AFP INTERNATIONAL CONFERENCENEW ORLEANS, LOUISIANA 2009

WHO IS WATCHING YOU NOW -------------

REGULATION OF CHARITABLE

FUNDRAISING AND THE NEW FORM 990

PRESENTED BY:

SETH PERLMAN

PERLMAN & PERLMAN, LLP

41 MADISON AVENUE

SUITE 4000

NEW YORK, NEW YORK 10010

212-889-0575

SETH@PERLMANANDPERLMAN.COM

THRESHOLD QUESTIONS

Why is fundraising regulated?

How extensive is the wrongdoing in the charitable sector?

How much is attributable to fraudulent fundraising?

HISTORY OF FUNDRAISING REGULATION

In 1955, New York established the Office of Charitable

Registration to administer new fund raising regulations.

Eventually over 40 other states established charity

offices modeled after New York, in response to:

Growth of mass marketing technology

Proliferation of charities

Increased competition

WHAT ACTIVITY IS REGULATED?

SOLICITATION

In short, solicitation is the affirmative act of asking for a gift or selling goods or services that will benefit a charitable organization.

GOVERNANCE

The new Form 990 puts the IRS in the position of regulating the governance of nonprofits

GOVERNMENT VS. CHARITY

Conflicting interests of charities and the government results in

increasing tension.

Government Interests

Ensuring assets are used for charitable purposes

Protecting citizens from fraud

Protecting donors’ privacy

Charity Interests

Disseminating information

Seeking funding unburdened by government restrictions

STATE REGULATION

Approximately 45 states (soon to be 47)have a statutory

scheme to deal with nonprofit solicitations and use of nonprofit

assets within their borders.

Registration and reporting requirements are imposed on

charities, professional fundraising counsel, professional

solicitors, and commercial co-venturers.

Each group is required to file annual registrations and financial

reports and/or the IRS Form 990.

NONPROFIT ORGANIZATIONS

Include Section 501(c)(3) and (c)(4) organizations

35-37 states require charities and other nonprofits to

register prior to commencement of solicitations.

Also may include other nonprofit organizations as

defined by state law – tax exemption and deductibility is

a function of federal tax law while the nonprofit status is

a creature of state law.

PROFESSIONAL SOLICITORS

Directly solicit the general public on behalf of a charitable

organization for a fee

Often have custody/control of the contributions received

Required to register in approximately 41 states, post a surety bond

and file contracts with their nonprofit clients

Many states also require a pre-solicitation disclosure of professional

status prior to making the request for a gift

PROFESSIONAL FUNDRAISING COUNSEL/CONSULTANTS

Help plan, manage, advise on or produce and design

solicitations to the general public for a fee

Do not make the solicitations or have custody or control

of contributions

Required to register in 26 states and post bonds in a few

COMMERCIAL CO-VENTURERS

As part of a sales promotion, a commercial co-venturer uses the charity’s name to sell its products or services and makes a charitable donation based on the sales.

Registration required in:

Maine, Massachusetts and Alabama (Hawaii?)

20 other states regulate the activity but do not require registration

EXEMPTIONS

Churches and in most states - Religious Organizations

Educational Institutions

Hospitals

Investment advisors, lawyers and accountants

Organizations raising less than $25,000

Organizations for which solicitations limited to membership

Volunteers soliciting for the benefit of a named individual

Bona fide employees or volunteers

SAMPLE CONTRACT PROVISIONS

Record retention for 3 years

Right to rescind by charity in NY and CA

Gross collections delivered to charity

Donor list owned by charity required (in some states)

Description of purposes of the campaign, services to be

provided, and calculation and basis for the fee

Signature by two officials, including one director or

trustee, of the charity

OTHER GOVERNMENT REGULATORY AGENGIES

Internal Revenue Service

Postal Service

Federal Trade Commission

State Trade Commissions

County and Municipal Registration Offices

STATE LEGISLATIVE TRENDS Primary Focus Areas

Financial Reporting Registration and Reporting Anti-Terrorism Gaming Disclosure Annuity Property Tax Vehicle Donation Do Not Call/Do Not Fax

THE REVISED 990: KEY OVERALL CHANGES

New format: Core Form with Schedules A – R

Disclosure of more detailed information Compensation Governance Financial Information

New first page includes summary of activities/governance, revenue, expenses, and net assets

THE REVISED 990: GOVERNANCE POLICIES

Conflict of Interest Policy Gift Acceptance Policy Whistleblower Policy Executive Compensation Policy (for key employees,

board members and officers) Joint Venture Policy Record Retention Policy Form 990 Review Policy Policy Governing Local Branches, Chapters and

Affiliates

THE REVISED 990: SCHEDULE G - INFORMATION ON FUNDRAISING OR

GAMING ACTIVITIES

Threshold Triggers: $15,000 or more in professional fundraising services, fundraising events income, or gaming events

