What is a whistleblower policy?

A whistleblower policy is an organizational policy that encourages workers to report suspected illegal or improper activity within the organization while protecting workers from retaliation for making such reports.

Is our nonprofit required to have a whistleblower policy?

New York nonprofits that have at least twenty employees and annual revenues of $1 million or more are required to have a whistleblower policy under Section 715-b of the New York Not-for-Profit Corporation Law.

Keep in mind that whistleblowers have significant protections under other federal, state, and local laws, even if those laws do not explicitly require adoption of a whistleblower policy. For example, Section 1107 of the American Competitiveness and Corporate Accountability Act of 2002 (more commonly known as the Sarbanes-Oxley Act) makes it a crime to intentionally retaliate against any individual, “including interference with the[ir] lawful employment or livelihood,”  for providing law enforcement with truthful information relating to the commission or possible commission of any federal offense. Many states and municipalities have other laws that protect whistleblowers from retaliation.

A whistleblower policy helps to educate management and workers about these legal protections. It is a helpful tool in promoting a culture of lawfulness and integrity. By explicitly stating management’s commitment to protect whistleblowers from retaliation and laying out a process for reporting illegal or improper activity, a whistleblower policy encourages workers to communicate their concerns to the employer in good faith without fear of reprisal. Adopting a whistleblower policy is a recommended best practice for nonprofit employers.

What are the key changes to New York’s whistleblower protections?

Effective January 26, 2022, New York amended Section 740 of the New York Labor Law, which protects workers who engage in whistleblowing activity from retaliation by their employers.¹ The amendments expanded the classes of protected workers, the types of protected whistleblower actions, the types of employment-related actions that are considered illegal retaliation, the time frame for individuals to file a retaliation claim, and the potential penalties for employers who do retaliate against whistleblowers. Below is a summary of some of the key changes.

1. Protected Individuals. The prior law appeared to protect current employees only. The amended law protects current employees, former employees, and independent contractors from retaliation for whistleblowing activity.

2. Protected Actions. Under the prior law, whistleblower protections only applied to disclosures or threats of disclosure that involved an actual violation of a law, rule, or regulation and presented a substantial danger to the public health or safety or constituted health care fraud. There were many types of illegal activities that did not fit within this standard, leaving employees who reported such activities at risk of retaliation. The prior law also stipulated that whistleblower protections did not apply if an employee disclosed an illegal activity, policy, or practice to a public body without first notifying the employer and giving the employer a reasonable opportunity to correct the problem.

The amended law changes these standards. An employer may not retaliate against a protected individual for doing any of the following:

• Disclosing or threatening to disclose to a supervisor or public body an activity, policy, or practice of the employer that the individual “reasonably believes” violates a law, rule, or regulation or poses a substantial and specific danger to the public health or safety;
• Providing information to, or testifying before, any public body conducting an investigation into any such activity, policy, or practice by the employer; or
• Objecting to, or refusing to participate in any such activity, policy, or practice.
• Protected individuals also need only make a “good faith effort” to report the activity, policy, or practice to the employer prior to notifying a public body. No employer notification is required at all when:
  • There is an imminent and serious danger to the public health or safety;
  • The whistleblower reasonably believes that reporting to the supervisor would result in a destruction of evidence or other concealment of the activity, policy, or practice;
  • The activity, policy, or practice could reasonably be expected to lead to endangering the welfare of a minor;
  • The whistleblower reasonably believes that reporting to the supervisor would result in physical harm to the whistleblower or any other person; or
  • The whistleblower reasonably believes that the supervisor is already aware of the activity, policy, or practice and will not correct it. 

3. Prohibited Retaliation. The amended law expands the definition of unlawful retaliation to mean any adverse action taken by an employer or the employer’s agent “to discharge, threaten, penalize, or in any other manner discriminate against” a protected individual who engages in protected whistleblowing activity. This includes:

• Actual or threatened adverse employment actions against a protected individual in the terms and conditions of employment, including but not limited to discharge, suspension, or demotion;
• Actions or threats to take actions that would adversely impact a former employee’s current or future employment; or
• Contacting or threatening to contact United States immigration authorities or otherwise reporting or threatening to report a protected individual’s suspected citizenship or immigration status or the suspected citizenship or immigration status of a protected individual’s family or household member. 

4. Increased Filing Time, Right to Jury Trial, and Penalties for Retaliation Claims. The statute of limitations for filing a retaliation claim under Section 740 is increased from one year to two years. Parties are entitled to a jury trial. A successful retaliation claim against an employer may result in any of the following penalties:

• An injunction against the employer;
• Reinstatement of the whistleblower to their same position or an equivalent position, or front pay in lieu of reinstatement;
• Reinstatement of full fringe benefits and seniority rights;
• Compensation for lost wages, benefits, and other remuneration;
• Payment by the employer of reasonable costs, disbursements, and attorneys’ fees;
• A civil penalty for the employer of up to $10,000; and/or
• Payment of punitive damages by the employer, if the violation was willful, malicious, or wanton. 

5. Employer Notice Requirement. Employers are required to inform protected individuals of their protections, rights, and obligations under the law by posting a notice “conspicuously in easily accessible and well-lighted places customarily frequented by employees and applicants for employment.” The New York State Department of Labor has issued a model notice that employers can post. Employers must also provide an electronic copy of the whistleblower notice to protected individuals via email and/or posting on their website.

1 In 2022, New York also amended Section 741 of the Labor Law, which applies to whistleblower complaints against health care employers.

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The California Department of Justice (“DOJ”) published a notice on December 23^rd stating that certain key provisions of the new law governing charitable fundraising platforms, known as California Assembly Bill 488, go into effect on January 1, 2023 (as is stated in the law), and noting that the registration and other requirements in the new law are delayed until January 1, 2024 while the California Attorney General finalizes the regulations necessary to administer the new law.

