A Moving Target: The regulation of online fundraising platforms

The National Association of State Charity Officials (NASCO) posted a document on its website titled “Internet and Social Media Solicitations: Wise Giving Tips.” True to its title, the document laid out advice on issues relating to fraudulent and deceptive solicitations, charities’ control over the use of their names on fundraising platforms, and transparency in fundraising platform policies.

But in what seems less a tip and more of a warning, it mentioned that certain fundraising platforms might be subject to state registration and reporting requirements.

The “Tips” includes a statement that fund­raising platforms “may be classified as an unregulated vendor, or a moderately regulated com­mercial co-venturer or professional fundraising consultant/fund-raising counsel, or a more actively regulated commercial fundraiser/professional solicitor.” It advises the operators to make sure they understand their legal status and comply with any applicable registration, reporting, and contract requirements.

The “Tips” is noteworthy in part because the state charity regulators rarely publish collective pronouncements on regulatory matters.

Fundraising platforms provide individuals, charities, and corporations with creative tools for raising funds for charitable causes. The platforms vary in structure and design, including peer-to-peer fundraising, project-specific crowdfunding, online charity auctions and sweepstakes, loyalty/rewards points conversion, and donations triggered by user actions (running, shopping, taking surveys, etc.). Gamification techniques are used to make the giving experience fun and rewarding.

Fun and games aside, consider the following evidence of state charity regulators’ keen interest in oversight of fundraising platforms:

* Without any announcement, in late 2011 state charity regulatory offices around the country sent letters requesting information from numerous online fundraising platforms regarding how they operate, how they determine the legitimacy of charities using their platforms, and how they protect against fraud.

* A panel was held during the 2014 NASCO conference to discuss the “Tips.” Based on questions asked by nonprofit attendees, it was evident that the registration requirement of fundraising platforms remained an area of significant confusion.

The “Tips” offers no guidance on how to evaluate whether a platform’s activities cause it to fit into a regulated category. In spite of that, the “Tips” concluded by advising platforms’ operators to “be cooperative with charity regulators and law enforcement if they contact you with basic questions about how your fundraising platform works . . . .” This suggests the prudent course for fundraising platform creators is to study the regulatory landscape they inhabit to ensure compliance and avoid facing any unexpected penalties.

When do you need to register?

To evaluate whether a for-profit fundraising platform might be subject to state registration requirements, the business must determine if it falls within the state’s definition of a regulated fundraising entity — professional fundraiser, fundraising counsel, or commercial co-venturer. Although these definitions vary from state-to-state, generally they can be defined as follows: Professional fundraisers are individuals or entities paid to solicit funds on behalf of a charity; fundraising counsels are individuals or entities paid to advise or assist with the solicitation of contributions on behalf of a charity, but do not solicit or have custody of funds; and commercial co-venturers are entities that advertise that the purchase or use of any goods, services, entertainment, etc. will benefit a charitable organization or purpose.

In 2011, Assistant Attorney General Bob Carlson of Missouri, then president of NASCO, gave a presentation at the organization’s annual conference in which he explained how state charity regulators were examining online fundraising platforms to determine whether and when they might fall into a regulated category. In determining whether a platform is a professional fundraiser, Carlson posed a core question: “Who is soliciting?” As he pointed out, “just because you’re online, does not mean you are doing the asking.”

Carlson also noted that certain factors, when taken together, could indicate that a for-profit platform might be soliciting, including, but not limited to:

(a) fee structures that are based on the amount donated (above and beyond third party credit card fees);

(b) the provision of customized fundraising content to the organizations; and,

(c) giving the impression of vetting charities and recommending which organizations to support (e.g., for an additional fee, placing charities into issue portfolios, or granting them featured status).

Most platforms today are structured as turnkey tools that allow charities to conduct their own fundraising campaigns. In peer-to-peer fundraising platforms, individuals create their own campaign to raise funds for a favorite cause. Most platforms assess some kind of transaction fee based on the amount of the donation, but most do not assist charities in creating campaign content nor are they paid to promote any particular charity’s campaign.

