In recent years, charitable sales promotions have become an increasingly popular way for consumer products companies to support charitable causes while, at the same time, fostering commercial goodwill. Companies that may not have traditionally engaged in such promotions frequently are surprised to learn of the broad regulatory scheme which applies to solicitations that raise funds, directly or indirectly, for charitable organizations.
Currently, over 40 states and the District of Columbia have charitable solicitation statutes. These laws cover a wide range of "solicitation" activities - including charitable sales promotions - and can subject violators to significant fines and even criminal penalties. Many require companies making charitable solicitations to include certain terms in the contract with the charitable organization; to make written disclosures in advertising; to file documents with state regulators before and after the solicitation; to consent to jurisdiction in states where the solicitation is made; and to retain fiscal and solicitation-related records. Thus, any company planning to run a charitable sales promotion should, sufficiently in advance of any solicitation, evaluate the extent to which the promotion will implicate charitable solicitation laws and take steps to ensure compliance.
Generally, a "charitable sales promotion" is an advertising or sales campaign which represents that the purchase or use of goods, services or any other thing of value will benefit a charitable organization or purpose. A "charitable organization" generally means a tax-exempt organization described in Section 501(c)(3) of the Internal Revenue Code, or one that purports to be established for a charitable ( e.g. , benevolent, educational, eleemosynary, public health, humane, patriotic, philanthropic, religious) purpose or employs a charitable appeal as the basis of a solicitation. Charitable sales promotions can be structured in countless ways and may, for example, take the form of an in-store promotion, a direct mail coupon program or a solicitation made on packaging or on a web site. For example, a sponsoring company might advertise that it will donate a certain portion of the proceeds of a purchase to a charitable organization, that it will donate "X" dollars to a charitable organization for every "Y" items purchased, or that for every item purchased and minimum amount contributed by the consumer the sponsor will make a donation to a charitable organization. These types of promotions and the solicitations made in connection with them are regulated, not only by general laws and regulations applicable to advertising, but under charitable solicitation laws.
Charitable solicitation statutes impose significant registration obligations on charitable organizations as well as on "fundraising counsel" and "professional fund raisers/solicitors." The term fundraising counsel often covers those who, "for compensation, manage, advise or consult" with respect to a charitable solicitation. Professional fund raisers/solicitors often are defined as those who, "for pay," "for financial consideration" or "for compensation" solicit, or employ someone to solicit, contributions for a charitable organization. Fundraising counsel and professional fund raisers/solicitors typically are required to register annually and post a bond in states where solicitations will be made, make disclosures with solicitations, have a written contract with the charitable organization and file it with the state, maintain financial records and report to the charitable organization and the state. Thus, an important threshold consideration for regulators is whether the person making the charitable solicitation is paid or "compensated" in exchange for his or her efforts.
Approximately twenty-two charitable solicitation statutes regulate charitable solicitations made by "commercial coventurers." 1 Generally, a commercial coventurer is a person who "for profit or other consideration is regularly and primarily engaged in commerce other than in connection with soliciting for a charitable organization" and who conducts a charitable sales promotion. In most of these states, 2 commercial coventurers are not required to register annually or to post a bond, which is welcome news for those conducting charitable sales promotions.
However, it is important for sponsoring companies to consider that some states without a specific definition for "commercial coventurer" have attempted to regulate charitable sales promotions in any event - by interpreting other statutory definitions such as "professional fund raiser" very broadly. For example, a "professional fund raiser" is defined in some states as one who solicits for compensation "or other consideration." Regulators in some of these states ( e.g. , Rhode Island, North Dakota, West Virginia) have informally advised that sales promotions necessarily result in a certain amount of goodwill being afforded to the sponsoring company. They noted that consumers often have a propensity to make a purchase if it will benefit a charitable organization, resulting in increased sales and goodwill to the sponsoring company. These benefits, the regulators contend, can constitute "other consideration" and render the sponsoring company a "professional fund raiser/solicitor" subject to registration, bonding and other requirements. Other states with "other consideration" as part of their definitions of professional fund raiser/solicitor have exceptions for when the sponsoring company benefits in goodwill only ( e.g. , Michigan, Illinois) or where the charity, not the commercial coventurer, supervises and controls the collection and distribution of solicited funds ( e.g. , Alabama, Massachusetts).