According to the December 23^rd notice, the key provisions of Assembly Bill 488 that become operative on January 1, 2023 are:

1. Soliciting or Receiving Funds Only for Charities in Good Standing

A charitable fundraising platform or platform charity may only facilitate solicitations or the receipt of donations for the benefit of charitable organizations in good standing.  “Good standing” means the platform charity or other recipient charity’s tax-exempt status has not been revoked by the Internal Revenue Service or the California Franchise Tax Board, or is not prohibited from soliciting or operating in California by the Attorney General. The notice includes links to the Attorney General’s list of charities that may not operate or solicit in California, as well as to the Internal Revenue Service’s list.

2. Segregation of Funds

Charitable fundraising platforms and platform charities must hold charitable funds raised in a separate account or accounts from other funds belonging to the platform or platform charity.

3. Required Disclosures

The new law requires charitable fundraising platforms to clearly disclose certain information, including: (1) a statement about who will receive the donations; (2) if applicable, a statement that a recipient charity may not receive donations or grants of recommended donations, with an explanation identifying the circumstances under which a recipient charity may not receive the funds; (3) the length of time it takes to send the donation or a grant of the recommended donation to a recipient charity; (4) the fees or other amounts (if any) deducted from or added to the donation or a grant of the recommended donation; and (5) whether the donation is tax-deductible or not.

The new law permits some, but not all, of these disclosures to be provided through a conspicuous hyperlink, so long as the disclosure is conspicuous when the hyperlink is selected.  The proposed regulations include additional details relating to these disclosure requirements.

4. Solicitations for Non-Consenting Charities

The law generally requires that a charitable fundraising platform or platform charity obtain the written consent of any recipient charity before using its name in a solicitation, but provides that such written consent is not needed if all of the following circumstances are met: (1) the platform only includes certain information about the recipient charities on the platform, as set forth in the new law or future regulations (e.g., the recipient charities’ name, address, telephone number, internet website, EIN, registration number with the California AG’s office, NTEE Code, and publicly available information from the recipient charity’s tax or information returns filed with the Internal Revenue Service or the California AG’s office); (2) the platform conspicuously discloses before persons can complete a donation that the recipient charity has not provided consent or permission for the solicitation, and has not reviewed or approved the content generated by individuals engaging in peer-to-peer charitable fundraising, when applicable; (3) the platform promptly removes any recipient charity from its list or any solicitation regarding the recipient charity upon written request by the recipient charity; and (4) the platform or platform charity does not require that a recipient charity consent to any solicitations as a condition for accepting a donation or grant of a recommended donation.

The notice states that the registration and other requirements in California Government Code section 12599.9 are being delayed to January 2024, given the pending nature of the proposed regulations.  The notice further states that “[p]roposed regulations do not carry the force of law.”

Status of the Proposed Regulations

Under Assembly Bill 488, the Attorney General is authorized to establish rules and regulations necessary to administer the new law. This includes regulations governing: (1) the additional acts of solicitation that meet the definition of a charitable fundraising platform or platform charity, as needed, in order to address changes in technology and charitable fundraising through platforms; (2) the content of the registration and annual reporting forms and other information to be provided to the Attorney General’s office; (3) the requirements for any written agreement between a consenting recipient charitable organization and a charitable fundraising platform or platform charity; and (4) the requirements for holding donations or distributing donations and grants of recommended donations (including the maximum length of time it takes to send the donated funds, taking into account various considerations; and the circumstances under which donors or persons may be contacted to provide alternate recipient charitable organizations or notified when the donated funds are sent).

On May 27, 2022, the California DOJ published a Notice of Proposed Rulemaking for Charitable Fundraising Platforms and Platform Charities regulations, including draft regulations to implement the law, and draft registration forms to implement the new registration requirement applicable to charitable fundraising platforms.  The California DOJ invited comments to be submitted by July 12^th, and held a public hearing on July 13^th.

On November 21, 2022, the California DOJ published a Notice of Modifications related to the Department of Justice Charitable Fundraising Platforms and Platform Charities proposed rulemaking initially noticed on May 27, 2022.  Comments to the Notice of Modifications were accepted through December 7^th. Final regulations have not yet been issued.

For a summary of the key provisions of California Assembly Bill 488, and additional context leading up to its enactment, read this earlier blog post.

The post Key Provisions of California Assembly Bill 488 Regulating Charitable Fundraising Platforms Take Effect January 1, 2023 first appeared on Staging Perlman and Perlman.

While “pay-for-play” is still prohibited by the NCAA,² these new rules have opened the door for college athletes to explore a new world of sponsorships, endorsements and compensation.  For example, college athletes can now earn money for commercials, appearances, speeches, social media posts, hosting sports camps, giving lessons, writing books and more — all without violating NCAA rules.

“NIL collectives” have emerged as the chief brokers of these opportunities.  This article discusses what NIL collectives are, their legal forms of organization, and the regulatory framework that governs them.

How are NIL Collectives Structured?
NIL collectives are entities that are structurally independent of a school, yet fund NIL opportunities for the school’s student-athletes. They are typically founded by well-known alumni and supporters of the school.  Collectives generate and pool revenue raised through contributions from a wide variety of sources, including boosters, businesses, fans and more.  They use these funds to create opportunities for student-athletes to leverage their NIL in exchange for compensation.

