Charitable Solicitation: Do Threatened Penalties and Sanctions Ever Actually Reach the Non-Profit Organizations Misappropriating Funds?

Emily A. Boyd

Senior Editor

Loyola University Chicago School of Law, JD 2019

In order to operate, non-profit organizations rely heavily on the ability to fundraise. The government leaves the regulation of that “charitable solicitation” to individual states, with most requiring formal registration to engage in such activities. With firms vying for organizations’ business to hire consultants to obtain funds, and ethics and oversight firms highlighting the careful approaches that must be utilized to appropriately raise funds for non-profit operations, charitable organizations may find themselves confused and threatened in the space between needing charitable solicitation to survive and maintaining regulatory compliance to engage in the activity itself. While the threats of penalties and sanctions are large and imposing, it appears that few organizations ever face their true weight. Charitable organizations must, of course, comply with each state of registration, but is the fear instilled equal to the reality of the consequences of non-compliance?

Non-Profit fundraising, known formally as charitable solicitation, is regulated at the state level. Most states have “laws regulating the solicitation of funds for charitable purposes, and those statutes generally require organizations to register with a state agency before soliciting the state’s residents for contributions.” Further still, state “laws may impose additional requirements on fundraising activity involving paid solicitors and fundraising consulting.” The threat of monetary penalties, loss of tax-exempt status, and even personal liability indicates that charitable solicitation should be closely monitored and internally audited for compliance with the laws of each in the states an organization operates. Even so much as hiring a consultant to facilitate fundraising triggers the Association of Fundraising Professionals (AFP)  to warn non-profit organizations to tread carefully as it relates to compensating consultantsfor their fundraising efforts. While compliance with these regulations is absolutely necessary, and an understanding of various state requirements for registration is essential to maintaining an organization’s ability to fund its operations, the actual enforcement and imposition of penalties and sanctions seems less than stringently enforced.

Harbor Compliance, a consulting firm for non-profit organizations throughout the United States, stresses that fundraising is a “major driving force” for non-profit success. They warn, however, that Many “nonprofit leaders believe that simply being recognized as a 501(c)(3) nonprofit means their charities are authorized to fundraise in any state. That is not the case. Charitable solicitation is highly regulated and failure to comply with the rules and requirements of state authorities can lead to steep financial penalties, personal liability exposure of the officers and directors, and a loss of credibility with donors.” Their Fundraising Compliance White Paperadvises that state “charity regulators exercise oversight over charitable solicitation activities in various ways, including through investigation, enforcing state laws by court order, and/or criminal prosecution. The risks and consequences of failing to register in a state where a nonprofit is engaging in solicitation activity include:”

  • Monetary Penalties
  • Investigations and Enforcement Actions
  • Loss of State Tax Exemption
  • Personal Liability for Corporate Officers
  • Negative Press
  • Poor Reflection of Board Members
  • Missed Grant and Donation Opportunities
  • Revocation of Right to Solicit
  • Triggering of a Financial Audit

Given those threats, one would expect that misappropriated funds gained through charitable solicitation would prove disastrous for an organization. In December 2018, U.S. Pain Foundationfaced just that. The 501(c)(3), non-profit organization working to advocate for, support, and educate on pain conditions was reported to have lost its solicitation registrationamid extensive delays in tax filings, “financial irregularities,” and an alleged misappropriation of $1.9 Million by the former CEO.Butthe predictions of AFP and Harbor Compliance seem not to have materialized [yet] given that U.S. Pain Foundation’s solicitation registration was renewed on January 4, 2019 and the company had its sights set on a prosperous future, stating:

“U.S. Pain fills a vital gap in support for the pain community and refuses to let the actions of one individual impede its efforts to educate, connect, empower, and advocate for those living with chronic pain…The organization is poised for a 2019 that will include even more services and events and looks forward to continuing to offer help and hope to individuals with pain for years to come.”

No salient professional would advise non-profit organizations to risk their livelihood through non-compliance with regulations that, if fully enforced, could crumble an organization. As we wait to see the final outcome for U.S. Pain Foundation, and the interplay of these requirements amid the implementation of new tax regulations, compliance professionals are best advised to learn and know the regulations in every state applicable to the organizations they advise and to wait, without suspicion, to see how far enforcement of these regulations ever truly go.