How is fundraising regulated in the US?

Summary:

State governments are the most active regulators of fund raising, and the standards are quite different from place to place. The use of the Internet for fund raising makes this situation even more complicated.

Harriet Bograd wrote in "Cyber Accountability" (the cyb-acc mailing list, hosted by CharityChannel [see http://charitychannel.com/forums/cyb-acc]) on 3/2/96 to discuss regulation of nonprofits and fundraising in the United States. She was responding to comments from an observer based in Germany. Her text follows:
I think it is urgent to have some kind of international compact on
charitable solicitation of funds on the Internet. This message is an
attempt to give you and others from outside the U.S. a picture of our
current regulatory system, so you can see why we in the U.S. are
concerned. As I understand it, you start out with a situation where
there is too little regulation of charities. We in the U.S. start out
with, perhaps, regulation that is too burdensome and yet not effective
enough. And because of our federal system, in which each state regulates
independently, we already have a chaotic system of many jurisdictions
with inconsistent laws.

Let me make it clear at the start that I'm an advocate of strong, clear,
reasonable regulation of nonprofits in the area of accountability. I'm
absolutely in favor of such regulation. But inconsistent laws in a
multiplicity of jurisdictions cause a heavy burden on the charities and
inadequate public access to accountability information. I hope that
things like centralized databases, information on the Web or CDROM will
make the systems less burdensome and more accessible.

Here is the background. Something between 30 and 40 states (out of our
total of 50) have laws regulating charities and/or fund-raisers. There
are requirements for one-time or annual registration, and annual
reporting. A group of states are working with representatives of the
nonprofit sector on a uniform registration form, but though about 23
states have agreed on this, I don't think the forms and package of
instructions for charities registration is available yet for use by
charities. For annual financial reporting by charities, many states now
use the national Internal Revenue Service's Form 990, supplemented by
their own form for additional questions. Even to obtain the appropriate
forms and instructions from all the appropriate state offices is
challenging and very time-consuming. In many states, out of state
charities soliciting in the state are required to register. In many
states, charities also have to file with the Secretary of State as
corporations "doing business" in that state.

(NOTE -- 5/29/05: There is a complete list of all the state charities regulators online, on the National Association of State Charities Officials (NASCO) website. Use this web address: http://www.nasconet.org/agencies/document_view --PB)

There is a group exploring the possibility of challenging aspects of the
registration laws, on the theory that simply mailing a letter into
another state should not be considered "doing business." A recent U.S.
Supreme Court decision, the Quill case, decided that a state could not
charge sales tax if all the company was doing was mail-order sales into
a state. The litigation group argues that the Quill case is relevant to
state regulation of charities.

So for charities that solicit in many states (notably the ones that use
professional fund-raisers and either direct mail or telemarketing
strategies), there is an overwhelming burden. The multi-state charities
complain that they have to file different reports, on different forms,
with different instructions, and different conceptual categories, for
each state - some states are even fussy about the size or color of the
paper. And many states charge substantial fees along with the filing.

There is little correlation between the size of the fees and the quality
of the charities bureau. Some charities offices have reasonably modern
database programs, while others have difficulty retrieving a form when a
citizen asks to see it. At least one state bureaucrat allegedly said
that they put all the forms in a shoebox and send them to a warehouse.
In some states, citizens who want to get access to the charities'
reports can go to the state charities office and make copies, for a fee.
But even in New York, one of the best of the charities bureaus, when I
wanted to get such a form in a hurry it took three trips to the office
over the course of a few days - once to submit a signed request, once to
bring in money to pay for the copying (after they had determined how
many pages were to be copied) and once to pick up the copies. States
also vary greatly in their resources - some have reasonably large and
competent staffs of attorneys and investigators who work on enforcing
the charities laws, while other states have hardly any staff assigned to
enforcement.

With this background, when I hear of a group like Diversity University,
run in cyberspace by a small group of volunteers, I shudder at what to
tell them about the laws that would govern them if they post a
solicitation for funds on the World Wide Web. At least one state
charities official has told me that, as she reads her state law,
solicitations on the Web ARE covered by her state laws, and any charity
that solicits on the Web must register and report in her state.

Thus I welcome your offer to take the initiative to lead the discussion
on what we need instead. Your message about an unauthorized credit-card
contribution system suggests that some kind of oversight is needed soon.


[Reminder - I'm trying out these ideas, and the Nonprofit Coordinating
Committee's research project should not be blamed for any outrageous
statements herein! -- HB]

Pete Kidder wrote on July 21, 1999, to fundraising@gilbert.org about ONLINE Fundraising and discussions of regulation:
"Accountability in the Nonprofit Sector" (1996) from the Nonprofit Coordinating Committee of New York, by Peter Swords & Harriet Bograd is an excellent source of information about who regulates the non-profit sector and the types of
problems they encounter. An online version of this paper is at:
http://www.charitychannel.com/forums/cyb-acc/resources/ag_prob.html