idealist.org

Can we use a commercial online service to seek donations?

Summary:

This is a complicated question. The answer depends in part on what the online service does for you and other people. This essay explores the issue in detail.

Answer:

This item was placed in an archive with other early FAQ discussions of questions about accepting donations online on February 24, 2006. To see the other articles, open http://www.idealist.org/npofaq/0/1547.html —Ed.

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Some Legal Implications of Soliciting Online Using Third-Party Hosting Agents

by Eric Mercer

Introduction

Many nonprofit charities with an online presence do not own their own Internet host computer and instead rent space for Web pages on a server provided by a hosting agent. Doing so may expose the charity to legal liability if the Web site is used for soliciting donations, because under some circumstances the hosting agent may be functioning under law as a professional solicitor. Charities are required under most states' law to notify a state charities regulation office when using a professional solicitor, and to only engage professional solicitors who are themselves appropriately registered. States are entitled to regulate the solicitation of donations within their state, and soliciting online may be interpreted as conducting a solicitation in every U.S. state. Therefore, legal compliance in this situation would require both the nonprofit charity and the professional solicitor to be appropriately registered in nearly every state.

(There is a list of all the state charities regulators online at http://www.nasconet.org/agencies/document_view.)
This text aims to aid nonprofit charities that wish to solicit donations online by describing some of the legal implications and providing some indicators for determining if a hosting agent is functioning as a professional solicitor, and guidelines for selecting a suitable hosting agent. Please note that this text is not legal advice nor should it be construed as such, and regulations both vary between states and are subject to change, so the reader must treat this writing as simply an introduction to the issues of online solicitation, and should consult a lawyer regarding any particular situation. This is an area of law that is still evolving, and this text (last updated 28Jun98) will eventually become out-dated. Additional background information regarding the legal issues raised here is given in a separate text entitled, "Choosing a Web Hosting Agent."

Finally, some experts argue that states have no right to regulate charities based outside the state if the only operation that charity engages in there is the solicitation of donations by mail, to which Internet mechanisms are often considered most similar. If this were the case, charities might only be obligated to address the solicitation requirements in their home state. "American Charities for Reasonable Fundraising Regulations" (Washington DC, 202-628-1113) is one organization that takes this stance and is working to end certain regulation of out-of-state charities. However, a cautious approach by charities at this time would be to assume states are allowed to and will enforce their local law regarding out-of-state charities conducting charitable solicitations their residents are exposed to.

Please note that this text takes a very conservative stance regarding the legal issues charities are exposed to when they solicit donations online. Case law and new legislation may eventually make clear that the legal risks are significantly less that those described here.

Web Hosting Agent Status

If a charity is seeking donations online by paying a hosting agent for space on a Web server, then the hosting agent will be functioning in either one of two roles: technical service provider, or professional solicitor. Note that in this case only a specific medium for online solicitation is being considered: a company sells space on a Web server to a nonprofit charities, i.e. provides a space for the charity to create Web pages that will solicit the public for donations. There are many other configurations for online solicitation and many other ways to seek donations that aren't being considered in this discussion.

Unfortunately, there is no simple set of criteria that distinguish a technical service provider from a professional solicitor. In some states, "professional solicitor" is defined very broadly, and only case law (which isn't easily accessible to anyone but lawyers) provides realistic criteria. Naturally, both statutes and case law vary between states, and at the time of this writing there is no case law specifically addressing the status of hosting agents as professional solicitors or online solicitation. For these reasons, any set of guidelines must be considered as tentative until it has been tested in court.

For an analogy, you can consider the case of a magazine selling advertising space to a nonprofit charity, which uses that space to solicit donations. The magazine is serving as a technical service provider. However, an agent whose primary business is to help charities raise funds by placing such advertisements for them in magazines is probably going to be considered by most states to be a professional solicitor.

It's important to note that most Web hosting agents do not qualify as professional solicitors under the criteria suggested below. In general, only Web hosting agents that provide special assistance to nonprofit charities soliciting online, or which specifically target nonprofit charities for their services, will require extra care in assessing the legal liability to which they expose nonprofit charities.

