Avoiding Fundraising Pitfalls: Keeping Your Nonprofit Compliant When Working with Paid Fundraising Professionals

8 min

These days, nonprofits seem to have a heightened awareness of how to leverage social media presence for fundraising, novel technologies are being created to help make this work more seamless and effective, and there are increasingly creative ways to reach out to the public and ask for support of nonprofits' missions. To launch these types of fundraising campaigns, as well as many of the old fundraising classics, nonprofit organizations often will hire individuals or companies to assist with their fundraising efforts by either helping to plan or manage a nonprofit's solicitation campaign, or actively soliciting contributions directly on behalf of the organization. Both of these fundraising activities not only pose regulatory hurdles for the fundraiser, but also have compliance implications for the nonprofit organization that hired them.

Advances in technology and tactics notwithstanding, this article offers a reminder of the basic issues your organization should consider when hiring a fundraising professional. Consideration of these details will help your nonprofit avoid common pitfalls associated with paid fundraising efforts and provide you with a high-level overview of the steps needed for your organization to comply with state fundraising regulations. Keep in mind that much like the broader charitable solicitation registration context, the reach of these fundraising regulations is not limited to section 501(c)(3) charitable organizations; section 501(c)(4) advocacy groups and other nonprofit organizations not otherwise exempt from registering under states' charitable solicitation laws also need to consider these rules when hiring fundraising professionals.

Fundraiser 101: Is This Person a Professional Fundraiser or Fundraising Consultant?

Under state law, there are several classes of regulated groups that are paid to help nonprofits with their fundraising efforts. Although the definitions of these terms vary between states, as do the terms themselves, these persons typically fall into two categories: "professional fundraisers" and "fundraising consultants."1 Understanding the difference between these two categories will help a nonprofit organization determine the applicable state regulatory requirements.

Generally, a professional fundraiser is a person who is compensated in some way for soliciting contributions on behalf of a nonprofit organization, and/or who has custody and control of contributions solicited. Professional fundraisers often contact individuals, companies, or other organizations and request a contribution to the nonprofit organization. For example, the professional fundraiser may ask a company to consider sponsoring the nonprofit, or ask an individual to buy tickets to an event hosted by the organization.

A fundraising consultant, on the other hand, is generally a person who is compensated to manage, advise, plan, produce, or design a solicitation, but who neither directly solicits nor holds charitable funds on behalf of the nonprofit organization. These individuals act behind the scenes to help the organization with its own fundraising efforts, whether by developing materials for the organization to send out directly, giving the organization insights into how it can increase the efficacy of solicitation efforts, or through other services.

Whether a person is classified as a professional fundraiser or fundraising consultant turns broadly on (i) the nature of the services they provide to the nonprofit organization and (ii) whether the person is being compensated or receiving other consideration for doing so.2

What to Consider When Hiring a Professional Fundraiser or Fundraising Consultant

About 40 states regulate professional fundraisers and fundraising consultants. This is in line with the underlying principle behind states' charitable solicitation laws: states regulate fundraising professionals in order to protect the public and nonprofits. To this end, there are several areas that nonprofit organizations should consider when retaining a professional fundraiser or fundraising consultant to avoid running afoul of states' solicitation laws.

State-Required Contract Provisions

Most state statutes require certain provisions to be included in contracts with professional fundraisers and fundraising consultants. These requirements may include the charity's right to cancel the contract, the minimum percentage of gross contributions to be received by the charity, the fee provided to the fundraiser or fundraising consultant, and the signature of two authorized representatives of the charity.

Because the contract requirements vary from state to state, a nonprofit organization should have a clear understanding of where a fundraiser's activities will be performed. This way, a nonprofit organization will be able to review the fundraising contract to ensure that the relevant state-required provisions have been included.

Furthermore, many states require fundraising contracts to be filed with the state, by the fundraiser (with their registration forms), the nonprofit (with its charitable solicitation registration or renewal), or both. Once filed, these contracts become a part of the public record and may be subject to regulatory or media scrutiny. Some states have also started to post fundraising contracts online to their charity databases, which makes public access to these contracts even easier. Because contracts will become part of the public record, the parties to fundraising agreements should be careful not to include any personal or organizational identifying information, such as social security numbers and bank account numbers.

Registration and Reporting by the Professional Fundraiser or Fundraising Consultant

Professional fundraisers and fundraising consultants must often register prior to performing any regulated work under their agreement. Moreover, either type of professional may be asked to secure a bond in connection with this registration—this requirement is more typically associated with professional fundraisers' registrations, but is not strictly limited to that group.

