Client Alert: Delaware HB 187: Draft Legislation Regarding Charitable Solicitation To Impact Delaware Nonprofits
Delaware Nonprofits Should Be Concerned and Voice Their Opinion to their State Legislators
Summary. The Delaware General Assembly is currently reviewing extensive legislation that, if passed, will have a significant impact on all Delaware nonprofits, including their staff, board, volunteers, and professional advisors. As discussed herein, House Bill 187, the Delaware Charitable Solicitation Act ("HB 187"), seeks to impose several new and potentially harmful state registration and reporting requirements on Delaware nonprofits and related parties, including in some cases the submission of annual audited financial statements and other registration information that greatly enhances the risk of disclosure of confidential donor information and may deter many current forms of fundraising.
In its current form, HB 187 should not become law for two primary reasons. One, it creates significant and unduly burdensome administrative expenses and costs for the very nonprofits it seeks to help. Two, it risks chilling any carefully cultivated relationship affected nonprofits may have with their donors because of the potential for a donor's confidential information to be disclosed. Effectively, the internal and external costs created by HB 187 will drastically reduce the charitable power of every dollar donated by a member of the giving public. In trying to enhance public confidence in legitimate charitable organizations, HB 187 threatens to undermine the fundamental relationships between a nonprofit and its donors.
Call to Action. All nonprofits should be aware of HB 187 and carefully review it to determine the extent it will impact their operations and budget. A copy of the most up-to-date version of legislation is available on www.innovincent.com and also can be found on Delaware's Legislative Tracking website (HS1 for HB187 here). Nonprofits who oppose or have any concerns with this legislation should contact their board, legislators and professional counsel (including this author at email@example.com) to voice their opinions and speak out against HB 187. The Delaware House Economic Development/ Banking/ Insurance/ Commerce Committee will be holding a hearing on HB 187 on June 4, 2014 at 2:20 pm at Legislative Hall in Dover. Nonprofits or their representatives are encouraged to attend.
Introduction to HB 187
HB 187 arose from the Delaware Department of Justice's twin goals to increase transparency of Delaware nonprofits and reduce charitable fraud. Specifically, HB 187 will "provide the public with the tools and information sufficient to make informed decisions about which charitable purposes to support while also facilitating transparency and confidence in the sector; thereby creating a more robust philanthropic climate in Delaware." HB 187 (Synopsis); § 2502D. These goals are undoubtedly important to the public as well as the nonprofit industry. As discussed below, it is unclear that HB 187 will be able to accomplish these goals any differently than through already existing publicly available information channels. Instead, the bill's additional reporting requirements will only serve to create a negative net philanthropic effect on the charities impacted by this proposed legislation.
Summary of High Impact Areas of Concern Created By HB 187
There are three primary aspects to HB 187 that a nonprofit should be aware of because of the potential impact the bill's requirements will have on its operations and bottom line.. First, HB 187 creates several new registration and reporting requirements that are largely duplicative of existing ones. Second, HB 187 imposes indirect administrative costs and overhead on mid-sized and larger nonprofits through its mandatory requirement for an independent certified public accountant review or audit. Third and finally, HB 187 potentially will impact future donations for nonprofits raising money with or through third parties (such as a guest bartending night) because of new disclosure requirements that risk exposing confidential donor information. Each of these issues will be discussed briefly in turn.
Concern 1: Section 2504D's and 2505D's Registration Requirements and Fees
HB 187 creates several new state registration requirements and expenses for nonprofits. Delaware, unlike many states, does not have a separate and distinct registration requirement for nonprofits. Under HB 187, qualifying nonprofits will be required to register with the Department of Justice and pay an annual registration and administrative fee.
The initial registration process created by HB 187 appears relatively straightforward, but is largely duplicative of existing federal reporting requirements. In addition to the various state (e.g., annual franchise tax reports) and federal forms (e.g., Form 990) that are already being filed, HB 187 requires many, but not all, Delaware nonprofits to also register with the Department of Justice. Because there are several exemptions to this registration requirement, HB 187's registration provisions should be carefully reviewed to determine whether registration is required.See § 2504D(b). If registration is required, the Unified Registration Statement ("URS"), which is used by 37 states across the country, will be accepted. § 2504D(a). Much, if not all of this information, is already available publicly (through sites like CharityNavigator.org, Guidestar.org, or in many cases, the nonprofit's own website). As such, the public already has access to this information, making HB 187's reporting requirements largely redundant and therefore unnecessary.
