In today’s world of ever-evolving fundraising methods, nonprofits face a host of legal and regulatory challenges. From traditional galas and planned giving to online crowdfunding and cause-related marketing, it’s clear that fundraising has significantly shifted in the past two decades. Navigating these changes while staying compliant is critical for nonprofit success. Below, we explore key points that can help nonprofits stay on track.
The Changing Landscape of Giving
Twenty years ago, nonprofit fundraising was rooted in direct appeals—major gifts, personal asks, and direct mail campaigns. Today, online giving dominates, including fundraising websites, mobile apps, and social media. Crowdfunding and peer-to-peer campaigns have opened new avenues for organizations to reach donors, while events like auctions, contests, and raffles add legal complexity to fundraising strategies.
Regulatory Framework
Fundraising is a highly regulated area, with federal, state, and local laws governing everything from charitable deductions to disclosure requirements. Here’s a breakdown:
- Federal Laws: Cover issues like charitable deductions, privacy, and trade regulations.
- State Laws: Focus on registration and disclosure for fundraising activities.
- Local Laws: Often impose additional disclosure rules.
State Regulation of Charities
Most states require nonprofits to register before soliciting funds. However, definitions of “solicitation” vary widely, and states like New York and Massachusetts interpret it broadly to cover all mediums, including online and mobile fundraising. For multistate campaigns, nonprofits may refer to the Charleston Principles, which recommend registering in both the state of domicile and any states where “substantial” contributions are received. However, not all states follow the Charleston Principles.
Disclosure Requirements
Many states mandate specific disclosures in written solicitations to ensure transparency. For example, New Jersey requires nonprofits to include a disclaimer about financial filings with the Attorney General. These laws are designed to protect donors and promote accountability.
Professional Fundraisers and Telefunders
Hiring professional fundraisers can be beneficial but comes with its own set of legal requirements. Contracts with professionals must often be filed with state attorneys general, and fundraisers may need to be licensed or bonded. Additionally, telefunders must comply with Federal Trade Commission (FTC) rules, including time-of-day restrictions for calls and disclosure of the nonprofit’s identity and mission.
Charitable Sales Promotions and Co-Ventures
Another popular strategy is cause-related marketing, in which businesses donate a portion of their sales to a nonprofit. However, some states have regulations requiring co-venture contracts to be entereed into, certain language to appear in the contract, and, in some cases, the contract has to be filed and bonds must be posted.
The Restriction Trap
When a donor specifies that their gift must be used for a particular purpose—this can create significant challenges for nonprofit organizations. While donors may have good intentions, earmarked funds can restrict a nonprofit’s ability to allocate resources where they are most needed, potentially leading to inefficiencies or budget shortfalls in critical areas. For example, if a nonprofit receives an influx of earmarked gifts for a new building but lacks funding for staff salaries or operational costs, the project may stall or become unsustainable. Additionally, restrictions can make financial planning difficult and reduce the organization’s flexibility to respond to urgent or unexpected needs. To strike a balance, nonprofits should communicate the importance of unrestricted gifts, which provide the flexibility to fulfill their mission effectively while still honoring donor intent.
The Earmarking Trap
Earmarking donations for a specific individual or a narrowly defined group can create legal and tax issues for nonprofits. Under IRS rules, tax-deductible contributions must serve a broad charitable class rather than a particular beneficiary. If a donor insists their gift be used for a specific person, rather than for the organization’s overall charitable mission, the donation may not qualify as tax-deductible, and the nonprofit risks jeopardizing its tax-exempt status. This restriction ensures that charitable funds are used for public benefit rather than private gain. To avoid these pitfalls, nonprofits should establish clear policies on restricted giving, ensuring that donor contributions support programs and services that benefit an identifiable charitable class rather than individual recipients.
By understanding the legal landscape and adopting best practices, nonprofits can safeguard their operations and maintain donor trust.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.