While a number of NIL collectives have been formed as for-profit entities,³ in a growing number of cases, they have been formed as nonprofits. Numerous nonprofit collectives have, in turn, sought and obtained 501(c)(3) public charity status from the IRS, which potentially allows donors to receive a tax-deduction for their contribution to the collective.⁴

Tax-exempt collectives typically use student-athletes as independent contractors to help further their charitable mission.  For example, some provide in-kind contributions of a student-athlete’s services to other charities, including speaking, appearances and other public relations services that help expand the charities’ reach and visibility in their communities.  The student-athlete is paid by the tax-exempt collective to provide the services, while the other charities receive these services on a pro bono basis.

Special Rules Governing Tax-Exempt NIL Collectives
Collectives that obtain tax-exemption should be mindful of special rules that apply to tax-exempt entities.  These rules are enforced not only by the IRS, but also by State Attorneys General, whose responsibility is to ensure that charitable funds are used for charitable purposes. These rules require that tax-exempt cooperatives operate differently from the typical NIL collective.

For example, NIL collectives commonly facilitate endorsement, merchandising and marketing deals that allow for-profit companies to promote their products and services using a student-athlete’s NIL, which helps these for-profit companies increase business and revenues.  Many NIL collectives have the flexibility to promote such commercial interests due to their structure as for-profit (and therefore, taxable) entities.

However, facilitating commercial deals does not constitute a permissible purpose for a charitable, tax-exempt organization.  Therefore, if a tax-exempt NIL collective engages in such activity, revenues from this activity could be taxed by the IRS as unrelated business income – i.e., income from a trade or business, regularly carried on, that is not substantially related to the collective’s charitable mission.

Also, if the IRS finds that these commercial activities constitute a primary or substantial non-exempt purpose of the organization, the IRS could revoke its tax-exempt status.⁵ State Attorneys General could bring enforcement actions for similar reasons.  Therefore, if a tax-exempt collective facilitates marketing or similar NIL arrangements, it should generally avoid arrangements promoting goods and services of for-profit companies.  However, it could use the NIL of student-athletes to help promote and amplify the charitable missions of nonprofits serving communities.⁶

NIL collectives are also becoming well-known for offering lucrative compensation to student-athletes in connection with promotional deals.  For many collectives, their status as for-profit entities give them the flexibility to do so.

But, in the context of a tax-exempt collective, these payments must be reviewed carefully to ensure they do not constitute “excessive compensation” for federal tax law purposes.  NIL collectives should therefore carefully structure athletes’ compensation in accordance with IRS rules to ensure it does not exceed fair market value.  Failure to do so could put the collective at risk of losing its tax-exemption, and lead to potential enforcement actions by State Attorneys General.

However, it should be noted that even if such compensation is determined to be reasonable, a tax-exempt NIL collective could nevertheless lose its exemption if the IRS determines that its primary or substantial purpose is to pay or recruit student-athletes.  For this reason, it’s important that tax-exempt collectives work closely with legal counsel to ensure they have well-constructed charitable programs.

Given the risks outlined above, an NIL collective seeking tax-exempt status should carefully consider whether any of its time and resources will be spent on pursuing commercial (non-exempt) activities.  Collectives considering such activities should consult with counsel to reconsider its structural options, and discuss whether it would be advisable to create a for-profit subsidiary to house any commercial activity.

NCAA Interim Rules
Aside from understanding the regulatory framework discussed above, NIL collectives (no matter their legal form) should have an understanding of the NCAA rules which, as of the time of this writing, consist of interim rules adopted in July 2021.  These interim rules will remain in effect until federal legislation creates a national standard (which is what the NCAA is calling for), or until new NCAA rules are adopted.  While the purpose of the interim rules is to suspend NCAA restrictions on athletes’ profiting off their NIL, the rules maintain certain guardrails to prevent “pay-for-play” and similar arrangements.  Subject to state law, the following is prohibited under the interim rules:

• NIL opportunities cannot be used as a recruiting tool for prospective student athletes.  Such an action is considered an “improper recruiting inducement.”  Therefore, NIL collectives should refrain from making offers of NIL opportunities contingent upon a student-athlete’s enrollment at a particular school.
• As discussed above, NIL arrangements that constitute “pay-for-play” are also prohibited.   This rule prohibits any kind of arrangement that constitutes compensation in exchange for a student-athlete’s participation or performance in college athletics.
• NIL agreements should be specific about the NIL work being performed by the athlete in exchange for compensation, and such compensation should be paid only for work performed.  Such compensation must be determined through an independent analysis, based upon the facts of each specific case and the value each athlete offers to an NIL arrangement.
• The NCAA interim rules prohibit compensation from any school in exchange for the use of a student athlete’s name, image or likeness.  In addition, schools may not direct how student-athletes use NIL compensation.  (For example, schools may not require a student-athlete to use NIL compensation for financial aid.) Athletic department staff are not allowed to represent student-athletes in marketing their athletic ability or reputation.  They also may not communicate with a recruit on behalf of an NIL collective.  In addition, such staff may not facilitate a meeting between an NIL collective and a student-athlete, including, for example, by sharing a recruiting list or watch list.

State Laws and School Policies
As noted above, the NCAA’s interim rules are subject to state law, which varies depending on the state.⁷  Therefore, NIL collectives should take steps to ensure compliance under any applicable state law, including any state law that applies to the collective, the school where the student-athlete is enrolled, as well as the state where the NIL activity will take place.

The collective should also look at any specific NIL policies established by the college.

Both state laws and school policies may include reporting requirements that NIL collectives should be aware of, and some state laws prohibit athletes from entering into a contract that conflicts with the student-athlete’s team contract.

Understanding the regulatory framework governing NIL collectives will help avoid missteps that can lead to punitive actions by the IRS, NCAA or State Attorneys General, or scrutiny from Congress, which has also taken an interest in these entities.  As the NIL’s regulatory environment continues to evolve, it is incumbent on both collectives and student-athletes to take affirmative steps, including consulting with legal counsel, to ensure compliance.