Generally speaking, sponsoring companies often face the following kinds of statutory obligations: (1) enter into a written contract containing mandatory terms with the charitable organization; (2) register annually and post a bond in some states; (3) file the contract with the charitable organization prior to the solicitation; (4) file other solicitation-related documents with the state; (5) make written disclosures in advertising and promotional materials; and (6) retain records of solicitation activities. A general discussion of these obligations follows.
Written Contract with Charitable Organization . It is prudent to begin negotiations with the charitable organization sufficiently in advance of the charitable solicitation to ensure compliance with state laws. The contract must be in writing and signed by the parties (Massachusetts and Virginia require signatures of two officers of the charitable organization), prior to the solicitation. In some states, the contract must be executed a certain number of days before the charitable solicitation ( e.g. , at least 15 days in Alabama). Not only should the contract clearly define the parties' respective obligations respecting the sales promotion (e.g., management and control of funds, promotional activities, fulfillment, warranty, indemnification terms), but many statutes require the contract to contain mandatory terms. Representative examples of such terms include:
- Identification of charitable purpose and goods/services to be offered to the public;
- Geographic area where, and starting and final date when, offering will be made;
- Permission to use the charitable organization's name and manner in which it will be used;
- Representation to be made to the public as to the actual or estimated dollar amount, or percent per unit of goods/services purchased or used, that will benefit the charitable organization;
- Estimated number of units of goods or services to be sold or used;
- Percentage of gross proceeds collected to be paid to the charitable organization;
- Date by which, and the manner in which, the benefit will be conferred on the charitable organization;
- If applicable, guaranteed minimum percentage of the gross receipts from the fundraising to be utilized exclusively for the stated charitable purpose of the solicitation;
- If applicable, maximum dollar amount that will benefit the charitable organization; and
- If applicable, a provision for a final accounting on a per unit basis to be given by the commercial coventurer to the charitable organization and the date by which it will be made.
Additional mandatory terms may be required by the charitable solicitation statutes in, for example, Georgia, New Hampshire, New York, Rhode Island, South Carolina and Washington. Some examples of these terms follow:
Georgia and New Hampshire
- Statement that contract is subject to the requirements of Georgia Code, Sec. 43-17 and New Hampshire Code Sec. 7:28-d.
New York
- Statement of charitable organization's right to cancel;
- Period during which the contract may be canceled (i.e., within 15 days after charity registers with the New York Attorney General);
- Address to which the notice of cancellation is to be sent;
- Address of the New York Attorney General to which a duplicate of the notice of cancellation is to be sent; and
- Statement of the financial arrangement including, if applicable, a statement of the percentage of the total funds collected to be paid to a professional fundraiser or any other person for purposes other than the exclusive benefit of the charitable organization.
Rhode Island
- Provision that within 5 days of receipt all funds received from the solicitation shall be deposited in a bank account in the sole name of the charitable organization or shall be delivered to the charitable organization for deposit.
South Carolina
- Legal name, address and registration number, if any, of commercial coventurer and of charitable organization; and
- Name and residence address of each person directing or supervising the solicitation activities.
Washington
- Name, address and telephone number of the commercial coventurer and the charitable organization.
Registration and Bonding . Sponsoring companies considered to be "commercial coventurers" may be required to register with state authorities in a handful of states ( e.g. , Alabama, Maine, Massachusetts, Washington) before making a charitable solicitation. As noted above, depending on the structure of the promotion, such companies may also be treated as "professional fund raisers/solicitors" and be required to register in additional states ( e.g. , Rhode Island, North Dakota, West Virginia).
Registration must be done sufficiently in advance to allow time for approval by the state before a promotion begins. Typically, there is a registration fee (usually less than $250). The sponsoring company may also be required to post a bond ( e.g. , up to $25,000) before commencing the solicitation. Many states make their registration and bonding forms available online. In most instances, states requiring registration will request a description of the promotion, the start and end dates, a copy of the contract with the charitable organization, evidence of other charitable activities the commercial coventurer is conducting in the state, and corporate information such as lists of officers and a copy of the company's articles of incorporation.
