California Assembly Bill 1539 (AB 1539), introduced by Assembly Member Jacqui Irwin (D) on February 22, 2019, provides for new laws governing crowdfunding without actually referencing crowdfunding as a defined term. It is the successor to Irwin’s earlier bill, AB 2556, which defined the terms charitable crowdfunding solicitation and charitable crowdfunding solicitor, but died late last year. We wrote about AB 2556 in a post from May 2018 available here.
The following are excerpts from the preamble to AB 1539:
Existing law prohibits certain acts and practices in the planning, conduct, or execution of any solicitation or charitable sales promotion, including misrepresenting or misleading anyone in any manner to believe that any other person sponsors, endorses, or approves a charitable solicitation or charitable sales promotion if that person has not given consent in writing to the use of that person’s name, or representing that any part of the contribution will be given or donated to any other charitable organization, unless that organization has consented in writing to the use of its name before the solicitation.
This bill would require a charitable organization to obtain the written consent of another charitable organization before using its name in a solicitation through means of the internet, unless the soliciting organization meets specified requirements, including conspicuously disclosing that the recipient charitable organization has not provided consent for the solicitation and has no association with the soliciting charitable organization, among other requirements. The bill would require a charitable organization soliciting pursuant to those provisions to file an annual report, under oath, that contains specified information with the Attorney General’s Registry of Charitable Trusts.
Section 12599.6(f) of the California Government Code currently provides in pertinent part:
Regardless of injury, the following acts and practices are prohibited in the planning, conduct, or execution of any solicitation or charitable sales promotion: …
(5) Misrepresenting or misleading anyone in any manner to believe that any other person sponsors, endorses, or approves a charitable solicitation or charitable sales promotion when that person has not given consent in writing to the use of the person’s name for these purposes. …
(11) Representing that any part of the contributions solicited by a charitable organization will be given or donated to any other charitable organization unless that organization has consented in writing to the use of its name prior to the solicitation. The written consent shall be signed by one authorized officer, director, or trustee of the charitable organization.
These provisions may apply to charities engaged in fundraising for other charities. But they don’t work well if applied to donor-advised fund (DAF) sponsoring organizations that raise funds for themselves and then grant them out to certain grantees that may have previously identified and selected.
A DAF sponsoring organization might list a number of possible grantees for which it intends to solicit funds. Providing such a list would not necessarily be misrepresenting or misleading donors to believe that all listed prospective grantees have sponsored, endorsed, or approved the solicitation.
A proper DAF sponsoring organization solicitation will not represent that solicited contributions “will be given or donated” to another charity because that is inconsistent with the DAF laws and would mean the DAF sponsoring organization was improperly acting as a mere conduit.
More on DAFs below.
Proposed Modifications to the Law
AB 1539 first proposes to prohibit one charity from using another charity’s name in an internet-based solicitation without getting the written consent of such other charity. Proposed Government Code Section 12599.9(a)(1) would provide:
A charitable organization shall obtain the written consent of another charitable organization before using its name in a solicitation through means of the internet. The written consent shall be signed by one authorized officer, director, or trustee of the charitable organization.
It does not matter if the soliciting charity is proposing to raise funds for which it is considering making the other charity its grantee. Accordingly, the following hypothetical internet solicitation by “Charity X” would require the written consent of the American Cancer Society unless it met the carve out described below:
Help us beat prostate cancer. The American Cancer Society reports that prostate cancer death rates declined 51% from 1993 to 2016 among men. Please support us with a donation and we’ll fund research to eradicate prostate cancer in our lifetime.
AB 1539 further proposes to carve out conditions where written consent is not required notwithstanding Sections 12599.9(a)(1) and 12599.6(f)(5) and (11).
(A) The soliciting charitable organization offers only a database or list of recipient charitable organizations that may receive contributions and provides only the recipient charitable organization’s name and other public information provided by the recipient charitable organization to the Internal Revenue Service, the Attorney General’s Registry of Charitable Trusts, or other federal or state government agencies.
(B) The soliciting charitable organization excludes recipient charitable organizations that are not in good standing with the Internal Revenue Service, and, where applicable, the Franchise Tax Board or the Attorney General’s Registry of Charitable Trusts.
(C) The soliciting charitable organization conspicuously discloses that the recipient charitable organization can request removal from the database or list, which shall be implemented within five days of a request.
