California is considering passage of a crowdfunding bill sponsored by Pay Pal Giving Fund and applicable to charitable organizations and crowdfunding solicitors. The bill, AB 2556, was introduced by Assembly Member Jacqui Irwin on February 15, 2018 and later amended on April 19, 2018. It currently is being held under submission in committee.

The legislative committee analysis summarizes the bill as follows:

This bill adds to the Supervision of Trustees and Fundraisers for Charitable Purposes Act the ability to engage in “charitable crowdfunding solicitations” by a new category of persons raising money for charitable purposes known as “crowdfunding solicitors for charitable purposes,” subject to various registration and reporting requirements, as specified.

More specifically –

This bill seeks to update California’s Charitable Purposes Act to recognize online charity giving platforms. Specifically, this bill creates a registration process for charitable solicitors and exempts charitable solicitors from the requirement to have a written agreement with each charity for which they are soliciting donations. Specifically, it provides for the recognition of, and consumer protections for, the practice of charitable fundraising by way of internet crowdfunding efforts.

Definitions

“Charitable crowdfunding solicitation” means the practice of raising contributions from a large number of people for charitable purposes through means of the Internet.

– This definition would appear to include almost all nonprofit websites with donation buttons (and not only what most people consider crowdfunding sites), though it’s unclear whether it is intended that the solicitation actually require a large number of people (whatever that means) to contribute to fall within the definition or whether the objective of raising contributions from a large number of people is enough. The term “charitable” also lacks clarity as to whether it would encompass 501(c)(4) “social welfare” purposes in addition to 501(c)(3) exempt purposes.

“Crowdfunding solicitor for charitable purposes” means a person, whether or not for profit, who engages in charitable crowdfunding solicitation, and who is not defined as a commercial fundraiser for charitable purposes, a fundraising counsel for charitable purposes, or a commercial coventurer.

– This definition explicitly includes nonprofits who engage in charitable crowdfunding solicitations, even if just for themselves.

Written Consent Requirement

A crowdfunding solicitor for charitable purposes (“Crowdfunding Solicitor”) must obtain the written consent of a charitable organization prior to using its name in a solicitation unless all of the following 8 requirements are met: 

1. the crowdfunding solicitor for charitable purposes provides only a database or list of charitable organizations that may receive contributions;
2. the solicitation only lists the charitable organization’s name and other public information provided by the charitable organization to the Internal Revenue Service, the Attorney General’s Registry of Charitable Trusts, or other federal or state government agencies;
3. the crowdfunding solicitor for charitable purposes excludes 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;
4. the crowdfunding solicitor for charitable purposes conspicuously discloses the charitable organization can request removal from the database or list, which shall be implemented within five days of a request;
5. the crowdfunding solicitor for charitable purposes conspicuously discloses that the charitable organization has not provided consent for the solicitation;
6. the crowdfunding solicitor for charitable purposes conspicuously discloses that the charitable organization may not receive the contribution and if so, that the contribution may be provided to a charitable organization with a similar charitable purpose unless the donor specifies an alternative organization;
7. the crowdfunding solicitor for charitable purposes shall provide to the charitable organization the contribution and an accounting of any fees imposed for processing the contribution within __ days of its receipt of the contribution; and
8. if the charitable organization requests donor name or contact information, the crowdfunding solicitor for charitable purposes shall provide such information for donors who consented to share their information, without imposing any fees or requiring the charitable organization to provide consent for other solicitation.

My Review of the 8 Requirements for the Exception 

1. The intent of this requirement is to exclude Crowdfunding Solicitors that are adding commentary or descriptions beyond the name of a charitable organization that may receive contributions. This seems fair.
2. This requirement seems to be in conflict with the first requirement as it allows the Crowdfunding Solicitor to include public information provided by the charitable organization to a governmental agency, which may include pages of subjective descriptions as some of the public filings (e.g., Forms 990) are treated by many organizations as marketing communications.
3. For Crowdfunding Solicitors that intend to allow donors to make contributions to any one of a very large number of charities (e.g., all the charities on the IRS Publication 78 database of organizations eligible to receive tax-deductible charitable contributions), meeting this requirement seems impractical, which may defeat their business model as getting consent from all these charities would be similarly impractical. Vetting for “good standing” will take time and it’s unclear how often that must be done for each charitable organization. If one charitable organization was in good standing at the beginning of the solicitation but (unknown to the Crowdfunding Solicitor) lost such status one month later while the solicitation was ongoing, would the Crowdfunding Solicitor be in immediate violation of not getting consent from every single charitable organization it was raising contributions for?
4. This seems fair.
5. This seems fair, though it remains to be seen how a conspicuous disclosure would be defined, particularly in the context where a Crowdfunding Solicitor provides a database of possible recipient charitable organizations. If, for example, the Crowdfunding Solicitor provided a link to the IRS Publication 78 database as possible recipients of its solicitation, but one organization opted out, would providing a separate web page of charities that opted out fulfill the conspicuous disclosure requirement?
6. This requirement gives me pause. If the Crowdfunding Solicitor is itself a public charity, this seems fair. The donation may be structured as being given to the Crowdfunding Solicitor subject to a recommendation from the donor that it be regranted to another charity, but the Crowdfunding Solicitor must maintain control and ultimate discretion over its own funds (e.g., donor-advised fund or DAF). A DAF sponsoring organization should not require written consent of its potential grantees, which has the discretion to refuse a grant from the DAF. However, if the Crowdfunding Solicitor is a for-profit, it must be careful of not misrepresenting that the donor can get a charitable contribution deduction if giving ultimate control over the funds to the Crowdfunding Solicitor. For a for-profit Crowdfunding Solicitor seeking the exception to written consent, it must tread very carefully here.
7. This requirement may not apply where the Crowdfunding Solicitor is raising money for itself, including as a DAF sponsoring organization which allows donors to recommend (but not direct) the charitable recipients of grants from a DAF. It doesn’t appear that the drafters of the bill are fully aware of how DAFs work.
8. This requirement may not apply where the Crowdfunding Solicitor is raising money for itself, including as a DAF sponsoring organization which allows donors to recommend (but not direct) the charitable recipients of grants from a DAF. It doesn’t appear that the drafters of the bill are fully aware of how DAFs work.

Registration Requirement

A Crowdfunding Solicitor “shall file an annual report on a form provided by the Attorney General, accounting for all funds collected from charitable crowdfunding solicitations during the preceding calendar year. The annual financial report shall be filed with the Attorney General’s Registry of Charitable Trusts no later than 30 days after the close of the preceding year.”

– If Crowdfunding Solicitors include all nonprofits raising charitable contributions for themselves from a large large number of people on the Internet, this will be a tremendous burden on the Attorney General’s Registry. Do the nonprofit Crowdfunding Solicitors have to account separately for amounts they’ve raised on different Internet sites?

Constructive Trustee for Charitable Purposes

A Crowdfunding Solicitor “is a constructive trustee for charitable purposes as to all funds collected pursuant to solicitation for charitable purposes and shall account to the Attorney General for all funds.”

– This may not make sense if the Crowdfunding Solicitor has no control over the monies raised. A constructive trustee generally has a duty to ensure that the charitable contributions are transferred to the intended party and not used to unjustly enrich another party. For a for-profit Crowdfunding Solicitor that merely engages in the solicitation but does not receive any monies, presumably, its duties end with setting up the platform to ensure the funds are directed to the intended charity, though it’s unclear whether its duties as a constructive trustee continue beyond such setup.

Crowdfunding Bill Survey

CalNonprofits is conducting a 7 question survey related to crowdfunding and AB 2556 here.