1 This dramatic shift by the NCAA also came on the heels of its loss before the U.S. Supreme Court in NCAA v. Alston 141 S. Ct. 2141 (2021). Though NIL compensation was not the subject of this case, Justice Kavanaugh wrote a concurring opinion which suggested that the NCAA’s NIL compensation rules could be in violation of antitrust laws, and stated that “the NCAA is not above the law.”  The NCAA’s change also follows action by numerous states that, since 2019, had led the way in creating NIL rights for student athletes.

2 As discussed later in this article, “pay-for-play” refers to any kind of arrangement that constitutes compensation in exchange for a student-athlete’s participation or performance in college athletics.

3 Other legal forms taken by NIL collectives have included formation as for-profit limited liability companies (“LLCs”), which provides more flexibility in a number of ways.  For example, unlike tax-exempt nonprofits, for-profit LLCs are not subject to a cap on what’s considered reasonable compensation.  They may therefore offer student-athletes NIL work at any compensation structure.  For-profit LLCs are also not subject to limitations on the type of activities they can facilitate.  Therefore, unlike tax-exempt entities, for-profit LLCs may facilitate NIL arrangements for student-athletes such as merchandising or endorsement deals which promote commercial activities.  NIL collectives should consult with counsel to discuss the various pros and cons of these options.

4 On September 29, 2022, Senators John Thune (R-S.D.) and Ben Cardin (D-Md.) introduced the Athlete Opportunity and Taxpayer Integrity Act which, if passed, would “prohibit individuals and organizations from using the charitable tax deduction for specific contributions that compensate college or incoming college athletes for the use of their [NIL].”   They argue that “[s]uch activity is inconsistent with the intended purpose of the charitable tax deduction, and it forces taxpayers to subsidize the potential recruitment of – or payment to – college athletes based on their NIL status.”  As of the time of this writing, this federal legislation is the latest of more than a handful of NIL proposals introduced, but not yet passed, in Congress.  Congress’ appetite for eventually passing NIL legislation is unclear, though these proposals do indicate that NIL collectives are facing increased scrutiny from Congress.

5 Regs. Sec. 1.501(c)(3)-1(e)(1) and Sec. 1.501(c) (3)-1(c)(1).

6 One example of this approach is discussed in the previous section – i.e.,  tax-exempt collectives that provide in-kind contributions of a student-athlete’s services to other charities to help them promote their charitable missions.

7 As discussed above, the NCAA is lobbying Congress for legislation that would create a national standard, and thereby pre-empt differing state laws.

The post Seeking Tax-Exemption for a Name, Image and Likeness Collective (NIL)? What to Know. first appeared on Staging Perlman and Perlman.

Current Trends and Issues in Charitable Regulation

Regulators
Conference panels presented by various state regulators covered ongoing trends and issues. Public trust of the charitable sector was a topic of general concern, based on surveys indicating a decrease in the trust in the nonprofit sector.  The regulators noted that they play an important role in enhancing trust by providing meaningful oversight of the sector.

Noteworthy topics included the importance of Board governance and oversight, particularly in monitoring the organization’s finances. The panelists noted a rise in for-profit entities soliciting in-kind disaster relief, particularly those that do not have a nonprofit partner. This trend has been largely observed in connection with the rise of natural disasters and the war in Ukraine.   Regulators are also troubled by the balloon and bust of opioid-crisis relief organizations. This is threatening given the importance these organizations play in their local communities. Such failures have been attributed to their overly rapid growth.

Several state regulators noted an increase in mergers and acquisitions filings of hospitals. Approval of these transactions generally turns on the question of whether the transaction is in the best interest of the community. As for charity care, regulators noted that nonprofit hospitals have a duty to provide subsidized care to patients in need, something they say they have seen too little of.

A notable increase of fraud, committed in the name of charities or directed at charities, is also of concern. It is reported that there has been a rise of bad actors using the name and information of known and respected charities to commit fraud.  One typical scheme is the impersonation of regulators claiming that registration fees are past due. Charities that receive such calls are admonished to use best efforts to confirm the identity of caller.

NASCO puts out an annual report detailing trends on state regulation and enforcement.

Nonprofit Sector and Practitioner Panelists
In the afternoon, other stakeholders in the charitable sector spoke on the trends they have observed during the past year. Jan Masaoka, CEO of the California Association of Nonprofits, discussed the Association’s concerns with donor-advised funds (DAFs) arising from the delay in time between donor benefit (i.e., the donor’s tax-deduction) and the donation reaching its target community. Erin Bradrick, Principal of NEO Law Group, spoke on the growth of fiscal sponsorships and the lack of sector education and oversight that exists. She observed that Decentralized Autonomous Organizations (DAOs) have the theoretical ability to seek 501(c)(3) status without having a governing body (the core distinguishing characteristic of DAOs).  Ms. Bradrick also noted an upward trend in the politicization of issues directly tied to key nonprofit areas, which have created a tension between state and federal law., naming the recent cannabis and abortion access laws as prime examples.

NFT and Cryptocurrency
Sara Hall, Chief Legal Officer and General Counsel of ALSAC, Andrea Kramer, Partner of McDermott, Will & Emory, Ruth Madrigal, Principal of the Exempt Organizations Group at KPMG, and Beth Short, Director of Outreach and Education, Charitable Law Section of the Ohio Attorney General’s Office, discussed cryptocurrencies, NFTs, and other emerging forms of donation.  The panel noted that these forms are not suitable for all organizations, as there is significant risk and several complex issues to consider in accepting donations of cryptocurrency.

