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6 January 20237 minute read

How California and other states will regulate charitable partnerships in 2023 and beyond

As we enter the new year, many businesses will offer promotions to benefit charities – for example, by providing a percentage of their sales to a charitable cause. Such promotions should include an arrangement with the benefitting charity. Typically, these relationships are referred to as commercial co-ventures, charitable sales promotions or cause marketing initiatives, and, while they are beneficial for both parties, they are also highly regulated by state laws and regulators.

As of this year, California’s Charitable Fundraising Platform law imposes specific obligations on charitable fundraising platforms.  With this, businesses seeking to conduct charitable promotions or providing internet fundraising platforms are encouraged to understand the legal requirements to ensure that they do not face any backlash from state regulatory agencies or otherwise.

Both charities and commercial businesses have important legal considerations for conducting charitable promotions. In this alert, we look at the requirements for commercial businesses.

State regulation of commercial co-ventures

While the specific requirements vary from state to state, states generally require the following:

  1. Contracts. Several states require that the parties enter into written contracts to document the terms of the agreement. These written contracts must include certain statutorily required terms such as the geographic scope of the promotion, the date or dates that the promotion will run, and how the name of the charity will be used during the promotion. Additionally, some of these provisions may require the contracts be signed by specific members of both the business and the charity.

  2. Registration. States including Alaska, California, Hawaii, Illinois, Massachusetts, Mississippi and South Carolina require certain types of commercial co-venture participants to register, submit filings and/or provide bonds for these promotions. Some states have annual registration obligations while any promotion is ongoing, while others require registration for each individual promotion. Each state has their own specific eligibility qualifications, requirements and forms which much be completed at the proper time to ensure that participants will not be fined.

  3. Disclosure. Several states require participants to provide disclosures in advertising and promotional materials to ensure that they are clearly communicating the terms of the promotion – for example, the amount or percent per unit of goods or services purchased or used that will benefit the charitable organization, and any maximum charitable donation, among others.

  4. Post-promotion compliance. After the end of the promotion, several states require the commercial entity to provide an accounting to the charitable organization of the sales and the amounts donated, require that the business push out payments to the non-profit on a regular, state-determined basis (eg, at least every 90 days), file summary reports with the state, and/or retain records related to the promotion for a set number of years.

Participants who do not comply with these regulations may be subject to several penalties including fines, injunctive actions and even imprisonment in certain jurisdictions. These are summary examples of the states’ various requirements for participants in commercial co-ventures, which companies are encouraged to carefully consider given the small differences and nuances that exist in each state’s laws.

Another important consideration when offering charitable promotions and fundraising is compliance with advertising laws.  Businesses must be careful to clearly and conspicuously disclose all important details and limitations when advertising that a purchase or other action will benefit a charity. If charitable marketing is confusing, false or misleading, the business also risks claims by consumers, competitors and regulators regarding false or misleading advertising, or unfair business practices. 

2023 update to California law

On January 1, 2023, certain sections of California’s new Charitable Fundraising Platform law became operative, according to a notice the California Department of Justice (DOJ) published on December 23, 2022. Principally, California made these changes to reflect the popularity of online charitable fundraising platforms, which largely existed in a legal gray area with lack of clarity regarding compliance requirements. The Attorney General is in the process of promulgating regulations to fully implement the new law, and those additional regulations are expected to be effective January 1, 2024. 

Charitable fundraising platforms are defined as “any person, corporation, unincorporated association or other legal entity that uses the Internet to provide an Internet website, service, or other platform to persons in this state, and performs, permits, or otherwise enables acts of solicitation to occur.”  The new law also covers other types of fundraising platforms and organizations, but we focus on the commercial charitable fundraising platform business in this article.

Per the DOJ notice, key current requirements for charitable fundraising platforms under the new law include the following:

  1. Good standing required. A charitable fundraising platform may only raise and distribute funds from donations for charitable organizations in “good standing,” which means that an organization’s tax-exempt status has not been revoked by the Internal Revenue Service or the Franchise Tax Board, and it is not prohibited from soliciting or operating in the state by the Attorney General. To determine good standing, a charitable fundraising platform may rely on electronic lists periodically published by the Internal Revenue Service, the California Franchise Tax Board and the California Attorney General’s Registry of Charitable Trusts.

  2. Separate account required.  Donations cannot be diverted or misused and must be maintained in a separate account from other funds belonging to the charitable fundraising platform.

  3. Consumer disclosures required. Charitable fundraising platforms must conspicuously disclose several specific details to consumers – for example, the maximum time for a donation to be delivered to the charity (the anticipated regulations are expected to limit the time for delivering donations), the party who will initially receive the donation, any fees which will be deducted from the donation and, in many cases, a statement as to the tax deductibility of the donation.

  4. Consent from charity may be required.  While consent from recipient charities is required in many cases, if the platform is simply allowing third parties to raise funds for various charities on the platform, written consents from all such charities are not feasible or required so long as certain conditions are met.  One such condition is that the platform must provide a clear and conspicuous disclosure, before a user can complete donation or select a recipient organization, that the charitable organization has not provided consent or permission for the solicitation and has not reviewed or approved the content generated by persons engaging in peer-to-peer charitable fundraising.

Among the changes to the California law anticipated to arise from the regulations, once finalized and implemented, will be a registration requirement for charitable fundraising platforms as well as annual renewal requirements by January 15 of each year.  It is also expected the regulations will further detail requirements for charitable fundraising platforms regarding written agreements with charities, holding and distributing donations (including time limits), reporting to charities, and other communications and data sharing.

Businesses considering charitable promotions or fundraising platform activities are encouraged to consult with an attorney who is up to date on all of these requirements to avoid unexpected snags, and to support effective fundraising efforts where both the businesses and consumers can feel good about their impacts on charity.

Please contact the authors of this alert with any questions.