California Attorney General Issues Guidance on Charity Crowdfunding Platform Regulation

The rapid growth of online and social media fundraising activities has caught the attention of state charity regulators. Yet, very little guidance exists that helps businesses, particularly technology companies new to the charitable fundraising space, analyze their compliance obligations under state charitable solicitation laws. In 2016, the California Attorney General’s office quietly issued the first specific written guidance of any state that articulates facts and circumstances it considers relevant in evaluating whether a crowdfunding website or platform[1] may be subject to the state’s charitable fundraising registration and compliance requirements. To better understand the California guidance, a quick read of an article on online fundraising platforms I wrote for The Nonprofit Times in 2015 will provide a primer on the topic.

To evaluate whether a for-profit crowdfunding platform may be subject to state charitable solicitation registration requirements, the business must determine if it falls within the state’s definition of a regulated fundraising entity — professional/commercial fundraiser, fundraising counsel, or commercial co-venturer. Although these definitions vary slightly 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. Crowdfunding platforms may fall into any of these categories, or none of them.

In the guidance, the California AG highlights three features that will likely qualify a crowdfunding platform as a commercial fundraiser:

  1. A crowdfunding site that actually solicits donations for a charity’s project, features a charity on its own social media pages, or promotes a charity project via advertisements and asks the platform’s followers to support it. This is in contrast to a platform that simply provides the technology and platform for fundraising campaigns to be conducted, and does not promote any particular charity projects.
  2. The platform holds the donated funds, rather than using a third party payment processor or financial institution to receive them.
  3. The platform “plans, manages, advises, counsels, consults or prepares materials for the solicitation of funds, assets or property” but is disqualified from the status of a fundraising counsel. Based on the state’s definitions, disqualifying factors include the two factors noted above (i.e., actually soliciting or holding donated funds), as well as: (a) charging fees based on a percentage of the funds raised, or (b) employing (i.e., subcontracting with) a company that solicits funds for the charity.

The California guidance highlights two factors that will likely qualify a crowdfunding platform as a fundraising counsel:

  1. “Coaching or giving specific charities advice on how to tailor their pages in order to raise the most money.”
  2. “Designing the content of a charity’s page relating to solicitations.”

As most states have similar regulatory frameworks, the California guidance provides a helpful tool for crowdfunding platforms to analyze their fundraising registration and compliance obligations both in California and elsewhere. Be aware, though, that the definitions of regulated fundraising entities vary slightly from state to state, and as such, it is possible that certain factors may trigger registration in some states but not in others. Another factor to consider is how broadly or aggressively a state chooses to apply its statutes.  Certain types of crowdfunding platforms are more likely to fall into a regulated fundraiser category than others, depending on how they operate and what services or activities they undertake, as seen in California’s guidance.

What if my crowdfunding platform is a regulated fundraising entity?

If a crowdfunding platform constitutes a commercial fundraiser in California, it triggers a number of compliance obligations, including registration and reporting, contract language requirements, and disclosure obligations, as further discussed below.

Registration and Reporting

Registration and reporting obligations include registration of the company operating the crowdfunding platform before any fundraising campaign begins in the state, filing of a solicitation notice for each charity campaign prior to the start of the campaign, and filing of campaign reports at the end of each fundraising campaign (or annually, if the campaign is ongoing). Given that crowdfunding platforms are developed for use by thousands of charities simultaneously, the compliance requirements to manage state filings and reports if a platform falls into a regulated category reaches a new level not seen before in traditional fundraising businesses, something states should consider in their enforcement approach.

Contract Requirements

Commercial fundraisers and fundraising counsels in California must include certain provisions in their contracts, including (but not limited to) a provision permitting the charity to cancel the contract within a certain period of time following its execution without cost, penalty, or obligation, and a statement that the charitable organization exercises control and approval over the content and frequency of any solicitation. Commercial fundraisers must include additional provisions, including a provision stating the actual or estimated percentage of total contributions received that will be remitted to, or retained by, the charity, and a provision requiring the commercial fundraiser to transfer all of the contributions to the charity or deposit all of the contributions in a bank account controlled solely by the charity within five business days after receipt of the funds. Similar contract language requirements exist in other states as well.

Disclosure & Transparency

Commercial fundraisers in California must disclose that the solicitation is being conducted by a commercial fundraiser for charitable purposes, and the name of the commercial fundraiser for charitable purposes as registered with the Attorney General. Upon request, commercial fundraisers must also disclose the percentage of total fundraising expenses of the fundraiser. If these disclosure requirements sound a bit odd in the context of crowdfunding platforms, it is because the commercial fundraiser regulations were written decades ago with a different type of commercial fundraiser in mind, most notably, paid telemarketers.

Disclosure of the fundraiser’s name and paid/professional status have long been an important requirement that is closely regulated and scrutinized, particularly when prospective donors submit complaints to regulatory agencies regarding potentially fraudulent or misleading solicitation calls. The California crowdfunding platform guidance instead talks about disclosure obligations under the concept of “transparency,” and advises crowdfunding platforms to be upfront and disclose how much of any donation will be kept by the crowdfunding site, and not to make representations or imply that a charity will receive an amount greater than the actual net proceeds reasonably estimated to be received by the charity.

What if my charity uses a crowdfunding site?

Charities should clarify at the outset whether a crowdfunding site that it contracts to use is a registered fundraising entity in any states, because it also affects the charity’s own reporting obligations. If a company operating a crowdfunding platform is registered as a fundraising entity in one or more states, the charity may be required to disclose the company as one of its fundraisers as part of the charity’s own registration filings. However, registration by the company in one or more states may not necessarily mean the charity’s contract is being (or should be) filed by the company in every state where the company is registered. Whether a particular campaign or contract must be filed or disclosed to a particular state depends on the solicitation activities being conducted in the state, and whether they create sufficient jurisdictional nexus with a state to require such disclosure. The mere fact that a campaign is accessible online by residents of a state or a donation is received from a resident of a state does not necessarily create sufficient jurisdictional nexus to require disclosure and reporting of a campaign in that state. [I touch upon this question of jurisdictional nexus in my Nonprofit Times article, but will explore the current landscape further in an upcoming blog post] It is therefore critical that the platform and each participating charity come to a clear mutual understanding as to what state registration and reporting obligations apply to a particular contract or campaign.

If you found this blog post useful, you may also find the following articles of interest:
A Moving Target: The Regulation of Online Fundraising Platforms, by Karen Wu
Navigating the Maze of Charitable Fundraising Regulation, by Tracy Boak
Operation(s): Top Five Things That Are Making Regulators Buzz, by Tracy Boak and Karen Wu
Are You Protected? Five Points to Include in Every Technology Agreement, by Jon Dartley
Defining the Terms of a Terms of Use, by Jon Dartley
Steal This Privacy Policy, by Jon Dartley

[1] California’s guidance defines “crowdfunding sites” as “an online place for individuals, businesses, and/or nonprofits to solicit funds,” but the guidance focuses solely on crowdfunding sites used to solicit charitable contributions.

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