Must list 10 highest paid fundraisers compensated $5,000 or more pursuant to written or oral agreements during the fiscal year

Includes disclosure of the “gross receipts from activity” performed by each fundraiser and the “amount paid to fundraiser”

Requires filing organization to list expenses (e.g. printing costs) separately in Schedule O, if possible

THE REVISED 990: SCHEDULE G - INFORMATION ON FUNDRAISING OR

GAMING ACTIVITIES Must “list all states in which the organization is registered or

licensed to solicit funds or has been notified it is exempt from registration or licensing”

Must include a revenue and expense breakdown for the two largest fundraising events with gross receipts greater than $5,000 and a summary for all other events with gross receipts greater than $5,000

Must include a revenue and expense breakdown for gaming events if gross income from gaming activities exceeds $15,000

Requires disclosure of other information related to gaming including the states where the organization performed the activity and whether the organization was licensed in each state

FUNDRAISING IN CYBERSPACE

Jurisdictional questions affecting nonprofit online activities:

Whether a state court has the power to adjudicate claims against

an organization for its conduct on the internet

The extent of statutory authority of state or federal regulatory

agencies

STATE JURISDICTION: ONLINE SOLICITATION State must have “minimum contacts” with organization.

The organization must purposefully avail itself of the privilege of doing business in the state.

The cause of action/regulation must relate to defendant’s activities within the state.

The exercise of jurisdiction must be reasonable in light of the various interests at stake.

Long-arm statutes determine whether the state has jurisdiction over

internet conduct of out-of-state organizations.

THE CHARLESTON PRINCIPLES

Advisory principles adopted by NAAG/NASCO to clarify

the applicability of state charitable solicitation regulations

to internet fundraising. These apply to: Entities domiciled within the state.

Out-of-state entities whose non-internet activities would require

registration in the state.

Out-of-state entities that solicit through an interactive or non-

interactive web site and specifically target persons physically located

in the state or receive contributions from the state on a repeated and

ongoing, or substantial basis through or in response to the web site

solicitation.

FEDERAL TAX ISSUES: NONPROFIT USE OF INTERNET

To maintain its 501(c) (3) status, a nonprofit must meet an organizational test and an operational test. Organizational Test: Organizing documents must limit the purposes of

the organization to one or more exempt purposes, and must not authorize the organization to engage more than insubstantially in any activities which are not in furtherance of their exempt purposes.

Operational Test: Organization must be deemed to operate “exclusively” for its specified exempt purposes.

Danger of Substantial Internet Activities Nonprofits should ensure that internet revenue-generating activities do

not become substantial in relation to their activities taken as a whole, unless those activities are primarily related to the nonprofit’s exempt purposes.

FEDERAL TAX ISSUES: UBIT

Tax Liability: A nonprofit might be liable for tax on

its unrelated business taxable income. Includes income from a trade or business, regularly carried on that is not

substantially related to the organization’s exempt purpose or function

except to the extent that the organization benefits from the profits derived

from the activity.

Activities that could trigger UBIT

Hyperlinks and Banner Exchanges

Advertising v. Corporate Sponsorship

Merchandising

CAUSE RELATED MARKETING REGULATION

Definition: A commercial marketing partnership between

a business and a nonprofit entity to market an image,

product or service linked to a social cause or issue, for

mutual benefit.

Many state regulations protect against potential

consumer fraud or deception and to ensure that the

funds raised are used for the charitable purposes as

advertised.

CAUSE RELATED MARKETING REGULATION

Advance registration for both the for-profit is required in Maine,

Massachusetts and Alabama. Hawaii as of July 2008 requires the

for-profit to file the contract.

About 20 other states regulate campaigns in some manner

Registration typically includes filing a registration statement, paying

a filing fee and posting a bond.

States may also require: a written contract, a final accounting or closing statement, certain

disclosures in any marketing campaign, and maintaining books

and records related to the co-venturer for a specified number of

years.

CAUSE RELATED MARKETING REGULATION State Specific Requirements

Connecticut requires a written contract from the commercial co-venturer. A copy of the contract must be filed at least 10 days prior to the start of the charitable sales promotion in the state.

California requires that the designated funds be transferred to the charity at certain intervals throughout the campaign.

New York requires that the commercial co-venturer provide the charity with an interim report, at least annually, for any sales promotions lasting longer than one year.

New Jersey recently passed legislation requiring every co-venture to be pursuant to a written contract, which must contain a provision clearly and conspicuously stating that the parties are subject to the Charitable Registration and Investigation Act.

CAUSE MARKETING EXAMPLES

• THE GOOD

• THE BAD(AND NOT SO BAD) AND

• THE UGLY