The Need to Update Current Fundraising Regulatory Frameworks

The fundraising regulatory landscape is complex and constantly evolving. Even so, regulations and bureaucratic processes often can't keep pace with the rapid changes in fundraising trends, methods, and outlets employed by nonprofits. Here are two areas where the regulatory framework needs updating to properly address now common activities of fundraising organizations.

Regulatory Challenges of Online Fundraising

More than ever, and catalyzed by the pandemic, nonprofit organizations are taking advantage of online fundraising avenues and platforms to reach more donors. After all, online fundraising is more cost-effective and faster to implement. It is likely that certain online fundraising alternatives to traditional brick and mortar fundraising campaigns are here to stay. These opportunities have also brought potential compliance issues, and the potential of fraud. A nonprofit organization that engages in online fundraising campaigns has little control of where donations could originate. All kinds of questions arise, like should nonprofit organizations accept donations from a state in which it is not registered? What fundraising activities trigger the need to register in a particular state? State laws vary, and as such organizations that are not registered in all states must do their diligence to comply with state charitable solicitation laws. Furthermore, the emergence of crowdfunding, peer-to-peer fundraising, social media sharing events, donation matching drives, virtual gala fundraisers, and so on has exposed the limitations of the current state regulatory frameworks. Wherever the regulatory arm of the law does not reach, there is always the potential for fraud. From a donor’s perspective, absent a robust regulatory framework, they may not feel confident that their donations are going directly to the cause they are contributing towards. It is an unfortunate reality that there always will be bad actors. Organizations and individuals stand ready to exploit gaps in the current regulatory framework to line their own pockets. Case in point, Minnesota Attorney General Keith Ellison restructured the charity, Pain-Free Patriots and replaced its leadership following more than $2 million in self-dealing transactions. These kinds of scandals are harmful to the nonprofit space largely by decreasing donor trust. The modernization of charitable state regulations to meet these challenges is overdue.

Regulatory Challenges of Commercial Co-Ventures & Crowdfunding Campaigns

Fundraising challenges brought forth by the pandemic have pushed nonprofit organizations to take advantage of low-cost, high-reach solicitation methods to stay afloat. We are seeing more commercial co-venture (CCV) and crowdfunding campaigns, which are in themselves changing in an ever-evolving digital age. The current regulatory framework is ill-equipped to address these changes and does not give clear answers to certain issues that could arise.

• When does a commercial co-venturer cross the threshold and legally become a fundraiser, thereby triggering the need to register as a fundraiser?
• When do specific facts and circumstances of a CCV campaign constitute unrelated business activity, thereby making it liable for unrelated business income taxes?
• At what point do these existing crowdfunding platforms become more than just a pass-through?
• How long is too long for crowdfunding platforms to hold funds before disbursing them to the benefiting charity?
• How can donor intent be safeguarded to make sure that their contributions are used as intended?
• On what grounds can regulators intervene when there is a conflict between a crowdfunding platform and a charitable organization? For example, did a crowdfunding platform use the name of the charitable organization beyond the agreed-upon use?
• Could alternative revenue streams cause a 501(c)(3) organization to fail its public support test, turning it into a private foundation or causing it to lose its tax-exempt status?

Charitable state registration compliance can be complex and time-consuming for nonprofit organizations without the resources to handle it alone. Nonprofits that do have experienced personnel also encounter challenges in keeping up with changes to state statutes and navigating the complexities brought forth by online fundraising. These complexities are further exacerbated by the fact that current laws were not written to account for online fundraising. It is in this light that the State of California has taken the lead, and updated its current charitable registration laws by enacting Assembly Bill 488. Meanwhile, nonprofit organizations have an obligation to be extra careful to make sure that they remain in good standing with the states that require some form of charitable registration prior to solicitation. If you have any questions about how to safely move forward, Labyrinth can help. Please reach out to one of our charitable registration experts for a free consultation.  

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