Commercial co-ventures are a form of cause-related marketing that have proliferated in recent years. Commercial co-ventures between a company and a charity not only help charitable causes, but also tend to increase a company’s bottom line. Indeed, market studies have shown that most people will opt to purchase a product associated with a charitable cause over a competitor’s product. Commercial co-ventures are highly regulated, so carefully planning and must be taken to avoid any legal pitfalls.
What is a commercial co-venture?
Generally, a commercial co-venture is a charitable sales campaign where a brand advertises to the consumer that the brand will donate a portion of the purchase price to charity.
How is it regulated?
Over 30 states have laws governing commercial co-ventures. Six states have registration requirements, and two states have bonding requirements. Many states have contractual, recordkeeping and advertising requirements. In addition, consumer protection laws apply to commercial co-ventures, the IRS may get involved to determine if a charity’s involvement triggered UBIT (unrelated business income tax), and private class actions are possible.
- Charity must be registered in applicable states, except if it is within a generally exempt category (e.g., religious institutions and accredited educational institutions).
- There must be a written contract between charity and the commercial co venturer.
- This contract must be filed with certain states. (Typically charity’s responsibility).
- Registration is required in AL, HI, IL, MA, MS, and SC.
- Bonding is required in AL and MA.
- Commercial co venturer must keep a copy of its final accounting for three years.
Mandatory Contract Provisions
- Description of goods and services offered.
- Estimate of number of goods sold/total donation.
- Geography of promotion.
- Start/end dates.
- How name of charity will be used.
- Per unit or $ amount to be donated.
- Any maximum or minimum donation.
- Date and manner in which charity will receive donation (every 90 days required in CA).
- Statement that GA, NH and NJ laws apply.
- Statement that contract is cancelable within 15 days in NY.
- Signed by co-venturer and charity. (2 officers of charity required in CA, MA, PA, VA)
- Per-unit amount going to charity in $ or %.
- Any maximum or minimum donation.
- Name, address and telephone number of charity.
- Statement of how funds will be used. (MA).
- Statement that effort being conducted by a “paid-fund-raiser.” (MA)
- Statement that donation is not tax deductible. (CA) (at least at point-of-sale/on package).
- Be upfront with the consumer. Clearly and conspicuously disclose what purchase triggers a donation and what the donation will be.
- Avoid vague donation statements such as, “all net profits,” “a portion of the purchase price” or a “portion of the proceeds” goes to charity. A consumer really has no understanding of exactly how much is actually being donated to charity.
- Don’t set any minimum donation so high so that a consumer’s purchase really doesn’t affect the total donation to be made.
- Don’t set a maximum donation so low so that it is reached well before the end of the promotion.
- You can license the use of the charity’s name/logo, but the charity should not take an active involvement in any solicitation or advertising. This may trigger UBIT.
- Don’t receive any payments from the charity. Separate, more onerous requirements exist for paid solicitors and fund-raising counsel.
In sum, structuring and running a successful commercial co-venture campaign requires consideration of many legal and practical issues.