By Ron Barrett, COGENCY GLOBAL INC.
That road sign just ahead is very clear. It’s black and white, and it’s telling me to slow down…drive 55! However, despite the black-and-white letter of the law, the gray world I live in dictates that I drive 65…with admonitions sounding in my head from my driver’s ed teacher in high school…“slow down, lead foot!”
Like the 55 MPH speed limit, state charitable solicitations acts are very clear about the requirement for registration when a nonprofit solicits charitable donations. The trigger, or threshold, for state charitable registration, absent any applicable exemption, is simply any activity that constitutes a request for a charitable contribution for a charitable purpose. Solicitations can be in the form of an e-mail, text, phone call, letter, personal contact, grant request, advertisement (TV, radio, magazine, or newspaper), special event, or a myriad of online fundraising options. A single request, direct or indirect, for a charitable contribution can trigger the need to register, regardless if a donation is received*.
Risk vs. Cost: Why a Nonprofit May Decide Not to Register
This is the black-and-white letter of the law. However, the gray world that some nonprofits live in can lead them to take their chances as a strategy, and err on the side of not registering to solicit in some states. I liken this to the fact that I choose to drive 65 MPH. I know that the law, according to the sign just ahead, says that I must limit my speed to 55 MPH. However, I am comfortable taking a risk and driving a little faster. Some nonprofits that have very minimal fundraising activities in some states, with little or no donations received from donors in those states, feel the risk is similar. They calculate that the risk of enforcement is low and not worth the time, money and effort it takes to register and renew every year, sometimes in up to 40 states.
Technically, both scenarios are wrong, I shouldn't be speeding and nonprofits shouldn’t be fundraising in states where they are not properly registered or exempt. The reason for the disconnect between the black-and-white letter of the law and the gray world we live in, is that sometimes the perceived cost of taking the risk seems lower than complying with the law.
Warning: Consequences May Be Ahead!
Some nonprofits use this as a strategy in certain states and choose not to register. In other words, they do register in some or many states, but not all. For example, a charity with little or no donations received from donors in Alaska, Hawaii and North Dakota, just to name a few states, even though they may have some solicitation activity in these states, may decide not to register in them. This is due to the initial and annual expense of complying with the law, versus the supposed low risk of being penalized by a state charity official. Driving 65…“I’m not going to get a ticket” is comparable to “minimal solicitation activity and donations, my nonprofit will not be fined”.
Of course, this is true only until it isn’t, and I receive a speeding ticket and your nonprofit is penalized or chastised by a state Attorney General. Both situations are “not good”, but your nonprofit will be more damaged than my driving record. Many nonprofits make the mistake of thinking that state charitable solicitations acts don’t have any teeth, when it comes to enforcement, which is sometimes true, until they are bitten. Granted, in most states, a first offense is usually met with a letter requesting that the offending nonprofit register or cease soliciting in the state. However, some states, such as Florida, have a more aggressive enforcement profile. Florida immediately levies a $500 fine, and opens an administrative proceeding against unregistered nonprofits soliciting in their state. Failure to pay the fine or respond to the proceeding can lead to a more stringent judgment against the nonprofit. For repeat offenders, the fines can start at $2,000 in some states and can go much higher, in addition to cease and desist orders, and the inability to fundraise in a state.
Please note, and I can't stress this enough, I am not encouraging nonprofits to break the law, I am merely reporting on how some nonprofits think about nationwide charitable registration and strategies they can use to minimize the number of states they register in. Of course, not soliciting in a state where they have minimal or no contributions is also an option. Also, nonprofits that need to register nearly nationwide (e.g. 25 or more states), frequently opt to register in every state that requires registration (usually 38 states, but sometimes up to 40 states for some nonprofits). This is sometimes preferred, just from a peace-of-mind perspective, in that they don’t have to worry about where they are soliciting and won’t have to limit their fundraising activities.
Proceed with Caution
Regardless of the approach your nonprofit takes, the black-and-white letter of the law option or the gray-world-that-we-live-in model, if your nonprofit is not properly registered, you should consider the risks your organization is taking. A speeding ticket is easy to recover from, whereas a state administrative proceeding can be very damaging to your organization’s reputation, arguably one of its greatest assets. Unfortunately, certain types of proceedings must be disclosed in most state charitable registration and renewal filings and the requirement to disclose these infractions have no sunset provisions. The fact that charitable registration filings are of public record and can be found online in some state databases, does not bode well for nonprofits reaching out to or trying to maintain donors that take due diligence seriously.
*Certain exemptions apply in most states, and California doesn’t require registration until 30-days after charitable assets are received.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.