Technology Evolves Fundraising, But Charleston Principles Remain Unchanged

October 15, 2014       Richard H. Levey      

Picture a consumer in Los Angeles visiting a New York charity’s website. The site slips a cookie — a tiny bit of tracking code — onto the consumer’s computer. An advertising network then deploys “remarketing” and serves up an ad for the charity with a prominent “donate now” button while the person is browsing an unrelated site a few days later.

Imagine that the attorney general in California declares that the ad constitutes a targeted solicitation, and notes that the charity mentioned in the ad has not registered with the state. The attorney general cites the charity for being in violation of The Charleston Principles, a set of guidelines issued in 2001 by the National Association of State Charity Officials (NASCO), which 39 states and the District of Columbia rely on, to varying degrees, when governing online charitable solicitations.

Millions of consumers recently lined-up for the latest iPhone that will be out of date within six months, yet the Charleston Principles, which target technology, have not been updated since being drafted in 1999 and issued in 2001.

The Charleston Principles call for — among other stipulations — out-of-state charities that target individuals within a given state to register with that state if the charity “[r]eceives contributions from the state on a repeated and ongoing basis or a substantial basis through its Web site.”

What constitutes repeated and ongoing and substantial is left to each state’s discretion, meaning that a fundraiser could conceivably be looking at 51 thresholds (including the District of Columbia) and interpretations and potentially 51 registration processes. This is in part because the principles are not regulation or law. They were intended to serve as guidelines for states considering online donation issues.

Geoffrey Peters, general counsel to American Charities for Reasonable Fundraising Regulation (ACFRFR) in Roanoke, Va., believes The Charleston Principles have fallen victim to mission creep. After they were initially issued, charities “were going on the good faith of the [state] regulators that they would abide by those principles and not attempt enforcement of their statutes beyond what the principles provided for,” said Peters.

NASCO drafted The Charleston Principles to codify and simplify the guidance states offer when regulating online solicitations. In the nearly 15 years since the principles were issued, however, the states have modified or interpreted them in such a way that “their own sets of rules and policies and regulations have from time to time impinged or infringed on The Charleston Principles,” said Peters.

“What happens in many cases is the states will literally make up a rule, not tell anybody that they have made up a rule or an interpretation of a rule, and then they will enforce the rule,” Peters said. “The first time you know about it is when you get a letter from the states saying ‘you violated our rules.’”

Ignorance of the law is no excuse, Peters added. It’s called strict liability. That means that you are required to know the rules. “Even if you didn’t, that’s not an excuse. Therefore, you get fined for not following a rule that you didn’t know about,” he said. “And, that is okay if the rule is in writing, because all of us lawyers can go look up the written rules that the states promulgate by regulation. But what if it is not a regulation — it’s an interpretation?”

Tracy L. Boak, a partner at the law firm Perlman & Perlman in New York City and a former state charity regulator in Pennsylvania, brought up another possibility. “When you are talking about the Internet, when you have a donate button just sitting there, it is a little more passive. It’s not actually targeting. If somebody happens upon your website and makes a donation based upon that button, did [the organization] target that person? Does [the organization] know necessarily what state they are coming from so I can be held to have targeted somebody in a particular state? That is where the idea of contacts comes into play. Are there minimal contacts for a state to be able to say ‘Yes, we can enforce our registration laws against you?’”

Chris Cash, charities program manager within the Colorado Department of State, said the rise of third-party firms that provide fundraising platforms is an issue. “They run the gamut from simply ‘This is software you can buy from us to do online fundraising yourselves,’ to fundraising platforms that actively promote the charity, help beef up its profile, and really guide it in terms of what things they support on those platforms,” Cash said.

“When they start going in that direction, when they start charging fees in any way that is based on a percentage of funds brought in, that gets us scratching our heads a little bit about whether our solicitation laws should apply to them and we should call them a paid solicitor,” Cash added.

Peters questions both the legality and the practicality of requiring product and service providers to register with the states, especially as these vendors rarely are involved with the targeting process. Furthermore, under both the Commerce Clause of the U.S. Constitution as well as the Due Process Clause under the 14th Amendment as applied to the states, states may not have the right to regulate Internet service providers or professional fundraising counselors, Peters said.

“We’ve litigated this already in several jurisdictions, and have had federal courts rule that there is no such jurisdiction,” Peters said.

There is a practical reason for states not requiring these vendors to register. “It’s a burden to the states because it’s more work that they have to deal with for which the states then have to pay for salaries and filing systems,” Peters said. “Historically these efforts have been money losers for the states, so they don’t have the money to do the work that they should do, which is prosecuting real fraud.”

While there hasn’t been a formal update to the Charleston Principles, NASCO members are aware of the impact of new technologies and contingencies. “We have a conference every year, and there has been at least one session related to social media solicitations, or — when they first came out — text solicitation donations,” said Alissa Gardenswartz, a first assistant attorney general at the Colorado Attorney General’s office and current NASCO president. “A constant part of the NASCO discussion is how to regulate, oversee, keep tabs on online solicitation,” she said.

“The Charleston Principles were developed to address the thorny issue of balancing the states’ rights to regulate charitable fundraising with due process issues and commerce clause issues,” Gardenswartz said. “There isn’t a whole lot of jurisprudence addressing those issues.”