Just as it is important to confirm the geographic scope of a fundraiser's activities for contracting purposes, knowing the scope is also critical for understanding which states' registration and reporting requirements apply. Be sure to ask which state(s) the fundraiser will be soliciting contributions in, or where the solicitation materials or strategy created by the fundraising consultant are intended to go. Once the organization has clarified the states that the fundraising professional will operate in, the organization should confirm that the fundraising professional is registered or is planning to register, if required, in each of those jurisdictions.

A professional fundraiser or fundraising consultant that solicits contributions or operates without the prerequisite registration, bond, and/or contract in place would likely be in violation of state law wherever the fundraiser operates. In addition, the nonprofit organization could face liability if it works with an unregistered fundraiser. Thus it is important that the organization do its due diligence when it decides to retain a professional fundraiser or fundraising consultant and have a clear understanding about where the fundraiser will register.

Reporting of the Fundraiser Relationship by the Nonprofit

Nonprofit organizations are often responsible for disclosing relationships with professional fundraisers and fundraising consultants on their periodic state charitable solicitation filings. These filings may require the organization to disclose the name, contact information, registration number, or a summary of the fee or compensation arrangement, or even provide a copy of the contract for each professional fundraiser or fundraising consultant that the nonprofit hired to perform services in that state. With this information, state regulators have the ability to confirm that the organization is working with a registered fundraiser and that other compliance obligations have been met.

Nonprofit organizations may also be required to disclose professional fundraisers and fundraising consultants on their Form 990, Annual Returns. Specifically, Schedule G calls for supplemental information on professional fundraising services, fundraising events, and gaming. If the nonprofit organization reported more than $15,000 in expenses for "professional fundraising services" on the Form 990 and entered into any agreements for these services, then the organization must report the ten highest-paid fundraisers who were each paid at least $5,000.3

Disclosures to Be Made by Professional Fundraisers

Just as nonprofit organizations are required to include state solicitation disclosures on active and passive solicitations, professional fundraisers must also comply with state-specific disclosure obligations when soliciting contributions on behalf of a nonprofit organization. The timing and substance of the required disclosures will vary, depending on whether the solicitation is made orally or in writing. Ultimately, the disclosures aim to provide the individual or entity who is being solicited with sufficient information to understand the identity of the professional fundraiser and the fact that the fundraiser has been compensated to make the solicitation.

Commission-Based Payments

Nonprofit organizations often ask whether they can pay the professional fundraiser on a commission basis rather than a fixed fee, in order to hedge against the possibility that the professional fundraiser will not be successful. While commission-based payments are not illegal per se, the Internal Revenue Service has, at least historically, viewed commission-based payments with concern, and the nonprofit fundraising industry, including some associations of professional fundraisers, either do not recommend such arrangements or directly prohibit these payment structures for their fundraiser members.4 From a tax perspective, these payment arrangements could lead to private benefit issues and related penalties. From a policy standpoint, avoiding these arrangements helps mitigate the risk that professional fundraisers would prioritize their personal interests over those of the organizations they have been contracted to help and avoids incentivizing solicitation tactics that could harm potential donors. If your organization is interested in paying on a commission basis, one compromise approach would be to set a cap on the amount of commission-based compensation that the fundraiser would be eligible to receive under the agreement.

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While it is advisable to consider these issues when first contracting with the fundraiser, it is not too late to begin complying with these obligations if your organization learns that it has retained an unregistered fundraiser or has failed to comply with its contract or disclosure requirements until now. Our attorneys are happy to assist with any fundraising questions or issues that you may have and to help you navigate the regulatory hurdles that impact your organization as it engages in paid fundraising efforts.

  1. State laws may also refer to professional fundraisers as "solicitors," "paid solicitors," or "commercial fundraisers for charitable purposes," for example. Likewise, fundraising consultants may also be termed "fundraising counsel." For simplicity, we use the terms "professional fundraiser" and "fundraising consultant" in this article.
  2. Keep in mind that although officers, trustees, or employees of a nonprofit organization may have responsibilities that include direct fundraising or fundraising strategy, and they may receive compensation from the nonprofit, generally these individuals would not be subject to the regulatory requirements imposed on professional fundraisers and fundraising consultants. They are almost always specifically excluded from the definitions of those terms.
  3. The definition of "professional fundraising services" in the instructions for the Form 990 covers both professional fundraiser- and fundraising consultant-type activities.
  4. See, e.g., Standard 21, Code of Ethical Standards, ASSOC. OF FUNDRAISING PROF'LS (1964), https://afpglobal.org/ethics/code-ethics.