Also, it is highly unlikely that any nonprofit charity will ever get legally entangled solely because their online solicitation effort used an unregistered professional solicitor. What will generally trigger an investigation is a report of fraud. If a state attorney general suspects that fraud did occur, then a badly designed online solicitation program may support that belief and provide an opportunity for bringing the charity to court.

Note that some states have special regulations regarding "commercial co-ventures," where a nonprofit charity receives a contribution from a commercial organization through a mechanism linked to commercial sales of a particular product or service in exchange for using the charity's name in association with those sales. This discussion doesn't extend to commercial co-ventures, and any arrangement (online or not) that involves commercial co-ventures should be entered into only with the advice of a qualified lawyer or accountant.

There is some question about whether revenue generated by certain arrangements between charities and Web service providers is subject to federal Unrelated Business Income Tax (UBIT). These cases are beyond the scope of this document.

Distinguishing Indicators

A Web hosting agent is probably a professional solicitor under at least some states' regulations if it charges charities for its services, and either of the following primary indicators are true:

1. It produces marketing material directed toward donors, to encourage them to donate to the charities it services.
   
2. It is associated with traditional professional solicitors who provide off-line services (e.g. direct mail or telephone solicitation), or provides these services itself.

Some secondary indicators that suggest a hosting agent is a professional solicitor are that:

1. It provides its Web hosting services entirely or primarily to charities (vs. to commercial organizations also).
   
2. It collects donations and then forwards the funds to the recipient charity (i.e. it has possession of the donated funds for some period). Note that professional solicitors additionally are commonly required to be bonded if they collect the donations for the charity. Web storefront agents usually process transactions and submit them to a banking network without ever having possession of the funds.
   
3. It bills the charity for a portion of each donation (vs. a monthly flat rate billed regardless of the amount donated), particularly if it collects the donations itself and retains part as payment.
   
4. It is not itself a public charity
   
5. It collects information about donors and compiles it for sale to charities and professional solicitors.

Note that a Web hosting agent that meets the first primary indicator (it advertises to and encourages donors itself) may still not be considered a professional solicitor by some states. "Informational" material, encouraging people to donate to charities in general, might be considered different from "mareketing" material, encouraging people to donate to the specific charities the Web hosting agent sponsors. Also, if a hosting agent doesn't meet either of the primary indicators, it may nevertheless be considered a professional solicitor under at least some states' laws if it meets one or more of the secondary indicators. Finally, even a hosting agent that meets all the secondary indicators may not be considered a professional solicitor in at least some states. The problem for the nonprofit charity is that if ANY state determines that the hosting agent is a professional solicitor, the charity may incur significant fines. Such a determination may also prompt other state's attorneys general to review that hosting agent also. Caution is therefore prescribed, and the indicators suggested above represent a good preliminary basis for evaluating a Web hosting agent.

Given a Web hosting agent that doesn't employ professional charitable solicitors or provide telemarketing or mail solicitation services, the most important criterion is whether the hosting agent directs its marketing toward donors rather than charities. If the hosting agent itself provides only information about charitable donations in general, and does not write its own texts promoting particular charities, it is probably less likely to be considered a professional solicitor. The only material on a site promoting a particular charity, other than a simple directory of charities hosted at that site, should be written by the charities themselves. The greater the extent to which the hosting agent participates in developing the charities' solicitation program, the greater the likelihood of that hosting agent being considered as a professional solicitor by at least some state regulators.

Conclusion

Legal concerns should be considered foremost for a nonprofit charity seeking a hosting agent for a Web site where it will solicit donations. Since it is unlikely that the hosting agent will be a properly registered professional solicitor, the charity must strive to insure that under no state's regulations will that hosting agent be considered a solicitor. The most important criteria for concluding that a hosting agent is not a professional solicitor are that it directs all its own marketing material toward signing up charities and none to promoting donations to the charities it serves, and that it doesn't employ professional solicitors or provide professional solicitation services in addition to its Web services. Hopefully Web hosting agents will take a positive role in crafting their programs, to help ensure the charities they serve will have the minimum possible legal exposure.

Eric Mercer (mercere@netcom.ca) -- June 28, 1998