Contract Filing Requirements . Several states require commercial coventurers to file with the state a copy of the written contract with the charitable organization relating to the promotion. 3 Some require the contract to be filed within a certain time period before the charitable solicitation is made ( e.g. , at least 15 days before the solicitation in Alabama and at least 10 days before in South Carolina), or a within certain number of days after the contract is signed ( e.g. , within 10 days after execution in Alabama and Massachusetts).
Additional Filing Obligations . Charitable solicitation statutes in Alabama and Maine require commercial coventurers to file a closing statement and an annual report, respectively. In Illinois, if an entity will hold funds for the benefit of a charity, it is required by the Charitable Trusts Act to register as a charitable trust and file an annual financial report. Several states ( e.g. , Hawaii, Louisiana, Ohio, Oregon) require a commercial coventurer to provide a final accounting of the charitable sales promotion to the charitable organization or to state authorities within a certain number of days (usually 10 or 20) upon request. New York, on the other hand, requires that the accounting be provided within ninety (90) days after the promotion ends, regardless of whether the charity or the state requests an accounting. Several states require the commercial coventurer to provide fiscal or sales records of the promotion to state authorities upon request.
Required Disclosures . Many charitable solicitation statutes require commercial coventurers or any person making a charitable "solicitation" to include certain disclosures in advertising or at the point of solicitation. In many states, the disclosure must state the dollar amount or percentage of the sales price, gross proceeds or other consideration (on a per unit basis where applicable) that will benefit the charitable organization or charitable purpose. Some states require the name, address and phone number of the charity to be disclosed ( e.g. , Florida, Massachusetts). Maine requires the commercial coventurer to state that it is a "professional charitable fundraiser." In New York, solicitations must include a statement of the consumer's right to request information from the New York Attorney General's Office, provide an address where requests can be sent and identify the nature of the programs and activities the charitable funds will support. Additional specific disclosures are required to be made in a number of states on "containers" soliciting charitable contributions in a public place. Additional disclosures required to be made by charitable organizations, professional fundraisers and solicitors may also have to be included with a solicitation made in a charitable sales promotion.
Record Retention Obligations . Finally, one of the most commonly imposed obligations on commercial coventurers is that of retaining records of charitable solicitation activities. The commercial coventurer must retain records relating to all solicitation activities for at least three (3) years after the solicitation ends ( e.g. , Maine, New Jersey, Ohio, Virginia, Washington) and final accounting records for at least three (3) years after the final accounting date in several additional states ( e.g. , Arkansas, Florida, Georgia, Hawaii, Louisiana, New Hampshire, New York, Oregon, Utah). New York law requires the commercial coventurer to retain the contract with the charity for at least three (3) years after the solicitation ends. State regulators in Alabama and Arkansas may request an inspection of the records required to be retained by the commercial coventurer.
In view of the extensive obligations charitable solicitation laws impose on commercial coventurers, the fact intensive nature of such laws and differing treatment afforded from state to state, consumer products companies planning to conduct charitable sales promotions should give careful consideration, well in advance of any solicitation, to the structure and scope of the contemplated promotion. This will facilitate compliance efforts and contribute to a successful sales promotion which not only benefits a charitable organization - but maintains public confidence and trust.
Please contact Julie Nichols Matthews at (312) 201-2551 if you have any questions about this article. Mrs. Matthews is a member of the Intellectual Property Practice Group at Wildman Harrold and practices primarily in the areas of trademark, copyright and advertising, promotion and marketing law.
Wildman Harrold enjoys a national reputation in the area of consumer products. We currently represent leading consumer products companies in all intellectual property needs including patents, trademarks, licensing and advertising review; as well as warranty and warning provisions. In addition, we handle a wide range of defense claims for a variety of consumer products including vehicles, firearms, food and beverage companies, home products, medical devices, cell phones, chemical and pharmaceutical companies. Many of these matters involve numerous regulatory bodies, multi-jurisdictional claims, and extensive media coverage. We also regularly counsel clients with respect to Consumer Product Safety Commission reports and product recalls.
Footnotes
1. E.g., Alabama, Arkansas, Colorado, Connecticut, Florida, Georgia, Hawaii, Louisiana, Maine, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Utah, Virginia, Washington, Wisconsin
2. E.g., Alabama, Maine, Massachusetts, Illinois, Oklahoma