Internet Appeals and the Law

By JENNIFER MOORE and GRANT WILLIAMS

State regulators are giving non-profit organizations their first road map showing how online fund-raising appeals will be monitored.

The National Association of State Charity Officials, a group of government regulators,

this week released a proposal that spells out the conditions under which charities and their for-profit fund raisers must file registration forms with states when they appeal for donations on their Web sites or by electronic mail.

Charities that solicit nationally through mailed appeals or telephone solicitations are already required to register with the states in which they solicit, but uncertainty has abounded over how online appeals would be regulated.

When charities include a request for donations on their Web sites, the appeals can be viewed by computer users around the world — even if the charity is a local one that is only likely to receive gifts from people who live in the organization’s home state. That has led some non-profit officials to worry that many small, local charities would be required to file paperwork with every state that has a registration requirement, an expensive and time-consuming proposition for many organizations.

Before state officials issued any guidance, some local and regional non-profit groups that seek gifts online had tried to meet registration requirements in all states, others had simply followed the rules of their home states, and still others had held off doing any online fund raising until state policies were clarified.

A Sigh of Relief for Charities

Jeffrey Even, assistant attorney general of the State of Washington and one of the authors of the proposed guidelines, says charities should breathe a sigh of relief after reading NASCO’s recommendations.

“We are not saying that any Web site that exists out there that asks for money for charity automatically has to register in every jurisdiction where it can be viewed,” he says. “It takes more than that. It takes some kind of a more tangible connection to the jurisdiction to trigger that registration requirement.”

The proposal — which was also written by Dan Moore, New Mexico’s charities registrar, and Nikki Baines Trella, of the Charities Division of the Maryland Secretary of State’s office, with advice from other state regulators — generally would require a charity or fund raiser that uses the Internet to ask for money to register in its home state, assuming the state has such a requirement.

The charity or fund raiser would have to also register in another state if it solicited and received gifts through a Web site and met one of these conditions:

• It “specifically targets persons physically located in the state for solicitation.”
• It “receives contributions from the state on a repeated and ongoing basis or a substantial basis.”
• It sends e-mail messages to residents of the state or contacts them in other ways, specifically to promote its Web site.

The proposal says that the phrase “specifically targets persons” refers to instances in which a charity or fund raiser includes on its Web site a direct or implied reference to soliciting money in that state, or otherwise appeals to residents there, such as sending e-mails to them.

However, the draft says that charities that are “purely local” or operate within a limited geographic area are not considered to be trying to “target” people in other states if their Web sites make clear that the focus of their fund-raising efforts is narrow and local, even if they get some money from people living in states outside of the organization’s geographic focus.

The proposal encourages states to set “numerical levels” for how many contributions from another state must be received before those donations are considered “repeated and ongoing,” thus requiring charities to comply with registration rules. The document also calls on states to set dollar amounts needed for such contributions to be considered “substantial.”

“For example,” the draft says, “a state might explain that an entity receives contributions on a repeated and ongoing basis if it receives at least 100 online contributions at any time in a year and that it receives substantial contributions if it receives $25,000, or a stated percentage of its total contributions, in online contributions in a year.”

The proposal was written with the goal that no state laws would have to be changed, so that regulators could easily put the recommendations in place without going to their legislatures.

A Simple Example

Charity regulators say that what sounds complicated is really fairly simple. For example, a charity like a local P.T.A. that receives occasional contributions from people in other states in response to an appeal on its Web site would not have to register with any state except its home state — if it makes clear on its site that its fund raising is limited to the local area.

“If it’s pretty clear in context that the organization is not trying to raise money nationally — that it is really touting its local bake sale — no one is taking the position that it has triggered a registration requirement in other states, even though the site could be viewed from anywhere,” says Mr. Even.

On the other hand, he says, “if some group is doing a really large-scale solicitation that’s Web-based that is trying to reach people everywhere, and it is starting to draw volumes of donations from particular states, then that charity would have to register.”

He says that charities that accept online donations in most cases would be able to determine quickly the locales of their contributors by checking the credit-card information submitted by donors.