The impulse to update The Charleston Principles to reflect changes in technology should be balanced with the need to proceed cautiously so charities’ rights to do business aren’t trampled in a quest for regulation, she added.

“I don’t think enforcement has necessarily suffered as a result of the Charleston Principles not being updated,” Gardenswartz said. “Since the Charleston Principles were drafted, there has been an increased number of states that register charities.

“We are hesitant to revisit the Charles­ton Principles until there is more solid jurisprudence around what constitutes minimal contact such that it is okay to subject someone to your jurisprudence in the context of Internet commerce,” Gardenswartz said.

Similarly, Boak questions whether changes in the devices through which consumers are solicited are as material as the underlying legal questions. “I’m not sure that changes in technology change the analysis that goes into deciding whether or not the Internet activity triggers registration in a state,” she said. “It’s not rooted in the technology. It’s rooted in whether or not your activities have the sufficient contacts with a state such that the state would have jurisdiction over you.”

Even without taking into account new technologies or marketing methods, the level of guidance The Charles­ton Principles offers is a bone of con­tention. Some are comfortable with the ambiguity. Others would like rock-solid qualifications, such as what constitutes “substantial” donations. This level of detail is offered by only two states right now: Colorado and Tennessee. Colorado incorporated The Charleston Principles into its Rule 10, which governs charitable solicitations.

“Tennessee’s is 100 online contributions in a year, or $25,000 in online contributions in a year,” said Cash. “In Colorado, ours is 50 online contributions in a year, or $25,000 contributions in a year, or 1 percent of their total contributions for the year. This rule is aimed directly at contributions received on the website, online contributions. And that 1 percent is in terms of dollars.”

Boak falls into the camp of not wanting dozens of conflicting criteria. “The more specific the guidance, the more that it ties our hands,” she said. “If state regulators were to start looking for guidance, I would hope they would look toward Tennessee, because it gives us a little more wiggle room than Colorado does,” Boak said. “But it’s like with everything else: Unless they are all going to get together and decide together what they believe repeated and substantial and ongoing is, we are faced with the states starting to define it their own way. Now we’ve got inconsistencies from state-to-state.”

Boak, who moved from a position within the Pennsylvania Secretary of State’s office to a private practice four years ago, brings a dual perspective to The Charleston Principles. “When you are a regulator and looking at that document, the goal is evaluating whether an organization should be registered in your state,” Boak said. “Now that I am on this side of it, I think a lot more about what it means for a state to have jurisdiction against one of my clients.”

Boak’s experience allows her to offer clients insight into how regulators view charity actions and regulation interpretation. “The goal is to stay out of trouble, to not have to actually have conversations with a regulator and have the argument about whether or not our side is right or their side is right,” Boak said.

As for quantitative measures of donations as proof of solicitation, “I think the numbers may give a state a reason to question whether you are targeting, but I don’t think it’s proof of targeting. I think that may be where the principles fall a little bit,” Boak added.

Despite the concerns about ambiguity and not being updated to address changes in electronic marketing, few interviewed wanted to toss The Charleston Principles entirely.

“The Charleston Principles were an effort to take several states with varying registration requirements, including whether or not they required charities to register at all, and come up with a template to use as guidance or regulation for whether folks should be registered in a state, given that their presence is only online,” Gardenswartz said. “They are relevant because they are a first step toward addressing increased online solicitation.”

For all the concern about The Charles­ton Principles’ ambiguity and interpretations, few industry experts could relate instances where they were cited as the basis for enforcement actions. “We polled states in the past on how much they rely on these, and very few states say they have any teeth, but they are serving their purpose of informing their policies,” Cash said.

When Cash last posed his question at a NASCO conference in 2012, responses ranged from states that discuss The Charleston Principles regarding enforcement options in-house, but which hadn’t enacted them into statute or rule, states that use them as guides but also hadn’t formally adopted them, and states that had recounted them to their bar associations as guidance for where they can exercise jurisdiction.

There are other reasons why data on enforcement actions is scarce. One reason is that many regulatory actions, whether undertaken by an attorney general’s office, the state’s secretary of state office, or whichever state entity has jurisdiction, often end up being settled without trial. As such, the proceedings are often not made public

Another reason is that violations of a state’s registration regulations might not be the sole reason for that state to take enforcement action. “If our office is going to do an enforcement action, registration is but one of several issues at play,” said Gardenswartz. “We haven’t brought any actions based on failure to register.”

The seeming inapplicability to fraud prevention makes Mark J. Fitzgibbons, president of corporate affairs of American Target Advertising (ATA), a direct marketing and fundraising firm in Manassas, Va., wonder about the need for any type of registration activity at all. “I’ve never been sure about fraud mitigated by state registration in general,” Fitzgibbons said. “You register, the states go on complaints, so the registration didn’t stop the fraud, it was the complaint. It might be easier to find the organization, but if you have an online system you just push a button.”

He said that ATA turns away potential clients because some of them can’t afford to register. “We turn down more organizations and ideas than we retain be­cause of the state registration process,” he said.

The goals of The Charleston Principles could be better accomplished, and could be more effective, if the regulators would be more creative in looking at how they regulate, Fitzgibbons said. “The solution for direct mail, Internet, social media, is in a 21st century registration and disclosure process,” he said. NPT

Richard H. Levey is a New York City-based freelance writer.