HB 187's annual registration process is also relatively straightforward and equally duplicative of existing reporting fees and mechanisms. The annual report itself does not appear cumbersome, see § 2505D(a), and the annual filing fee due to the Department of Justice is relatively small ($10 to $100 depending on the organization's gross revenue). See § 2505D(h). Nonprofits will also be required to disclose "a schedule of the activities carried on by the charitable organization in the performance of its purposes and the amounts expended thereon during the fiscal year." § 2505D(a). As discussed above, this information is already required to be publicized through other existing mechanisms. The fee is simply one more expense nonprofits will have to pay to the State. According to the fiscal note attached to HB 187, these fees (along with others discussed below) will help fund a paralegal in the Department of Justice's office, presumably in the Consumer Fraud Protection Unit. See Fiscal Note to HB 187. Put another way, more of the money donated to nonprofits will go toward administrative costs of a state agency rather than to the charity.
In short, HB 187 will require more of a nonprofit's limited time and resources to be devoted to these new and largely duplicative state reporting requirements. Many nonprofits already publish this information and even if they do not, the information is publicly available elsewhere. In this respect, HB 187 appears to unnecessarily duplicate existing laws and regulations.
Concern 2: Section 2505D's Financial Reporting and Audit Requirements
HB 187 also imposes additional financial reporting requirements that are likely to cause a significant strain on medium to large Delaware nonprofits in terms of time and resources. In particular, a charitable organization with gross revenue exceeding $1 million a year (or one already required to do so by another government authority or third party) will be required to submit an audit report prepared by a certified public accountant. See § 2505D(f). For those nonprofits with gross revenue between $500,000 and $1 million, they will not have to submit an audit, but will instead have to submit an independent certified public accountant review report. Id. These audits will certainly take resources and increase administrative costs, thereby diverting time and donor money away from the charity's primary purposes. 
Nonprofits should speak with their CPA and financial planners to determine the impact of the various audit requirements on their annual budget. Particularly when considering that nonprofits may need at least five more years before they are able to raise as much as they did before the recession started in 2007, an audit may be unnecessarily burdensome expense on already tight budgets.
Concern 3: Fundraising Event Disclosure Requirements
Finally, HB 187 creates new filing requirements for a nonprofit's professional fundraising counsel and consultants, as well as for any third party business a nonprofit may be using for fundraising. These requirements are highly problematic and burdensome to nonprofits and to those professionals who are committed to helping them. There are three aspects to the fundraising requirements detailed in HB 187 that are problematic and warrant careful review. The first affects those professional fundraising counsel or consultants hired by nonprofits to assist them with various aspects of their fundraising or other strategies. The second materially impacts how information about donors is collected and maintained and potentially disclosed. The third fundamentally alters how nonprofits will be able to work with certain third parties who are using their businesses in conjunction with a fundraising event.
Section 2506D's Requirements for Professional Counsel Assisting with Fundraising
HB 187 imposes several requirements for nonprofits using third parties to assist them with marketing, event planning, fundraising, and capital campaigns. With few exceptions, any outside professional fundraising counsel or professional solicitor, including consultants, will need to register with the Department of Justice and pay an annual $250 fee. See § 2506D(a). This new fee would be in addition to any state, county, or city licenses and fees these individuals should already be paying. If the fundraiser is holding funds in escrow for the nonprofit, a $25,000 bond will need to be filed with the Department of Justice. § 2506D(b). Nonprofits will only be allowed to use those professional advisors who are registered. § 2513D(b). Contracts will be required between nonprofits and their counsel, and HB 187 outlines the minimum provisions these contracts must have, including whether compensation is paid as a percentage of revenue generated by the outside counsel. § 2513D. These contracts also must be submitted to the State. § 2510D.
These provisions are burdensome for many reasons and risk chilling the relationships between nonprofits and their outside advisors. First, nonprofits should always carefully select outside counsel, whether it is for legal reasons or business ones. Second, for any professional relationship, best practices call for a written contract that reflects the parties' understanding of the scope of the work expected. Although compensation is always subject to negotiation, best practices with respect to fundraising for nonprofits discourage professionals from taking a percentage of the money raised as compensation.