It was noted that organizations that decide to accept NFT or cryptocurrency donations should ensure they have a detailed donation acceptance policy and procedure in place.  The policy should include how the organization will protect the security of the crypto wallets through which they accept the donation, how to appraise the cryptocurrency or NFT, and whether to use an intermediary service like a Donor Advised Fund (DAF). Including the development department on any decision on acceptance of these donations is critical.

Now and Next in Charitable Giving
In her keynote address, Dr. Una Osili, Associate Dean for Research and International Programs at the Indiana University Lilly Family School of Philanthropy, made a deep dive into the data to identify donor trends. Among those Dr. Osili highlighted are that giving is at an all-time high, that individuals remain the largest group of donors, and that fewer households are donating. She also pointed to a downturn in religious donations, historically the largest generator of donations, and an upturn in donations to racial identity and environmental groups. Donors are moving from a trend of making passive donations to getting more involved in the causes they support through active engagement and education.

Dr. Osili ended by sharing some of her key findings, notably that giving is the great equalizer. Adjusted for gross income, charitable giving is the same across all groups. Technology, specifically crowdfunding websites and social media, has become one of the strongest vehicles for attracting donations, making up 40% of all giving. Finally, charities should start thinking of the value of donating one’s testimonial and network of connection, not just time and gifts. For more information, visit the Indiana University website at Generosity for Life.

Establishing a Healthy Board
Dr. Gerri King, President of Human Dynamics Associates, taught board mediation and communication techniques. Her talk centered on the five states of group development: Forming, Storming, Norming, Performing and Adjourning. Dr. King explained that at each stage, there are unique challenges affecting Board dynamics, and that any change to the make-up of the Board can be a setback.

Dr. King emphasized the importance of creating a no blame, no gossip environment among the team and the organization, noting that although it sounds simple, it can be intensely difficult to achieve. The benefits, as she noted, are indispensable., creating higher accountability, cohesion, trust and efficiency.

Update on the California Charitable Fundraising Platform Law
Brian Armstrong, Deputy Attorney General of the California Attorney General’s Office, discussed Assembly Bill 488, which is set to take effect on January 1, 2023. This is the first law in the U.S. specifically designed to regulate online charitable fundraising platforms, including through a new registration and reporting requirement, specific required public disclosures, and other provisions designed to safeguard charitable donations received through these platforms.

The proposed regulation is currently in the “review of public comments” stage. Armstrong indicated that a second, 15-day period for public comments will open up again once the review is complete, but did not specify when that would be.  During the follow-up Q&A, our team learned that the registration portion of the law is not likely to go into effect on January 1, 2023. Still pending would be final regulations and the development of the new registration forms. However, the AG’s office intends to begin enforcement of those portions of the law which are not dependent upon the passage of final regulations (e.g., the disclosure requirements).

Charitable fundraising platforms and platform charities should take time to carefully review their current platform disclosures (including disclosures made throughout the user/donor flow, as well as the platform Terms of Use) and ensure they are in compliance with these new requirements.  For more details on the legislation, please read California Enacts New Law to Regulate Charitable Fundraising Platforms by firm partner Karen Wu.

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Navigating the types of activities that tax-exempt nonprofits are allowed to engage in (and how much) without jeopardizing their tax-exempt status can be tricky.  Many charities engage in types of activities that are important to the organization’s mission, donors, and people they serve.  Two activities that charities may use to influence public policy include “advocacy” and “lobbying.”  While advocacy and lobbying are terms that are sometimes used synonymously, the two are distinct in important ways, most notably because federal tax law limits the amount of lobbying that charities may engage in.

How Does Advocacy Differ from Lobbying?

Advocacy can take many forms that do not constitute lobbying, including: leading, directing, conducting, and publishing research; and disseminating educational information.  Charities may engage in many different types of advocacy, and so long as that activity does not constitute lobbying, 501(c)(3) organizations are generally not limited in the amount of time or money they can spend on advocacy.

Lobbying, on the other hand, is subject to specific, restrictive rules.  Charities may engage in only an insubstantial amount of lobbying, and must take care not to jeopardize their tax-exempt status or run afoul of other lobbying restrictions.  Lobbying is any attempt to influence legislation, which can include acts, bills, resolutions, or ballot initiatives by Congress, state legislatures, local councils, or similar governing bodies.  An organization whose employees contact or urge others to contact members or employees of one of these bodies for the purpose of influencing (by encouraging them to adopt, reject, support, or oppose) legislation, is engaging in lobbying.

State and Local Lobbying Registration, Reporting, and Disclosure Requirements

In addition to following the strict federal tax rules governing the type of lobbying and amount of lobbying an organization can engage in,  charities should also be aware of any state and local requirements to register (including registration of certain employees as lobbyists, or registration of the organization itself, which retains and pays lobbyists) and to report lobbying expenditures and activities on a regular basis.¹ Federal and state lobbying rules can be confusing and complicated, and often depend on several factors, including: (1) whether the organization employs an in-house lobbyist or an outside lobbyist; (2) whether any of the organization’s employees are lobbying; (3) the total amount of expenses the organization spends on lobbying activities; and (4) the timing of any contacts or communications made with federal or state officials.

After the organization makes a determination about which federal and state registration requirements apply to its lobbying activities, the organization and its lobbyists must file regular reports (often quarterly or semi-annually) until the registration terminates (the method by which registrations are terminated also varies from state to state), or otherwise expires.

If an organization decides to engage in lobbying activities, it is critical to ensure that executive staff are aware of the applicable requirements for registration, reporting, and disclosure.  Failure to comply can result in fines, censure from the regulatory agency, and possible negative press exposure for the organization.

