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Client Alert: No CFC! No Federal Funding! How Do We Raise Funds Now? – Avoiding Legal Pitfalls When Beginning New Fundraising Campaigns

Nonprofits are experiencing funding challenges and scrambling to fund their missions. While termination of nonprofits’ federal funding has garnered a lot of attention recently, yet another funding challenge arose this week. Charities participating in the Combined Federal Campaign (“CFC”) now face a new funding shutoff created by the Trump Administration’s pause of the annual charitable fundraising program.

For over 60 years, charities have benefitted from the CFC, which allows federal employees, retirees, and contractors to contribute money and/or time to approved local and national charities through the popular payroll deduction, a mobile giving app, text-to-give program, and paper forms. Whether or not the pause becomes permanent, it is clear that nonprofits need to look to other funding sources.

As noted in this recent Client Alert, charitable fundraising has become more challenging. One thing remains constant regardless of a nonprofit’s fundraising mechanisms – compliance is key. Participating CFC charities, or other nonprofits experiencing loss of revenue and exploring other sources of income, should be mindful of laws and restrictions that govern various types of fundraising as they look to fill the funding gap.

Fundraising While Avoiding Legal Pitfalls

Regardless of the particular fundraising method utilized, over 35 states require Section 501(c)(3) organizations to be registered to fundraise, that is, to solicit contributions from citizens, including other nonprofits, within their borders. A lesser number of states require Section 501(c)(4) organizations to be registered. Individuals and companies assisting these organizations with fundraising, including strategy, designing fundraising materials, and soliciting funds, are also required to register in certain states. In addition to this charitable solicitation registration obligation, the method or manner of fundraising may raise additional compliance issues.

Sponsorships and corporate support, while not a new fundraising stream, still require proper structuring to avoid jeopardizing a charity’s tax status and other tax issues. Strong contractual language can help protect the organization’s intellectual property and allow for termination of the relationship if it threatens the goodwill or reputation of the nonprofit.

Soliciting contributions via text can be effective, but nonprofits need to be mindful of federal and state laws (e.g., the Telephone Consumer Protection Act) that govern consent, opt-out, and the use of auto-dialers, among other things. An organization’s privacy policy should be reviewed to ensure it covers any new methods of collection and use of data.

Nonprofits wishing to raise money through raffles, lotteries, sweepstakes, contests, and other games of chance need to pay close attention to state laws, which vary widely regarding the legality of, and exceptions for, the conduct of such promotions, required permits or licenses, and contest rules. Social media platforms have their own requirements for contests conducted on their platforms. Federal law requires specific disclosures for the conduct of sweepstakes and other contests via the mail.

Charitable sales promotions, also known as commercial co-ventures (“CCVs”), have become more common in recent years as for-profit companies partner with charities to raise awareness and funds for the charity. Often, a for-profit company will conduct an advertising campaign promising that a percentage of each purchase will be given to the named charity. Or, a company will promise to donate a set amount in exchange for the consumer taking certain actions, such as liking a page or referring friends to a website.

This type of fundraising can be beneficial to both the company and the charity, but it does impose compliance obligations on both parties. In addition to the charitable solicitation registration requirement (discussed above), for-profit companies conducting a CCV must currently register in 7 states. These state registration and reporting laws impose contractual provisions and advertising disclosures for CCV promotions.

Any nonprofit considering a partnership or co-venture with a for-profit company should carefully draft the written agreement to protect the nonprofit’s most important assets – its tax status, reputation and goodwill, and name, trademarks, and other intellectual property.

Why Compliance Matters

Particularly in this competitive environment, nonprofits should put their best foot forward with potential donors and carefully review planned fundraising programs to make sure they are compliant. Donors care about compliance and want their dollars to go to fund the organization’s mission, not to enforcement actions for failure to comply with fundraising laws. The penalties for failing to register, or illegal fundraising campaigns, can range from fines, late fees, denial of the right to solicit funds, damaged relationships with donors, and negative publicity.

Our firm has extensive experience and expertise in advising clients on fundraising and other evolving issues impacting the tax-exempt sector, and we are ready to assist you in navigating the challenges presented by the regulatory and enforcement landscape. Please contact Heidi Abegg or another member of the Associations, Nonprofits and Political Organizations practice group if you have any questions or concerns regarding your compliance obligations, risks, or strategies.

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The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.