The state regulators’ proposal notes that a complex question could arise for a charity when a for-profit fund raiser helps it — and many other charities — obtain contributions nationally through a single Web site. Numerous companies have been developing such donation sites, and some promise to send a donor’s gift to any organization that the Internal Revenue Service considers to be a charity.

In such cases, the fund-raising company would be required to register because it would be seeking money from residents in every state in the names of its client charities. But the amount of money that many individual charities end up receiving in their own names might not be so large that they would be considered to be soliciting outside their home state.

A complication: Some state laws flatly require a charity to register if commercial fund raisers or fund-raising consultants raise money in their behalf. But the draft guidelines make it clear that state regulators might consider not enforcing that requirement for charities that receive only small sums from out-of-state residents through a for-profit donation site.

In those states, the proposal says, a regulator’s office “should consider whether, as a matter of prosecutorial discretion, public policy, and the prioritized use of limited resources, it would take action to enforce registration requirements.”

Overwhelmed by Rules

Charities have been anticipating the release of the regulators’ draft proposal since last year’s annual meeting of the National Association of State Charity Officials, which was devoted to the topic of Internet fund raising. In fact, regulators named their proposal “The Charleston Principles” because the meeting was held in Charleston, S.C.

At the meeting, non-profit leaders cautioned regulators not to take an approach that would unnecessarily hamper charities, especially small organizations.

Many non-profit organizations are already feeling overwhelmed by the registration and reporting requirements they face from states and local governments. Some of those requirements are currently being challenged in court, including:

• Utah’s charitable solicitation act. The U.S. Supreme Court is considering whether to review a lower court’s ruling that upheld some provisions of the state’s law but decided that others — including a requirement that paid solicitors secure a $25,000 bond before they can seek contributions in the state — were unconstitutional (The Chronicle, January 27).

• A registration requirement in Pinellas County, Fla. A federal court is considering the legitimacy of a law that requires consultants to register with the county if any of their paying clients send fund-raising letters or make other appeals to county residents (The Chronicle, August 24).

• A solicitation law in Jefferson County, Ky. Several national organizations have sued the county, arguing that its registration and reporting requirements are unconstitutional and unnecessarily burdensome (The Chronicle, July 13).

A ‘Reasonable’ Burden

In the draft proposal, the regulators say they recognize that the “burden of compliance” on charities and their fund raisers “should be kept reasonable in relation to the benefits to the public achieved by registration.”

The document urges charity regulators to publish their registration and reporting forms, laws, regulations, and related information on the Internet to make it easier for charities and fund raisers to comply.

But the proposal also emphasizes that registration and financial reporting by charities and their fund raisers play a critical role in obtaining information that allows regulators to “fight deception and misuse of contributions” and permits donors to have increased confidence in the charities that solicit their support.

Some Remain Skeptical

However, Lee M. Cassidy, executive director of the National Federation of Nonprofits, says that he remains skeptical about the usefulness of registration and reporting requirements to identify fraud.

“In most cases, what states are prosecuting is a lack of registration, not fraud,” he says. He says he believes that charities and professional fund raisers should only have to register in the jurisdiction in which they are located, regardless of what kinds of solicitations they use — online, direct mail, telephone, or other.

“It’s not only a question of saving money and energy and resources, it’s a question of not being put in a situation where you’re bound to make errors: the more paper you have to fill out the more errors you’re going to make,” he says.

For charities, easing the burden of registration is essential, says Robert S. Tigner, general counsel of the Multi-State Filer Project, a consortium of non-profit groups that works with state charity regulators to simplify the registration and reporting systems.

Mr. Tigner says that many non-profit organizations in recent months have abandoned fund-raising efforts on Web sites because they were daunted and confused by the prospect of possibly having to sign up with the 39 states that have registration requirements for charities.

“Unless these new principles provide a fairly clear answer and fairly clear relief for this muddled mass of non-profits of all sorts — tiny ones and medium ones and regional ones and even big ones that don’t do direct mail or telemarketing — then it hasn’t accomplished anything,” says Mr. Tigner, who also is general counsel of the Association of Direct Response Fundraising Counsel. “Those are the groups that need help.”

People can read and comment on the draft proposal, “The Charleston Principles,” online through the National Association of State Charity Officials Web site at http://www.nasconet.org.

Regulators hope to adopt a final version of the proposal early next year.