1 While this article is focused on the lobbying rules as they pertain to 501(c)(3) public charities, it is worth noting that 501(c)(4) organizations, which may engage in unlimited lobbying in furtherance of their tax-exempt missions, are more likely to trigger lobbying registration and disclosure requirements.

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Any responsible business must stay within the law when conducting revenue-generating activities. For nonprofits, this means taking steps to ensure that its fundraising activities are compliant with all applicable laws and regulations. This is prudent from a business perspective, especially because charitable fundraising is the activity that most state charity regulatory agencies across the country focus their oversight efforts.

Although many of the fundraising compliance requirements arise from state charitable solicitation laws, federal tax law compliance must also be addressed, given its role in determining the tax-deductibility of donations and to ensure that nonprofits aren’t inadvertently treating revenues from commercial business activities as charitable sponsorships, and thereby improperly avoiding payment of unrelated business income tax (UBIT).

What should an organization do to assess its overall fundraising compliance? Following are ten steps nonprofit organizations can take to ensure their fundraising activities are legally compliant.

1. Review your organization’s state charitable registration compliance.

• Generally, if a charitable organization is engaged in the solicitation of funds for charitable purposes, there are state rules that require registration, reporting and disclosures by the charitable organization or someone fundraising on its behalf. Forty-four (44) states and the District of Columbia have laws that regulate fundraising activities, with the specific rules and requirements varying from state to state. Most charitable organizations must register in about thirty-eight (38) states.  Click here for a chart of states that require charitable organizations to register.
• Review and confirm that all fundraising contracts that need to be filed as part of the organization’s registration file are being submitted in the correct states. This includes contracts with professional fundraisers, fundraising counsels, and commercial co-venturers.

2. Ensure that the organization’s fundraisers are properly registered where applicable.

• About 42 states require professional fundraisers to register, post a surety bond, file contracts with their nonprofit clients, and file campaign financial reports.
• About 28 states require fundraising counsels to register and file contracts.
• Up to 8 states require commercial co-venturers to register and/or file a copy of any commercial co-venture contract and a campaign report per contract.
• Click here for a chart of states where professional fundraisers, fundraising counsels and commercial co-venturers are required to register.

3. Review your fundraising contracts to ensure they include any state-required language as well as other general protections (e.g., termination; indemnification; trademark license and approval rights).

• Click here for more information about professional fundraiser contract provisions.
• Click here for more information about fundraising counsel contract provisions.
• Click here for more information about commercial co-venturer contract provisions.

4. Review corporate sponsorship arrangements for qualification as a qualified sponsorship payment.

• Review the organization’s corporate sponsorship cultivation strategy to ensure that it takes into account potential UBIT implications.

5. Review other fundraising contract templates (e.g., corporate sponsorship agreements, pledge agreements, royalty agreements, etc.) to ensure that they take into account any legal considerations, including donor benefits and gift restrictions.

• Ensure that pledge agreements clearly outline the expectations of the parties with respect to the gift, including the scope of any gift restrictions, and whether the agreement is intended to be legally binding (including on successors and assigns or the donor’s estate).
• Ensure that passive licensing or royalty agreements are properly structured so that the income generated is not subject to UBIT.

6. Review compliance with state solicitation disclosures (in mailings, online, emails, etc.).

• Click here for a summary of state charitable solicitation disclosures for charities and professional fundraisers, and model disclosure statements.
• Click here for more information about advertising disclosure requirements in commercial co-venture promotions.

7. For 501(c)(3) organizations in particular, review donation tax receipts for compliance with federal tax law requirements.

• Make sure the organization complies with the special rules governing quid pro quo donations
• Be aware of special exceptions whereby donations given in exchange for low-cost token items or certain recurring membership benefits may be disregarded.
• Tax-exempt organizations other than 501(c)(3) organizations should ensure that solicitations and donation receipts clearly state that donations are not tax-deductible.

8. Review direct mail solicitation practices to ensure that the communications are truthful, accurate, and not misleading.

• Consider the best practices established by the Better Business Bureau Wise Giving Alliance with respect to accuracy of solicitation materials, specifically Standards 15 and 19.

9. Ensure that special solicitation campaigns are reviewed for compliance (matching gift campaigns, sweepstakes, raffles, etc.).

• Click here for more information regarding legal considerations in matching gift campaigns.
• Note that state and federal laws govern the conduct of sweepstakes, and require specific disclosures to be made. Sweepstakes may also be subject to possible state registration and bonding requirements (although there may be an exclusion for charities if the sweepstakes is not undertaken in connection with the advertising, promotion or sale of consumer products or services).
• Note that charitable raffles are strictly regulated at the state and local level, and are difficult to conduct in multiple jurisdictions. Review the state and local laws of the jurisdiction where any raffle will be undertaken.

10. Ensure that solicitations associated to gifts-in-kind are communicated in a clear and transparent manner, and that the corresponding receipt, valuation and disposition of the gifts-in-kind are properly handled.

• Consider the best practices established by the Accord Network in connection with the receipt and distribution of gifts-in-kind.

A fundraising legal audit is a core component of a comprehensive legal audit for nonprofits, which reviews an organization’s compliance with legal requirements and best practices applicable to tax-exempt organizations across various operational areas. Stay tuned for another blog post coming soon, which will discuss the key components of a comprehensive legal audit!

The post Ten Key Components of a Nonprofit Fundraising Legal Audit first appeared on Staging Perlman and Perlman.

Hawaii, which requires companies to file a written consent form at least ten (10) days before a charitable sales promotion begins, has recently begun to enforce its statutory late filing fee of $20 per day (up to $1,000 maximum penalty) for failure to timely file a written consent.  In order for the written consent to be timely filed, it must be “fully executed” by both parties through an electronic approval process. A delay in obtaining either party’s electronic consent can mean late fees will begin to accrue.

