May 16, 2024

Navigating the Risks: The Impacts of Noncompliance in Nonprofit Solicitation

By Rory Burke, Senior Manager, Assurance Services

Navigating the Risks: The Impacts of Noncompliance in Nonprofit Solicitation Nonprofit & Social Sector

Fundraising and solicitation of donations are an integral source of revenue for nonprofit organizations to support their missions. However, with this practice comes a complex web of legal obligations that vary from state to state, specifically, the “Solicitation of Charitable Funds Act.”

The “Solicitation of Charitable Funds Act” typically refers to state-level legislation in the United States that governs the solicitation and collection of charitable contributions. The name of the act and the specific legislation varies from state to state, but the laws generally have common elements designed to protect the public from fraudulent practices and to ensure transparency in the fundraising activities of charitable organizations.

Nonprofits must register with the appropriate state authorities, usually the state’s Attorney General or Secretary of State before they begin fundraising activities. Compliance becomes more complicated for organizations that solicit funds across state lines, including online solicitations. Nonprofits must be aware of the requirements in each state where it is actively fundraising, as what is permissible in one state may be prohibited in another. Noncompliance with these regulations can have severe implications for an organization.

Other requirements required by most states in these types of acts are as follows:

  • Registration Requirement: Nonprofit organizations and professional fundraisers are required to register with a state authority before soliciting donations from the public.
  • Financial Reporting: Submission of annual financial reports that detail fundraising activities, including the amounts raised and how the funds were used.
  • Disclosure Requirements: Disclosures about the organization’s identity, purpose, and how the donations will be used.
  • Prohibitions and Restrictions: Restrictions on how and when solicitation can occur.
  • Contracts with Professional Fundraisers: Written contracts outlining the terms and conditions of the fundraising activities may be required for professional fundraisers.

Impacts of Noncompliance

Failing to adhere to solicitation regulations can have several negative consequences for a nonprofit organization, including:

  • Financial Penalties: States may impose fines and penalties for noncompliance, which can be significant and unnecessary costs that could affect the organization’s financial health.
  • Legal Consequences: in certain instances, noncompliance can potentially lead to civil or criminal legal action against the nonprofit or its directors.
  • Reputational Damage: News of noncompliance can harm an organization’s reputation, resulting in a loss of donor confidence and a decline in contributions.
  • Operational Disruptions: Time spent on noncompliance issues can divert resources from the nonprofit’s core mission and lead to operational inefficiencies or deficiencies.
  • Loss of Tax-Exempt Status: In severe cases, noncompliance can result in the revocation of a nonprofit’s tax-exempt status, which can be catastrophic for its continued operations.

What Nonprofit organizations should do before soliciting donations in a state:

  • Research state charitable solicitation laws and understand disclosure requirements, including soliciting donations online.
  • Consider hiring a professional fundraiser, attorney, or consultant for advice to navigate complex multi-state solicitation requirements.
  • Register with the appropriate state authorities.
  • Conduct regular audits of fundraising activities and practices.
  • Train staff and volunteers on state-specific solicitation laws.
  • Implement robust record-keeping systems to track donations and compliance efforts.
  • Be transparent with donors and the public about how funds are raised and used.
  • File required financial reports timely and keep track of registration renewal deadlines to ensure timely renewal.

By following these steps, nonprofit organizations can help ensure they comply with the various state laws governing charitable solicitations and avoid potential fines or legal issues. To get the specifics of the “Solicitation of Charitable Funds Act” for a particular state or to understand how it may apply to a specific situation, one should refer to the text of the legislation itself or seek legal counsel for advice. Additionally, organizations must ensure they are aware of and comply with any federal regulations concerning charitable solicitation, such as those enforced by the Internal Revenue Service (IRS).

Transparency in solicitation practices is not just a legal requirement but also a matter of maintaining public trust. Potential donors are increasingly vigilant about where their contributions go, and organizations must provide clear information about their programs, finances, and fundraising practices. Noncompliance with solicitation laws can pose a grave threat to the sustainability and trustworthiness of a nonprofit organization. It is essential for such organizations to understand and adhere to the legal requirements of each state where they operate. By being proactive and prioritizing compliance, nonprofits can not only avoid the severe impacts of noncompliance but also strengthen their relationships with donors and the communities they serve.