What this is: Current charitable solicitation laws and regulations were mostly written decades prior to the advent of the Internet, and thus there was little to no guidance for nonprofits on how to comply with existing laws and rules when fundraising online.
What this means: As charitable fundraising continues to evolve, California's Assembly Bill 488 and proposed implementing regulations marks a turning point in the regulation of online charitable fundraising.
The Wild West of Fundraising
Since the late 1990s, the Internet has dramatically changed how nonprofits fundraise. For the past decade, I have referred to crowdfunding, social media or peer-to-peer fundraising, customer round-up or choose-a-charity campaigns, charitable fundraising platforms and other online solicitations, as the Wild West of charitable fundraising. These 21st-century fundraising methods operated in a legal and regulatory vacuum with no clear understanding of how to comply with existing laws and regulations. This is because current charitable solicitation laws and regulations were mostly written decades prior to the advent of the Internet, and thus there was little to no guidance for nonprofits on how to comply with existing laws and rules when fundraising online. It was a classic square peg; round hole conundrum.
Enter the Charleston Principles
Yes, the Charleston Principles, when they were released in 2001, did provide some regulatory guidance for online fundraising, but even these guidelines are decades old and there has since been an explosion of online fundraising methods not imagined since their release. State charity officials have frequently called for a retooling of the Charleston Principles to provide more guidance to charities fundraising online in a legal and regulatory desert. Enter the State of California as a new sheriff in town, armed with the passage of Assembly Bill 488 and proposed regulations soon to be finalized.
The Wild Wild West of Online Fundraising
In a move that echoes the pioneering spirit of the Wild West, California has taken a bold step to regulate the uncharted territory of online charitable fundraising. On October 7, 2021, Governor Gavin Newsom signed into law Assembly Bill 488, an amendment to the Supervision of Trustees and Fundraisers for Charitable Purposes Act (The Act). This legislation fills the regulatory gaps that have persisted in the world of internet-based charitable solicitations. The legislation, partially effective from January 1, 2023, extends its reach to encompass charitable fundraising platforms, platform charities and entities utilizing the Internet to facilitate charitable contributions within California. The law establishes a comprehensive framework designed to ensure that these entities operate in a responsible, transparent and accountable manner.
Riding the Winds of Change: The Need for Amendment
The existing Act, designed to oversee more traditional fundraising endeavors such as direct mail, phone solicitations and in-person events, left the digital fundraising landscape largely unregulated. Also, traditional charitable registration categories such as "commercial fundraisers" and "commercial coventurers" struggled to encapsulate the diverse and rapidly evolving world of online fundraising platforms. This disconnect created a regulatory vacuum where charitable fundraising platforms often found themselves struggling to adhere to outdated legal and regulatory frameworks. Recognizing this shortfall, California's legislature rode into action by creating a new regulatory framework to corral the burgeoning frontier of digital fundraising.
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Enforcing Law in the Digital Frontier
As the digital frontier expands, California's new law introduces 2 new registration classes: "Charitable fundraising platforms" and "platform charities." Moreover, the introduction of the term "recipient charitable organization" completes the triad of relationships intrinsic to digital fundraising arrangements. Also, the proposed regulations introduce distinct categories for different types of charitable fundraising platforms, such as commercial charitable fundraising platforms, peer-to-peer charitable fundraising platforms and more, which help delineate specific compliance obligations. These obligations encompass a spectrum of responsibilities, ranging from the creation of "conspicuous disclosures" to the verification of "good standing" of recipient charitable organizations. The law also mandates prompt transfer of donations and adherence to a litany of guidelines.
6 Key Elements of California's Assembly Bill 488
1. Registration Requirements
Effective January 1, 2024, charitable fundraising platforms and platform charities are required to register with the California Registry of Charitable Trusts.
2. Disclosure Obligations
Charitable fundraising platforms and platform charities are required to furnish clear, conspicuous disclosures regarding their solicitation activities, providing guidelines on how to present critical information to donors. This promotes clarity and ensures that donors can make informed decisions about their contributions.
