Advising Nonprofits on their Fundraising Strategy? You May Need to Register

Perlman & Perlman
May 27th, 2020

Some States Require Fundraising Counsel to Register

Currently, twenty-three states require fundraising counsel to register prior to providing services in connection with charitable solicitation activities. The regulatory purpose of this registration requirement is to protect charitable assets for their intended use and to ensure that charitable donations contributed by state residents are not misapplied through fraud or other means.

Who Qualifies as a Fundraising Counsel?

A fundraising counsel (“FRC”) is generally a person or entity paid to plan, manage, advise, counsel, consult, or prepare materials for, or with respect to, a charitable solicitation. A fundraising counsel does not solicit contributions or have custody of solicited funds.  Most often, an FRC is paid a fixed fee or rate rather than a percentage of contributions collected. Consultants providing services that fit within the definition of a fundraising counsel, but who also solicit contributions, have custody of funds, or are compensated on a percentage basis may be considered “professional fundraisers” under some state laws and be subject to greater regulatory obligations, including obtaining bonds and filing detailed reports after each solicitation campaign.

Typically, an FRC provides strategic planning services with the goal of improving a charity’s fundraising activities in order to increase donations. States define “fundraising counsels” broadly, however, and thus their services include a variety of activities, such as the following:

  • A company hired to design and manage a direct mail campaign
  • A company hired to manage an annual fundraising gala
  • An individual hired to design a digital fundraising strategy
  • A firm hired to develop a major gift or capital campaign strategy
  • An individual hired to prepare fundraising materials, including providing advice on how best to use the materials to maximize fundraising results
  • An individual hired to coach an organization’s development staff or volunteers who are conducting peer-to-peer fundraising campaigns
  • An online fundraising platform that is paid by a charity to help optimize its fundraising efforts. (This might include providing customized advice on how to better use the platform’s tools to maximize the charity’s fundraising success. Since each state has adopted slightly different definitions of “fundraising counsel,” states may reach varying conclusions on a platform’s classification.)

Where Do Fundraising Counsels Need To Register?

The key question in determining whether a fundraising counsel must register is whether sufficient contacts exist between the fundraising counsel and the state such that it is not fundamentally unfair for the state to subject the fundraising counsel to its registration and reporting requirements. The fundraising counsel must purposefully avail itself of the privilege of conducting activities within the state. In other words, the registration requirement is triggered by the extent to which the fundraising counsel’s actions reach a state, and the degree to which the fundraising counsel (as opposed to the charity) caused those actions to do so.

Several Supreme Court cases have addressed whether a fundraising counsel has enough contact with a state to be subject to its regulatory jurisdiction. Interpretation of these cases suggests the following takeaways:

  • Fundraising counsel should register in the state where they are domiciled;
  • Fundraising counsel should register in the state where the charity is located;
  • Fundraising counsel that advise charities with respect to solicitation in particular counties, states or regions or that, in some other way, target a particular state with its fundraising counsel activities should register in the targeted states. For example, a fundraising counsel that, as part of managing a direct mail campaign, recommends specific donor mailing lists, should register in the states where the direct mail recipients reside.

Online fundraising platforms are often structured to avoid classification as a fundraising counsel. Common reasons for falling outside the fundraising counsel definition are either that the online platform is directed at providing technology rather than consulting services, or the platform does provide fundraising counsel services but is also collecting a percentage of funds raised, thereby triggering categorization  as a professional fundraiser.

Determining whether an online fundraising platform is classified as fundraising counsel, and if so, where it should register, requires a nuanced analysis that takes into consideration published guidelines for state regulation of online fundraising. A concise analysis of this issue is contained in my colleague Karen Wu’s Nonprofit Times article A Moving Target: The regulation of online fundraising platforms

Fundraising Counsel Contracts

In addition to the registration requirements, state charitable solicitation statutes require that contracts between a charity and a fundraising counsel include certain provisions. Common contract provisions required by state statute including the following:

  • Legal name/address of the charity
  • Statement of the charitable purpose for which the solicitation campaign is being conducted
  • A clear statement of the fees to be paid to the fundraising counsel
  • The effective/termination dates of the contract
  • A statement that the fundraising counsel will not have control or custody of funds
  • A statement that the charity exercises control and approval over the content, volume and/or frequency of any solicitation
  • California and New York require lengthy cancellation provisions designed to allow the charity cancel the contract within 10-15 days of signing without penalty
  • Several states require the contract to be signed by two authorized officials of the charity

The services fundraising counsel provide can be of great value to nonprofit organizations. Understanding the regulatory framework governing fundraising counsels will help you avoid missteps that can lead to actions by state regulators, including fines and penalties. It is incumbent on both the fundraising counsel and its charity clients to take the steps that ensure compliance under state charitable solicitation laws seriously. If in doubt, it’s always a good idea to seek counsel.

Topic: Fundraising Counsel