulated at the state level. States generally define "charitable solicitation" to mean a direct or indirect request for contributions for a charitable organization or for a charitable purpose. Solicitations may include making an oral or written request, an announcement for a special performance or event for which contributions are requested, grant solicitations, or a statement that a portion of a sale of goods or services will benefit a charitable purpose. Currently, 40 states and the District of Columbia require charitable organizations to register with the state charity agency prior to soliciting contributions, unless otherwise exempt. Charitable solicitation laws and registration and reporting requirements vary from state to state. 

The charitable registration process generally requires a charitable organization to file a state registration form along with a copy of the organization's most recent Internal Revenue Service Form 990; financial statements; governing documents such as the organization's articles of incorporation and bylaws; IRS determination letter; copies of contracts with professional fundraisers, fundraising counsel, or commercial co-venturers, if applicable; and a filing fee, which ranges anywhere from $25 to several hundred dollars, depending on the state. Once registered, most states require charitable organizations to renew their registration annually. 

There are questions of jurisdiction that may come into play for foundations which may solicit only through a website or at annual conferences—in many instances an association and its related foundation may take the position that it has not triggered jurisdiction in a particular state. However, states have been aggressive in asserting jurisdiction, usually pointing to a website or email solicitations directed to or received by the states' residents. 

Many states exempt organizations that solicit contributions only their members from registration requirements. For example, District of Columbia regulations provide an exemption from registration and reporting requirements for a solicitation of the members of a society where the governing body "by official action" has approved that solicitation and has made provisions to supervise the solicitation. Of course, such exemptions do not normally apply when an association’s related foundation (usually a separate nonprofit corporation with separate tax-exempt status from the parent) is doing the soliciting. 

Commercial Co-Venture Compliance 

Associations will often offer programs that have a charitable giving component. For example, an association may state that a portion of the registration fee for a particular event will be donated to a local charity. These types of promotions can implicate a different set of state laws governing "commercial co-venture" activities. 

Approximately 25 states regulate commercial co-ventures as part of the state charitable solicitation statutes. In most of these states, a commercial co-venture is defined along the lines of, "a person who is regularly engaged in a trade or business other than raising funds for charitable causes that advertises that the purchase or use of goods or services will benefit a charitable organization or charitable purpose."

Although the regulatory requirements may seem burdensome in the scope of the campaign, it is important to note that these sorts of promotions have been receiving heightened attention from state regulators. For example, a few years ago, the New York Attorney General ("NY AG") concluded a yearlong initiative looking into commercial co-venture activities involving "pink ribbon charities." As part of the initiative, the NY AG sent extensive questionnaires to at least 40 charities and 130 companies conducting commercial co-ventures that were said to benefit breast cancer causes. The NY AG then analyzed the responses and released its "Best Practices for Transparency in Cause Related Marketing," which details recommendations that in some instances go above and beyond the requirements for disclosures under New York or any other state's law. 

There have been some well-publicized enforcement actions in which commercial co-venturers have been held liable for failure to disclose information and misleading the public through the advertising of the commercial co-venture. By way of example, in 1996, a consumer health products company had advertised the launch of an over-the-counter pain reliever in which it claimed that a portion of the sale of the product would benefit a charity. The advertising did not disclose that the company had pledged a guaranteed minimum of $1 million dollars regardless of the level of sales—thus, according to a multistate group of 19 state attorneys general, misleading consumers into believing their individual purchase was making a difference in the contributions that the foundation would receive. Ultimately, the company settled the case by contributing $250,000 to the National Institutes of Health and paying almost $2 million in "costs" to the states. 

Conclusion 

While high-profile examples of enforcement do exist, practitioners familiar with this area generally agree that state enforcement of solicitation and commercial co-venturer rules is not aggressive and—likely as a result of such spotty enforcement—compliance among charitable organizations and other entities is inconsistent at best. Of course, lax enforcement does not excuse noncompliance. Further, it is possible that states may view this area as a potential source of income through the collection of fines. As such, associations and their related foundations should review whether they are in compliance with the applicable registration and reporting requirements and, if not, take steps to address the matter.