AFP INTERNATIONAL CONFERENCE NEW 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

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  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