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Fundraising: What Laws Apply?

July 2003

Fundraising for nonprofit organizations has been likened to driving across the country with the caveat that gas must be purchased a single gallon at a time1. The danger is that the destination will fade in importance while the driver searches for the next gas station. A secondary danger is that a few unscrupulous souls will find dishonest ways to fuel their vehicles. Fortunately, most drivers (and nonprofit organizations) remain honest and follow the rules. This article spells out some of these rules for donors who hope to avoid being duped by fundraising scams and for nonprofits that plan to follow both the letter and the spirit of the law.

Basic Rule

The most basic rule of fundraising is that the donors must actually give away funds. They cannot receive goods and services in return for their gifts, nor can they obtain dividends on their investment. Donors can receive recognition and small tokens of appreciation, but if they receive a monetary return for the donation, they will lose their tax deduction, and the nonprofit organization could lose its tax exemption.

Registration Laws

Most nonprofits and donors are aware of this basic rule, but many are unaware that most states have adopted charitable solicitation laws designed to protect donors, the general public, and charities themselves from fraud. Generally, these laws require charities and their fundraisers to register with the state, describe their fundraising activities, file financial documents, and pay a fee that covers the administrative expenses of monitoring charities. Nonprofits that need to know what each state requires should bookmark Mult-State Filer Project Web site. That site includes the Uniform Registration Form, which is accepted in 36 jurisdictions (35 states and the District of Columbia). It also includes all supplemental forms that these states require as well as information on the four states that require registration but do not accept the Uniform Registration Form.

Registration and the Internet

The registration rules are relatively straightforward, except when it comes to fundraising over the Internet, because the law is not yet settled with respect to this issue. Although some argue that solicitation laws apply to Internet fundraising as well as to telephone and mail solicitations, others suggest that simple requests for funds that appear passively on a Web site are quite different from active telephone and mail solicitations. The National Association of State Charities Officials (NASCO) has promulgated the Charleston Principles, which arrive at a middle ground, but these are recommendations to other state charity officials, not laws. Nonprofit organizations should check with their legal advisors and with charity officials in their states (see links to the charity officials' sites) to determine how to handle the issue of registration for Internet fundraising.

Solicitations Cannot Be Fraudulent

Even if charities are registered, it can be difficult for donors to know whether their gifts are actually reaching the charity and being used for a good cause. Occasionally, the costs of fundraising are as much as, or even more than, the return to the charity. States cannot mandate that a certain percentage of the funds raised go to the organization's charitable activities, because fundraising appeals are protected free speech (Schaumburg v. Citizens for a Better Environment, 444 U.S. 620 [1980], Secretary of State of Md. v. Joseph H. Munson Co.,467 U.S.947 [1984], and Riley v. National Federation of Blind of N.C., Inc., 487 U.S.781 [1988]). States can, however, insist that the charity or its fundraiser tell the truth when soliciting funds.

Last month the Supreme Court ruled unanimously that the state of Illinois could proceed with a fraud suit against a fundraiser who allegedly made misrepresentations by informing potential donors that their gifts would help Vietnam veterans and then pocketed most of the money. The Court reaffirmed that high fundraising costs alone would not constitute proof of fraud, but it did leave room for intentionally misleading statements to provide such proof (Madigan v. Telemarketing Associates, Inc., 2003 U.S. LEXIS 3430 [2003]). Thus, donors can and should ask careful questions of a charity requesting funds, with the knowledge that the organization has an ethical and a legal duty to answer these questions truthfully.

FTC's Operation Phoney Philanthropy

The Federal Trade Commission is also working to prevent fraud in the nonprofit world. It recently launched "Operation Phoney Philanthropy," a law enforcement and public education campaign designed to help donors recognize and avoid bogus charities. The FTC is working with state charity officials in 34 states, the Better Business Bureau's Wise Giving Alliance, and GuideStar in this endeavor. The FTC makes several recommendations, among which is the suggestion that donors verify a charity's legitimacy by researching it on GuideStar. The FTC site has information for donors who want to verify the legitimacy of their contributions as well as for charities seeking to hire outside consultants for a fundraising campaign. See FTC Web site.

FTC Telemarketing Sales Rule

This summer, the FTC is also launching amendments to its Telemarketing Sales Rule to help protect consumers from unscrupulous telemarketers. This rule applies to interstate solicitations, and it applies primarily to for-profit telemarketers who sell products rather than to those who solicit charitable contributions. Telemarketers selling products and services will be required to scrub their list against a national "do not call" registry before making calls. Although charitable solicitors will be exempt from this requirement, they will still need to honor all "do not call" requests from individuals. If you request that an organization not call you and it subsequently does so, it could be subject to a fine of $11,000.

Other aspects of the rule are applicable to those who use the telephone to raise money for charities. These telemarketers must:

  • Make all calls between the hours of 8 a.m. and 9 p.m.
  • Promptly disclose the name of the organization and state that the purpose of the call is to ask for a charitable contribution
  • Tell the truth and avoid misleading statements during the call.
  • Honor all requests to be placed on a "do not call" list.

Conclusion

In the nonprofit world, fundraising is as inevitable as death and taxes in the for-profit world. If only a small percentage of fundraisers are unscrupulous, the general public may lose trust in the entire sector. Thus, charitable organizations must register with all applicable states and follow the charitable solicitation rules in order to help maintain trust in the sector. Potential donors can protect themselves—and others—by asking thoughtful questions and reporting unscrupulous behavior to state charity officials and the FTC. There will always be some unscrupulous operators trying to siphon funds from the unsuspecting, but an educated and proactive charitable community can minimize their success.

1Tom Tierney, founder and chairman of The Bridgespan Group, has made this analogy. "Imagine if a typical CEO spent 2+ days a week with bankers, Wall Street analysts and venture capitalists. Now imagine that it took over 100 different sources to capitalize his business, and that none of them would ever commit to more than a single year's funding. It would be like trying to drive from San Francisco to Boston on a gallon of gas at a time. You'd never be able to plan the fastest or most direct route and would always be looking for the next gas station." See "The Prophet of Nonprofits," and "Taking a Deeper Look at Philanthropy," The Gathering, 11-02-2002.

Elizabeth Schmidt, 2003
© Philanthropic Research, Inc.

Elizabeth Schmidt is a consultant to nonprofit organizations and teaches Nonprofit Law and Practice at the College of William and Mary Law School.

Note: this article is for informational purposes only and does not provide legal advice.