The Law of Fundraising. Bruce R. Hopkins

3.9 LIMITATIONS ON FUNDRAISING COSTS

One of the most controversial issues in the field of fundraising for charitable purposes is the matter of fundraising costs. While there is general agreement that charitable fundraising costs should be reasonable, there is much disagreement and misunderstanding as to what in fact is a reasonable fundraising expense. There also is disagreement about how to determine the reasonableness of fundraising costs. Ascertainment of the reasonableness of a fundraising cost depends on a variety of facts and circumstances.⁶¹

Many of the states long tried to prevent charitable organizations with (allegedly) “high,” “unreasonable,” or “excessive” fundraising costs from soliciting contributions within their jurisdictions. The traditional mechanism for doing this was denial of permission to solicit in the state if a charity's fundraising costs exceeded a particular percentage of total contributions or revenues received. This percentage ceiling came in two forms: (1) an absolute limitation (i.e., one without a means of proving reasonableness, irrespective of a particular percentage) and (2) a rebuttable limitation (where the prohibition on fundraising could be overcome by a showing that the fundraising expenses were in fact reasonable, notwithstanding the percentage that may have been produced). It is now settled, however, that this mechanism is unconstitutional as a violation of the rights of free speech of soliciting charitable organizations.⁶²

Consequently, the states have been forced to repeal these percentage limitations, although the practice is dying hard. As an illustration, the law of a state once prohibited registration by a charitable organization, professional fundraiser, or professional solicitor where the charity would receive less than 90 percent of the receipts of a solicitation. According to a representative of the state's tax commission, which at that time administered the state's charitable solicitation act, the provision had not yet been removed from the statute by the state legislature, and was therefore still being enforced. This was the case even though the state attorney general's office had written an opinion stating that the provision was unconstitutional. Another state had a provision that a fundraising cost of a charitable organization that is in excess of 30 percent of total revenue was presumed to be unreasonable; a charitable organization with an unreasonable fundraising cost could not register in the state. That rule was repealed.

      The law of another state provided that a charitable organization registered under its solicitation statute could not expend an “unreasonable” amount of its gross contributions for fundraising. An amount in excess of 25 percent of total contributions was presumed to be unreasonable, and the secretary of state was empowered to—using unstated criteria—approve higher costs. This provision was subsequently removed from the state's charitable solicitation statute.

      An unsuccessful attempt involved shifting the limitation away from the charitable organization and placing it on the amount of compensation received by the professional solicitor. Thus, one state had a provision prohibiting a professional solicitor from receiving more than 25 percent of the total amount received in a solicitation. This rule has since been removed from the solicitation act; during the time it was part of the statute, the state regulators conceded that the law was unconstitutional and not being enforced. The law of another state provided that a charitable organization could not pay a professional solicitor an amount in excess of 15 percent of the contributions received. This law also asserted a rebuttable presumption in connection with the fundraising costs of charitable organizations, which placed a general limitation on fundraising costs of 35 percent, albeit with an opportunity for higher expenses in the event of “special facts and circumstances.” This provision was not enforced and has since been eliminated.

      The law of another state provided that a charitable organization may not pay a professional solicitor more than 25 percent of contributions received and that a charitable organization may not have fundraising expenses in excess of 50 percent of contributions received, again with an opportunity for the allowance of higher expenses in the case of special circumstances. During the time before the provision was removed, the state regulators were uncertain as to whether or how to enforce it. The law of another state provided that a charitable organization could not pay a professional solicitor for services in connection with the solicitation of contributions in excess of a “reasonable percent” of gifts raised. This law also authorized the state's secretary of state to pass judgment on the contract between a charitable organization and a professional solicitor, and to force renegotiation of the agreement or perhaps disallow it where the contract would “involve an excessively high fundraising cost.” These rules are no longer in the law, and the state regulators evinced little interest in enforcing them while they were.

Rules aimed at imposing ceilings on the compensation paid to professional solicitors are not proving easy to eradicate. One of them was struck down as unconstitutional in 1994⁶³ and another was rendered ineffectual in 1995.⁶⁴ Yet, as discussed next, provisions in the states' charitable solicitation acts involving percentages remain plentiful.

      Many states require a statement about any percentage compensation in the contract between the charitable organization and the professional fundraiser and/or professional solicitor. One rule in this regard provides that the contract must state the “guaranteed minimum percentage of the gross receipts from contributions which will be remitted to the charitable organization” and the “percentage of the gross revenue for which the solicitor shall be compensated.” One state requires that a contract between a charitable organization and a professional fundraiser be filed with the state where there is percentage-based compensation.

Some states utilize the percentage approach in setting disclosure. Of these, a few require that the solicitor disclose, at the point of solicitation, the funds that the charity will receive, stated as a percentage, and a state will occasionally require this type of disclosure following a request by the prospective donor for the information. A state may require a disclosure of this nature upon the request of anyone or require a charitable organization's fundraising cost percentage to be stated in its registration statement. In a few states, solicitation literature used by a charitable organization must include a statement that, upon request, financial and other information about the soliciting charity may be obtained directly from the state.⁶⁵

      A rare rule prohibits a professional fundraiser from receiving compensation from a charitable organization if the compensation depends wholly or partly on the number or value of charitable contributions that result from the effort of the fundraiser.

§ 3.10 AVAILABILITY OF RECORDS

      The information filed in accordance with a state's charitable solicitation act, whether contained in an application for registration, annual report, contract, or other document, is a matter of public record. This requirement encompasses information filed by charitable organizations, professional fundraisers, professional solicitors, and commercial coventurers. The fact that these records are public is usually stated in the statute.

For example, the law may provide that statements, reports, professional fundraising counsel contracts or professional solicitor contracts, and all other documents and information required to be filed shall become government records in the department or agency and be open to the general public for inspection at such times and under such conditions as may be prescribed.

      This type of provision is frequently buttressed by a record-keeping requirement. In almost all instances, this record-keeping obligation is imposed on the soliciting charitable organization; however, in some states, the requirement is confined to professional fundraisers, professional solicitors, and/or commercial coventurers.

      Many of these laws require that the information be maintained, by the regulators and/or the regulated, for a stated period, usually three years. Where the records