Fundraising Compliance in Mergers & Acquisitions

For-profit companies that are in the business of providing charitable fundraising services often look to grow strategically through a merger or acquisition, but one of the details that is often overlooked by mergers and acquisitions (M&A) attorneys is proper planning for fundraising regulatory compliance.

The key to a smooth transition is making sure the surviving entity is properly registered in all the states where it is providing services before the completion of the M&A transaction, and ensuring proper review of any contract restrictions regarding contract assignments or any other change in ownership. This requirement applies to all of the regulated fundraiser categories — professional solicitors (e.g., telemarketers or any other entity directly soliciting funds for nonprofits), fundraising counsels (e.g., direct mail companies or other companies that advise or assist in fundraising campaigns but that do not themselves solicit funds), and even commercial co-venturers (companies offering sales promotions in which a portion of their sales proceeds will be given to a charity). Yet fundraising compliance is a detail that is often overlooked by traditional M&A attorneys because they do not regularly advise their clients on charitable solicitation laws. In many cases, the surviving, unregistered entity mistakenly believes that the registration of the dissolving entity carries over into the surviving entity.

Some states will pardon the compliance oversight so long as the surviving entity comes into compliance as soon as it becomes aware of the requirements. Other states are not as forgiving, and good faith oversight followed by self-initiated remedial efforts may not be enough to save the entity from paying financial penalties or entering into voluntary settlement agreements. Although voluntary consent agreements with state agencies generally do not concede any violation of state law, they nevertheless become a blemish in the surviving entity’s permanent record because they must be disclosed to other states as part of the annual registration renewal process. For companies whose core business is the provision of fundraising services, a temporary injunction from providing its services in even one state can cause significant harm, so it is critical for such companies to account for fundraising regulatory compliance as part of their business transition.

This article was originally published in the June 12, 2012 eWire newsletter of the Association of Fundraising Professionals, and can be downloaded at http://www.afpnet.org/ResourceCenter/content.cfm?ItemNumber=11780.

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