Nonprofit Fundraising in the Internet Age: What You Need to Know

It’s no surprise that many nonprofits turn to the Internet to meet fundraising goals and connect with potential donors. But, does using the Internet for fundraising pose any legal issues? For example, if you have a nonprofit in Pennsylvania, but your online fundraising post reaches a donor in California, is your nonprofit now conducting business in California?

Fundraising platforms provide tools for raising funds for charitable causes. The platforms vary in structure and design. AmazonSmile, for example, sends donations to a designated nonprofit each time a customer makes a purchase from Amazon.

The National Association of State Charity Officials (NASCO) published the guide “Internet and Social Media Solicitations: Wise Giving Tips.” It lays out advice on issues relating to fraudulent and deceptive solicitations, charities’ control over the use of their names on fundraising platforms and transparency in fundraising platform policies.

Over the years, state charity regulators have taken an interest in oversight of fundraising platforms. Here are two examples:

• Without any advance notice, in late 2011, state charity regulatory offices sent letters requesting information from numerous online fundraising platforms regarding how they operate, how they determine the legitimacy of charities using their platforms and how they protect against fraud.
• Based on questions asked following the panel on online solicitation at the 2014 NASCO conference, it was evident that the registration requirement of fundraising platforms remained an area of significant confusion among nonprofit attendees.

When Do You Need to Register as a Fundraiser in a Particular State?

To evaluate whether a for-profit fundraising platform might be subject to state registration requirements, the business must determine if it falls within the state’s definition of a regulated fundraising entity: professional fundraiser, fundraising counsel or commercial co-venturer. These definitions vary by state. However, generally, they can be defined as follows.

Professional fundraisers are individuals or entities paid to solicit funds on behalf of a charity. Fundraising counsels are individuals or entities paid to advise or assist with the solicitation of contributions on behalf of a charity, but do not solicit or have custody of funds. Commercial co-venturers are entities that advertise that the purchase or use of any goods, services, entertainment, etc. will benefit a charitable organization or purpose.

To determine if your platform is a professional fundraiser, ask the question, “Who is soliciting?” In addition, you should consider the following factors:

• Fee structures that are based on the amount donated (above and beyond third party credit card fees).
• The provision of customized fundraising content to the organizations.
• Giving the impression of vetting charities and recommending which organizations to support (e.g., for an additional fee, placing charities into issue portfolios, or granting them featured status).

The Unified Registration System

NASCO has developed a Unified Registration Statement (URS), a standardized registration form now accepted by 33 states. The URS is one part of the Standardized Reporting Project, a larger effort to streamline and standardize compliance under the various state solicitation laws. The URS is useful for organizations that solicit funds in multiple states, whether online or via other means (such as direct mail). However, even if a charity uses the URS, it must still pay the necessary filing fees of each state in which it is required to register, and this can be expensive. It is also important to note that the URS is a registration document only. It cannot be used to satisfy annual financial reporting obligations of a given state.

Nonprofits seeking to partner with a for-profit entity in an online cause-related marketing venture (for example, a percentage of the sale of the for-profit’s goods or services will be donated to the charity) should carefully examine the legal and tax implications before proceeding. Just as is the case with such partnerships offline, revenue derived from these arrangements may be subject to Unrelated Business
Income Tax, depending upon how the arrangement is structured.

The Internet holds many exciting possibilities for furthering a nonprofit’s goals. But as with any evolving field, exercising due caution is important. A little up-front investment in time, research and consultation with appropriate professionals (such as attorneys and accountants) can help your organization avoid problems down the road.