3. Good Standing Requirements
The law requires that charitable fundraising platforms and platform charities ensure that recipient charitable organizations are in “good standing” (i.e. the organization’s tax-exempt status has not been revoked by the Internal Revenue Service or the California Franchise Tax Board and that their registration with the California Registry of Charitable Trusts is “current” or “active”).
4. Prompt Transfer of Donations
The law stipulates that charitable fundraising platforms and platform charities must ensure the swift transfer of donations to recipient charitable organizations. The proposed regulations outline precise timelines for the prompt transfer of donations, based on the type of platform and the specific circumstances of the transaction.
5. Tax Donation Receipts
Charitable fundraising platforms and peer-to-peer fundraising platforms must promptly provide tax donation receipts to donors (within 5 business days).
6. Recipient Charitable Organizations
AB 488 places emphasis on maintaining communication with recipient charitable organizations. Charitable fundraising platforms and platform charities must provide comprehensive accounting and reporting details to ensure clarity and accuracy.
A New Dawn on the Digital Fundraising Frontier
As California pioneers the regulation of charitable fundraising platforms and platform charities, the implications ripple beyond its borders. By establishing a robust framework that prioritizes regulation, transparency and accountability, the state sets a new standard and precedent for fundraising regulations in the digital age. As charitable fundraising continues to evolve, California's Assembly Bill 488 and proposed implementing regulations marks a turning point in the regulation of online charitable fundraising. With the spirit of the Wild West, the state has tamed the untamed, bringing clarity and structure to a realm previously marked by uncertainty. By navigating this uncharted terrain, California ignites a new era of regulated online fundraising, one where the virtual horizon is ripe with possibilities and the compass points towards a future of ethical and impactful fundraising. Additionally, California's new law is lighting the way for other jurisdictions to navigate the intricate landscape of digital fundraising, providing guidance for other jurisdictions considering similar measures.
Is the Unified Registration Statement (URS) helpful for charities new to the filing requirements?
The simple answer is that the URS is still a useful, time-saving tool when registering or renewing to solicit. However, for charities new to the filing requirements, use of the URS will likely lead to possible late fees and multiple state rejections, which in turn require a significant amount of time and effort in having to make multiple filing attempts. Furthermore, the filing landscape has changed dramatically since the URS was introduced. Only 22 states now allow nonprofits to use the URS when they register to fundraise and only 15 states accept it for renewal filings. Also, many states now require online filings and no longer accept the URS. Other states, tired of rejecting the URS, have since mandated the filing of state-specific forms. Charities that are new to the registration filing process should not use the URS, unless they are diligent with meeting the specific state requirements. Do not rely on the URS filing guidelines. For more information, check out our article, Why New Charitable Registration Filers Should Not Blindly Use the URS.
Are there any alternatives to satisfying state audit requirements?
Three states will accept an audit OR a completed IRS Form 990. In North Carolina and Virginia, for example, the audit requirement for initial and renewal registrations can be fulfilled by submitting an IRS Form 990, 990-EZ, 990-PF or audited financial statements by an independent CPA. (North Carolina nonprofits also have the option of filing an Annual Financial Report Form.) Nonprofits in either state that have not yet completed a full fiscal year can provide their board-approved budget in lieu of these documents. Read our article, Audit Requirements for Nonprofit Charitable Solicitation Registration, for more information.
What are some of the consequences if a nonprofit organization fails to meet compliance requirements?
It is imperative that nonprofit organizations fulfill all state corporate and charitable compliance obligations in a timely and accurate manner. Compliance is not an option, it’s the law. Noncompliance, late filings or material false statements in registration and renewal filings can be costly in many ways. Though penalties and late fees vary widely, the states are more uniformly aggressive in terms of enforcement. The more damaging consequences of failing to register or meet compliance requirements include:
- Civil and criminal penalties
- Publicly announced cease and desist orders
- Forced return of charitable donations
- Taxation of all charitable donations received
- Loss of ability to raise funds in a state
- Loss of tax-exempt status
- Civil and criminal prosecution of officers and directors
For more information on this topic, please visit our article, Charitable Solicitation Registration, Renewal and Compliance: Required Filings and the Consequences of Failing to Comply.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.