The factors highlighted by Carlson help when evaluating which entity is actually soliciting, but no factor on its own is determinative of whether a platform is acting as a professional fundraiser. Consequently the platform structure, functionality, and any services that are provided to charities that sign up must be reviewed as a whole in reference to the state’s definition of professional fundraiser.

A fundraising platform might constitute a fundraising counsel when it provides, for a fee, advice, assistance, or counsel to a charity about how to optimize its fundraising efforts. This might include the provision of customized advice regarding how to better use the platform’s tools to maximize the charity’s fundraising success.

A fundraising platform might be acting as a commercial co-venturer when it promotes or advertises that the purchase or use of any goods, services, entertainment, or any other thing of value will benefit a charitable organization or be used for a charitable purpose.

Because each state has adopted slightly differing definitions of “professional fundraiser,” “fundraising counsel,” and “commercial co-venturer”, different states might arrive at varying conclusions on the platform’s classification.

Jurisdictional nexus

Even if an online fundraising platform is considered to meet a state’s definition of a particular fundraising category, the states’ ability to regulate that platform is limited by the constitutional standard of “minimum contacts,” i.e., the minimum amount of contacts necessary for a state to exercise jurisdiction over a person or entity.

NASCO issued the Charleston Principles in 2001, a set of guidelines which represent the states’ effort to consistently apply minimum contacts principles to the existing state charitable solicitation regulatory framework. The Principles assert that existing state charitable solicitation laws encompass and apply to solicitation on the Internet. The Principles do not constitute binding law. However, NASCO encourages state charity regulators to use the Principles as practical guidelines for applying existing state laws to internet fundraising activities.

While two states, Colorado and Tennessee, have affirmatively incorporated the Principles through formally adopted regulations, other states have not taken such a clear position. In fact, a few states have informally advised that they do not use, or will not disclose whether they consider, the Principles as guidelines. At the end of the day, platforms can only rely on the minimum contacts standard as the established principle upon which to guide their regulatory compliance.

According to the Principles, state registration and reporting regimes only apply to: (1) entities domiciled within the state; (2) out-of-state entities whose non-Internet activities would require registration in the state (e.g., mail or telephone solicitation into the state); and (3) out-of-state entities that solicit through an interactive or non-interactive Web site and either 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. Worth noting is that in March 2011 state charity officials convened a closed-door meeting to review the continued applicability of the Principles a decade after their adoption. Their conclusion? The guidelines were still valid.

Unsettled regulatory environment

One of the consequences of the continued lack of clarity around fundraising platform regulation is that when a platform and charity are not in agreement regarding the platform’s regulated status, it can lead to avoidable regulatory actions.

For example, a charity might assume that a platform is acting as its professional fundraiser because of the online fundraising nature of the platform and the transactional fees being assessed, and on that basis, list the platform as one of its professional fundraisers in the charity’s state registration filings.

Meanwhile, the platform’s creators might not consider itself a professional fundraiser because it is not actively involved in creating or promoting the charity’s fundraising campaign, and is therefore not registering. This disconnect can cause states to initiate investigations of the platform, which can lead to fines and other penalties.

While platforms should cooperate with any state regulatory official issuing letters or inquiries, such formal communications could be avoided if the charity and the fundraising platform discuss the platform’s regulatory status and state filing intentions in advance of making any disclosures.

The continuing focus by regulators on internet fundraising makes it critical for online fundraising platforms and their charities to clarify to the best of their ability the platform’s status and comply with applicable regulatory requirements. Fundraising platforms should understand the regulatory framework in which they operate so that they can more proactively build their business model and adjust their operational strategy to minimize any unnecessary burdens those regulations might impose. NPT

Karen I. Wu is a partner, Perlman & Perlman, LLP, a New York City law practice specializing in charitable solicitation law and regulation. Her email is [email protected]