While not new, companies should be also be aware that South Carolina regularly imposes administrative fines of $10 per day for late filing of campaign reports, up to a maximum fine of $2,000 per report. Illinois, which requires companies to register under their charitable trust law to conduct charitable sales promotions, has been enforcing its $100 late filing fee for campaign reports.

While California 1 has the statutory right to impose a late fee of $25/month for registration statements or campaign reports, we have not observed this late fee being regularly imposed.

To avoid incurring late fees and penalties, companies should ensure that they are monitoring their filing deadlines and planning ahead in order to avoid getting hit with significant and unanticipated financial penalties.

For a general overview of the laws regulating commercial co-ventures and charitable sales promotions, please read Do Good And Sell It Well: An Overview Of Cause Marketing Regulation on Engage for Good’s website.

1 Registration in California is not required if certain contract and related compliance requirements are met, including transfers of payments every 90 days. However, note that some companies engaging in online campaigns may need to register as a charitable fundraising platform in California beginning on January 1, 2023. For more information, see the post California Enacts New Law to Regulate Charitable Fundraising Platforms.

The post What are the Penalties for Making a Late Filing of CCV Registrations and Campaign Reports? first appeared on Staging Perlman and Perlman.

While most nonprofits are required to register in many states to conduct charitable fundraising, religious organizations are generally exempt from the registration requirement. It’s important to be aware, however, that the scope of the states’ religious exemption varies. Therefore, religious organizations should carefully review each state’s statutory exemption to determine where they are exempt, and where they are not exempt and therefore may need to register to solicit contributions.

Overview of Charitable Solicitation Registration & Religious Exemptions

Charitable fundraising activities are primarily regulated at the state level, through the offices of the Attorney General, Departments of State, Consumer Protection and the like. Charitable solicitation regulations were established to protect the public from fraudulent fundraising and assist prospective donors in making well-informed giving decisions. Each state’s statutory framework typically requires charities to register with the state, disclose information about their finances and fundraisers, and provide certain oral or written disclosures to their prospective donors. Currently, forty-one (41) states and the District of Columbia require most organizations to register before soliciting charitable contributions in their respective jurisdictions.

Most states exempt or exclude religious organizations from their charitable solicitation registration and reporting requirements. Keep in mind, however, that each state defines the scope of its exemption for religious organizations differently. As a result, some religious organizations may be required to comply with a state’s registration requirements while others may not. Several states require that religious organizations make a written request to confirm that they are exempt from the state’s registration requirements, while others consider it a legal determination to be made by the organization, and explicitly advise that they do not provide legal advice or make a formal determination as to whether or not an organization is exempt.

For some states, the religious exemption provisions are broadly constructed, and exempt any “duly organized religious corporation, religious institution or religious society.” Other exemption provisions are more narrowly drafted, exempting only those religious organizations that are not required to file the Form 990 with the IRS, which primarily includes churches¹, their integrated auxiliaries², and ecclesiastical or denominational organizations. Churches and other non-990 filers are exempt from registering in all states unless they use the services of a professional fundraiser.

As a general matter, religious organizations that are required to file the Form 990 with the IRS will be exempt in some, but not all, states. Many religious organizations that are required to file Form 990 describe their mission as both religious and charitable as together these constitute an expression of their religious faith and values. Direct services for human needs may include the provision of food, shelter, education, and medical support to vulnerable populations. Oftentimes, they incorporate prayer and religious instruction in their programmatic work, and will require their employees to agree to an organizational statement of faith.

It is worth noting that the laws of a few states continue to include a provision in their religious exemption law which the Supreme Court has declared unconstitutional. These unenforceable provisions limit the scope of the religious exemption to only those religious organizations that are primarily supported by contributions from their members or congregation.³

Impact of Religious Exemptions on Fundraising Professionals

Even when a religious organization is exempt from registering in a state to solicit contributions, in most states, when a fundraising professional provides their services to the organization, the fundraiser must be registered with the state. In a few states, the religious organization’s exemption also extends to the fundraiser’s contract filing and reporting obligations, thereby relieving them of any such filing requirements.

Professional fundraisers (also known as commercial fundraisers or paid solicitors) that directly solicit funds on behalf of charitable organizations are required to register in up to forty-four (44) states. In addition, they must post surety bonds in each state, file copies of their fundraising contracts, and file annual financial reports relating to each fundraising campaign conducted in the state. There are ten (10) states that extend the religious organization’s exemption to their professional fundraiser’s contract filing and reporting obligations.

Fundraising counsels (also known as fundraising consultants) that help plan, manage, advise, or produce and design solicitation campaigns, but do not directly solicit or have custody or control of contributions, are also required to register in twenty-seven (27) states, file contracts, and in a few states, post bonds. There are seven (7) states that extend the religious organization’s exemption to their fundraising counsel’s contract filing and reporting obligations.

Fundraising professionals need to understand the scope of a religious organization’s registration or exemption status in those states in which they will be providing fundraising services to the organization. Not only must they comply with their corresponding filing obligations, but they must also ensure compliance with collateral obligations, such as solicitation disclosures. Thus, it would be prudent for religious organizations to ensure that they have appropriately assessed their exemptions, have documentation to support the exemption in each applicable state, be registered to solicit where required, and communicate with their fundraising professionals to ensure alignment on the impact of their status as a religious organization on both parties’ filing obligations.

Does a religious organization need to register if it solicits on the internet?