(D) The soliciting charitable organization conspicuously discloses that the recipient charitable organization has not provided consent for the solicitation and has no association with the soliciting charitable organization.
(E) The soliciting charitable organization conspicuously discloses the fees taken by the soliciting charitable organization from the contribution designated for the recipient charitable organization.
(F) The soliciting charitable organization conspicuously discloses the circumstances in which the recipient charitable organization may not receive the contribution.
(G) The soliciting charitable organization makes all reasonable efforts to ensure that the donation reaches the recipient charitable organization and provides a confirmation to the donor when it does and seeks one or more alternative organizations from the donor if the originally selected recipient charitable organization cannot receive the contribution.
(H) The soliciting charitable organization provides to the recipient charitable organization the contribution and an accounting of any fees imposed for processing the contribution within 60 days of its receipt of the contribution, if the originally selected recipient charitable organization cannot receive the contribution, to an alternative organization within 30 days of receiving an alternative recommendation from the donor, or, if no alternative recommendation is made within 30 days, to an alternative organization of the soliciting charitable organization’s choice in an exercise of its variance powers, within 30 days of exercising the variance power.
(I) Until contributions are disbursed to the recipient charitable organization, the soliciting charitable organization holds contributions in trust for the recipient charitable organization in a separate bank account.
(J) If the originally selected or alternative recipient charitable organization requests donor name or contact information, the soliciting charitable organization provides the information for donors who consented to share their information without imposing any fees or requiring the recipient charitable organization to provide consent for other solicitations.
Donor-Advised Funds and Crowdfunding
A donor-advised fund is defined in the Internal Revenue Code as a fund or account:
- which is separately identified by reference to contributions of a donor or donors,
- which is owned and controlled by a sponsoring organization, and
- with respect to which a donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor’s status as a donor.
When a crowdfunding campaign initiated by a particular charity uses a DAF, there is often confusion about which organization – the initiating charity or the DAF sponsoring organization – is doing the solicitation and which has legal control of the raised funds. Generally, it’s the DAF sponsoring organization, through its agents, raising the funds, and it’s the DAF sponsoring organization that has full legal control of the funds. It gets confusing because the agents of the DAF sponsoring organization are typically also agents of the initiating charity and likely principally identify themselves as the latter.
After receiving the solicited charitable funds, the DAF sponsoring organization customarily makes a grant to the initiating charity, so long as the initiating charity remains a public charity. But the DAF sponsoring organization must maintain the variance power necessary to re-direct the funds to another organization that can carry out the charitable purposes described in the solicitation. Such variance power is rarely exercised absent egregious circumstances because it would deter other charities from working with the DAF sponsoring organization.
Similarly, when a crowdfunding campaign is initiated by the DAF sponsoring organization with the intent to benefit one or more other charities, it’s the DAF sponsoring organization raising the funds, and it’s the DAF sponsoring organization that has full legal control of the funds. Donors to such a crowdfunding campaign may have intended that their funds reach one of the other charities identified by the DAF sponsoring organization, but they are making their donations to the DAF sponsoring organization.
AB 1539 doesn’t work well for DAF sponsoring organization-initiated solicitations that are designed to provide donors to a campaign the ability to recommend a grantee, subject to the DAF sponsoring organization’s ultimate oversight.
- If the DAF sponsoring organization wants to place examples of charities it could fund, it would need written consent from those charities or else it would need to first (and continue to) vet the charities for compliance with the IRS, Franchise Tax Board, and Attorney General’s Registry of Charitable Trusts. If a DAF sponsoring organization wanted to offer a very large number of charities as potential grantees, such vetting would be impractical.
- Generally, fees are not charged externally by a DAF sponsoring organization even though a portion of a solicitation is typically moved to a general operating account as an intra-organizational administrative fee (that is not booked as income) charged to the restricted fund which received the donation. The restriction generally matches the purpose of an intended grantee but cannot designate the grantee.
- In a DAF context, the intended grantee may ultimately be a recipient organization but it should have no rights relative to the donation made to the DAF sponsoring organization. The DAF sponsoring organization should not owe an accounting to a prospective grantee. Moreover, the DAF sponsoring organization does not hold the funds in trust for a prospective grantee.
There are several other problematic areas with the bill, but we’ll reserve further comment until we see where it goes next.