The Law of Fundraising. Bruce R. Hopkins

expenses.

      Fundraising expenses generally include all costs involved in inducing others to contribute resources without receipt of economic benefits in return. Fundraising costs usually consist of the direct costs of solicitation (such as the cost of personnel, printing, postage, occupancy, and so on) and a fair allocation of overhead.

      One aspect of accounting for fundraising costs is subject to considerable judgment—accounting for the joint costs (such as postage) of multiple-purpose materials, such as educational literature that also includes a request for funds. Formerly, accounting literature (and industry practice) was inconsistent on this issue. Some organizations allocated joint costs between respective functions. Other organizations did not allocate joint costs and reported joint fundraising and educational costs exclusively as fundraising expenses.

Functional allocation of multiple-purpose expenses is now required by the accounting profession in its most recent pronouncement on the subject, if certain criteria are met. Recommended bases of allocation include the content of the materials, the use made of materials, and costs associated with different functions.

(b) Financial Reporting Requirements

      Nonprofit organizations that solicit funds in several states are confronted with a web of financial reporting requirements. Regulation of charities in different states is the responsibility of different agencies with different reporting requirements and different filing deadlines. In addition, charities are often subject to the registration and reporting requirements of local units of government.

      Fundraising expenses frequently are a focus of state and local regulators. Different jurisdictions require different detail in reporting fundraising costs. Some states and municipalities have attempted to restrict the right of solicitation to organizations whose fundraising costs do not exceed a fixed percentage of contributions, but the federal courts have ruled this to be unconstitutional.

      State and local regulation of charities is fluid and subject to unanticipated changes. Accountants, therefore, must closely monitor the reporting requirements of all jurisdictions in which their organization solicits funds from the public.

      Accountants must also be alert to guidelines established by private “watchdog” agencies. These agencies establish “standards” for nonprofit organizations. Deviation from these standards may result in public censure and in sanctions, in the form of reduced or withheld contributions from corporations and other grantmaking organizations that judge potential donees and grantees on the basis of these standards.

(c) Financial Management

      In addition to conforming with generally accepted accounting principles and with reporting requirements of various regulatory bodies, accounting for fundraising expenses should provide information that facilitates sound financial management.

      Creation of information of this type usually requires a system of cost identification and cost allocation. Effective analysis of fundraising costs requires an accurate identification of fundraising cost components and an objective allocation of joint costs and overhead.

      By relating the cost of various fundraising activities with the amount of contributions received—that is, identifying the cost of each dollar raised—fundraising policy may be enhanced and the results of fundraising activities may be improved.

§ 2.5 ROLE OF A LAWYER

      The legal counsel who represents or otherwise works for a charitable organization that is ensnarled in regulation of its fundraising likewise has a multitude of responsibilities. In addition to all other tasks that must be undertaken in serving the organization, they should:

       Review the law of each jurisdiction in which the organization solicits contributions and advise on compliance responsibilities.

       See that all applications, forms, reports, and the like are properly prepared and timely filed.

       Assist the organization where it is having difficulties with enforcement authorities, such as by helping prepare a statement in explanation of its fundraising costs or by arguing its case before administrative staff(s), state commission(s), or court(s).

       Review and advise as to agreements between the organization and professional fundraisers and/or professional solicitors.

       Assist the organization in the preparation of annual reports and other materials by which it presents its programs, sources of support, and expenses to the general public.

       Keep abreast of recent developments in the law concerning government regulation of fundraising by charitable organizations.

      One problem facing lawyers who represent charitable organizations in the fundraising setting warrants particular mention. It is common knowledge that some states regulate charitable fundraising more stringently than others. It is also common knowledge that the states will not proceed against charitable organizations that are not in compliance with their law without first contacting organizations and requesting their compliance. Thus, many charitable organizations decide to not register and otherwise comply with the law of one or more states until they receive a formal request from each state to do so. Consequently, the lawyer is often asked this question: Which states should the organization register in and which state's law can the organization “safely ignore” until or unless contacted by the regulatory authorities? The problem for the lawyer is that they ought not to counsel flouting or breaking the law. Thus, the lawyer should advise the charitable organization client that it must adhere to the law of every state in which it is soliciting contributions and not wait for some informal notice or otherwise wait “until caught.” The lawyer ought not to advise the charitable organization client to comply with the law in the “rigorous regulatory” states and “wait to see what happens” in the others.

There is one subject about which the law is nearly nonexistent: the extent to which a charitable organization must register and otherwise comply with state (and local) law when it is soliciting contributions by means of its website.⁵⁷ Lawyers and others must await future developments for definitive answers on this point.

      Occasionally, the argument will arise—either from charitable organizations or professional fundraisers, or both—that the states' charitable solicitation laws are inapplicable, either because the enforcement of them obstructs interstate commerce and/or that the law concerning use of the mails overrides state regulatory law. These contentions have been tried in the courts, have failed, and are not likely to have any currency in the future.

      The lawyer's role in relation to fundraising regulation should not be performed in isolation but should be carefully coordinated, not only with the charitable organization's staff, officers, and governing board, but with other consultants, principally the accountant and the professional fundraiser.

§ 2.6 VIEWPOINT OF REGULATORS

As is attested to throughout the book, the methods and extent of government regulation of fundraising are controversial. This section provides the viewpoints of a seasoned regulator of charitable fundraising.⁵⁸

      Although the charitable sector makes significant contributions to society and has been experiencing astonishing growth, it is no different from any other sector of the economy in that it has its share of unscrupulous individuals who seek to profit by defrauding innocent donors out of their hard-earned income and, in some cases, their lifetime savings. These fraudulent schemes harm not only contributors, who respond in the mistaken belief they are helping charitable causes, but also the charitable community, in that each new scandal hurts legitimate charitable organizations by increasing skepticism in the giving public.

      The states have the difficult, but