In addition to ascertaining whether a religious organization is exempt from registration based on its religious status, a separate analysis should be undertaken to determine if the organization’s solicitation activity creates a jurisdictional nexus that would trigger a state’s registration requirement. For example, a website with a donate button that is accessible to residents in all states does not necessarily create a sufficient jurisdictional nexus. In many cases, it makes sense to undertake a jurisdictional analysis based on the organization’s targeted and/or online fundraising activities before delving into the religious exemption analysis as there may only be a few states where the organization has a jurisdictional nexus based on its fundraising activities. In such cases, the organization may simply review the applicability of the religious exemption in those relevant states.

For more information on how to assess an organization’s registration requirements based on its online fundraising activities, please read this article.

What are the practical steps for religious organizations to determine their registration requirements?

Assess whether registration is necessary or not based on a jurisdictional analysis, taking into account both traditional forms of fundraising (e.g., direct mail, telemarketing, events) and online fundraising activities.
Review with your legal counsel whether your organization qualifies for the religious exemption in the relevant states.
Apply for religious exemptions where applicable and appropriate.
Follow the exemption application procedures in the states that have such procedures in place.
For states that take a “self-determination” approach, and will not formally confirm an organization’s qualification for the state’s religious exemption, it may nevertheless be prudent to submit a letter, putting the states on notice of the organization’s position that it is statutorily exempt from registering as a religious organization.
Register in all applicable states where: (1) a registration requirement exists; (2) the organization is soliciting (and the state has jurisdiction over their solicitation activity); and (3) the organization does not qualify for the religious exemption. Note that charitable solicitation registration must be renewed annually in each applicable state.

The post When are Religious Organizations Exempt from Charitable Registration? first appeared on Staging Perlman and Perlman.

The bill follows New York’s passage in 2019 of another diversity related law which calls for a study of the number of women serving on certain corporate boards.

The bill’s sponsors say ethnic diversity is critical to a nonprofit board’s ability to understand its community’s needs.  They say when the ethnic makeup of a nonprofit board mirrors that of the community it serves, the board is more able to relate to the shared experiences of its community, and is therefore better equipped to identify problems and feasible solutions.   The bill makes an analogy to ethnically diverse police departments, stating that as data bears out that diverse police forces provide better service to diverse communities, the same may be true for nonprofit boards.

On January 5, 2022, the bill was referred to the Senate’s Corporations, Authorities and Commissions Committee.  It’s unclear whether this bill will gain traction during this legislative session.  Nevertheless, the call for more diversity on boards is trending not only in New York, but in California, Maryland, Illinois and other states where board diversity requirements have either been enacted or proposed.  Given the growing expectation for greater inclusion of underrepresented minorities on boards, nonprofits should consider familiarizing themselves with best practices for board diversity.

The post New York State Legislature Considers Bills Requiring Diversity for Nonprofit Boards first appeared on Staging Perlman and Perlman.

Data breaches are the leading threat in today’s digital world, with a new cyberattack occurring approximately every 39 seconds. Non-profit organizations are increasingly being targeted by cybercriminals, not only because of the wealth of data they possess, but because they simply do not take the same precautions nor employ the same resources as their for-profit counterparts.  In fact, small-to-medium-sized organizations are actually more likely to be targeted by hackers for that very reason.

The financial cost of managing a data breach is well documented.  A recent study estimated the average cost of a breech in 2021 at 4.24 million dollars, a 10% rise from 2019.  Although less tangible, the potential loss of trust of the nonprofit’s donors, volunteers and the community can be significant. Such a loss is not only difficult to restore, it can also affect fundraising activities, volunteer engagement, and partnerships with other organizations for years to come.

For organizations seeking to decrease their cybersecurity vulnerabilities, a good first step is to obtain a comprehensive understanding of the current risk environment. For example, what kind of data does your organization collect, store, share and transmit?  Where and how is the data being stored, and who has access to the data?  How does the organization transmit data? (Data transmission is often one of the most significant vulnerabilities; any time data is sent from one location to another, there is a risk of interception.) During the COVID-19 pandemic, the risk of insecure data transfer has increased as more and more individuals have begun accessing critical data from personal mobile devices or using personal digital storage solutions.  Assessing these weak points can be achieved through a data-privacy audit whereby information gathered is then used to strengthen the organization’s cyber-readiness.

Additionally, organizations should consider implementing the following measures:

Implement (Or Update) Organization-Wide Cybersecurity Policies
The first step in ensuring the security of an organization’s data is to have consistent, documented cybersecurity policies in place for all employees to follow.

Provide Ongoing Cybersecurity Training
Next, all individuals within the organization who have access to secure data should receive annual cybersecurity training.

Focus Your Cybersecurity Efforts/Revaluate Third-Party Vendors
Focus on security controls that would be the most effective based on your specific needs and resources. And as many breaches occur from the actions/omissions of third-party vendors who store an organizations data, review the legal terms of all such agreements to make sure there are appropriate terms and conditions to protect your organization (read Are You Protected? Five Points to Include in Every Technology Agreement).

Create A Data Retention and Deletion Policy
Most organizations collect more data than they need, and hold the data longer than necessary or practical.  The more data your organization stores, the greater the liability if a breach occurs.  It is imperative that organizations adopt a policy that dictates the types of data to be stored, and when/how that data is deleted when no longer relevant.

Prepare for the Unexpected
Every organization needs a plan for what to do in case of a data breach. An incident response can help organizations plan to comply with applicable laws and regulations, and launch a rapid and coordinated response that will mitigate the damaging consequences of a data breach.  On a side note, the recently enacted NY SHIELD Act requires organizations that collect information from NY residents to have both a Data Retention and Deletion policy as well as an Incident Response plan in place, among other requirements (read The SHIELD Act – A New York State of Mind … and Privacy).

The post Cyber Readiness – If it Ain’t Broke, You May Still Want to Fix It… first appeared on Staging Perlman and Perlman.