Crowd source funding, or crowdfunding, is an innovative method for businesses and organizations to raise small amounts of money from a large base of individuals. Crowdfunding is particularly helpful for nonprofit organizations, as it allows them to carry out their programmatic activities without being heavily reliant on donations and grants from wealthy individuals, institutions, and the government, while at the same time engaging members of the community. But nonprofit entrepreneurs are well advised to pay close attention to nonprofit crowdfunding laws of different states.
Most states require nonprofit organizations soliciting donations from individuals within that state to register with the state, usually with the state’s attorney general or secretary of state. The results of failure to register with a state can range from the loss of ability to solicit in the state to personal civil penalties—and possibly even criminal fines—imposed against the organization’s leadership. This vigilance is particularly important, as crowdfunding has become easier for nonprofits in the wake of the success of websites such as Indiegogo and Kickstarter.
Do I Need to Register to Comply with Nonprofit Crowdfunding Laws?
If your organization solicits donations in a state, you are most likely required to register in that state. Solicitation is defined differently in different states, however, so the question of whether crowdfunding implicates a state’s registration requirements depends on the state in question. While states have not formally taken a position on the specific question of crowdfunding, internet solicitation laws can provide guidance or you can contact a corporate legal expert.
States with the most stringent nonprofit crowdfunding laws define solicitation broadly to include the existence of a website which can be viewed by individuals in the state and which allows the individual to make a donation on the website. Notable states that have adopted such nonprofit crowdfunding laws are New York, Illinois, and Florida. In these states, simply requesting donations on a crowdfunding platform, without sending direct solicitations to individuals in the state, would likely require registration.
Most states, however, have adopted the more lax “Charleston Principles,” which require registration if the organization directly solicits donations from residents of a state by email or phone, or if it receives a substantial amount of donations or ongoing donations from individuals within a specific state. Notable states using this approach include California and Massachusetts. In these states, simply posting a crowdfunding campaign, without any direct solicitations to individuals in the state, would not be enough to require registration, but you would likely have to register if you email a link to your crowdfunding website to individuals in the state or ask for donations directly in the email.
Certain nonprofits may be exempt from the nonprofit crowdfunding laws in some states. The most common exemptions are for religious, health care, and educational organizations. In some states, a nonprofit may determine its exemption, while in other states a nonprofit has to request for and receive an exemption decree.
Do I need to Register in the State in Which I am Incorporated to Comply with Nonprofit Crowdfunding Laws?
Typically, a nonprofit is registered to solicit donations in a state in which it files its initial formative documents, so no additional registration is needed for crowdfunding efforts.
For example, in California, a nonprofit will file its Articles of Incorporation with the Secretary of State’s Office and a Form CT-1 with the Attorney General’s Office, which permit it to solicit funds in California.
However, if your organization has not filed Form CT-1 with the Attorney General’s Office, or its equivalent in another state, you must do so to be able to continue soliciting donations there.
How Do I Register to Comply with Nonprofit Crowdfunding Laws?
Registration will be handled directly via each state’s attorney general office or secretary of state. One notable exception is Florida, where the Department of Agriculture and Consumer Services directs registration of nonprofits. To register with a state, you may be required to gather and submit documents such as: articles or certificate of incorporation, bylaws, its IRS tax-exempt determination letter, Forms 990, professional fundraiser contracts, financial statements, and a list of board members.
If you anticipate having to register in multiple states, the Uniform Registration Statement (URS) provides an alternative to registration with each state’s charitable organization authority individually, but the URS is not accepted in all states. Accepted by 37 jurisdictions, the URS form allows you to consolidate repetitive information between various states’ registration forms. To see which states accept the URS and which states require registration but do not accept the URS, visit this link. There are some differences among states, however, such as additional supplemental forms and filing fees.
DISCLAIMER: The information in this article is provided for informational purposes only and should not be construed or relied upon as legal advice. This article may constitute attorney advertising under applicable state laws.