HB 187 unnecessarily codifies what most nonprofits should be and probably already are doing, but then takes this process one step further by requiring complete disclosure of these private contracts for public review. Such disclosure would have the effect of chilling relationships nonprofits may have with vendors, suppliers, and donors, depending on the nature of the contract and the event. While nonprofits should be forthright with this information (and in many ways this high level information is in Form 990), these additional intrusive state disclosure requirements are nonetheless problematic because they could easily be misused or misconstrued by the general public or other third parties.
Section 2510D's Burdensome Event Financial Reporting Requirements
HB 187 also creates a new financial reporting requirement of nonprofits and their professional advisors that risks exposing the confidentiality of donor information. For any fundraising event (golf tournament, guest bartending night, telethon, car wash, etc.), the nonprofit or its outside fundraising counsel will be required to submit financial reports to the Department of Justice. §2510D. These reports are required to be submitted for every fundraising event within 90 days of it being completed (or for campaigns lasting more than one year, within 90 days of the anniversary of commencement). §2510D(a). These reports are required to show gross revenue (broken down by in-state and out-of -state donations), expenses, and any contracts that were used. Id. Although the donor information is not required to be published as part of any particular report, the reality is that this information will need to be collected in conjunction with the records requirement of HB 187. See § 2511D(a). These particular requirements may be detrimental to nonprofits for many reasons, the least of which is that confidential donor information could become public.
HB 187 also requires that nonprofits maintain sufficient internal controls and record keeping policies. See § 2511(c). Best practices call for this type of information (e.g., access to donor database records) to be internally maintained under the strictest confidences, and third party access limited and usually controlled by contract to prevent misuse. HB 187's attempt to control the flow and safeguarding of this information undermines the existing procedures nonprofits use to protect this information and its exposure creates additional and unnecessary burdens on a nonprofit's administration.
Section 2512D's Burdensome Private Business Co-Promotion Requirements
Finally, HB 187 imposes a new requirement of commercial co-venturers that will significantly impact fundraising events. Because commercial co-venturers includes any business that is not a charity or whose primary purpose is not soliciting for charity, but one that is conducting charitable sales promotions, HB 187 potentially impacts any business that donates a gift or gift-in-kind to charity through a fundraising event. Under the proposed legislation, if a commercial co-venturer is conducting a charitable sales promotion, it will be required to obtain written contract to do so from the nonprofit and file that contract with the Department of Justice at least ten days prior to the event. § 2512D(b). Following the event, the organization will also be required to provide a financial accounting of the event (just like a nonprofit would be required to do so as discussed above) and such records must be maintained for at least three years. §§ 2512D(c), (d). This accounting, depending on how it is collected and maintained by the commercial co-venturer, could potentially expose confidential donor information. See §2511D(a).
This requirement has several problems and is sufficiently broad such that it could to cover any private event where portions of proceeds are given to a charity. These problems are best illustrated by the example of a guest bartending event. If a charity and business agree to host a guest bartending event where a portion of proceeds go to charity, HB 187 would apply. The parties would need to provide a copy of the written contract to the Department of Justice before the event, including how sales will be made and what percentage of those sales will be given to the charity. §§ 2512D(b)(3), (4). The business would then need to provide an accounting of the event to the Department of Justice within 90 days. § 2512D(c).
The reality of HB 187's business co-promotion disclosure provisions is that businesses will be less willing to work with charities to do these sorts of events. That means a significant reduction in such charity events (such as a privately organized event likes the Mud Run® or Color Run® where portions of the proceeds may go to a designated charity) and in turn, charitable revenue. In short, charities looking to the private sector to help support their cause will be effectively prevented from doing so because of HB 187.
Innovincent believes the problems with HB 187 are extensive enough that the bill cannot be revised in its current form before the close of the legislative session on June 30, 2014 and therefore should not become law. Nonetheless, should HB 187 pass in its current form, Innovincent will hold at least one roundtable event for nonprofits and other interested parties to discuss and learn about the new requirements under the law.
Should HB 187 not pass, Innovincent will continue to work with its clients and other industry professionals on determining the best approach to addressing the fundamental transparency and fraud issues HB 187 purports to solve, including potentially drafting alternative legislation. More information about these programs and events will be posted on www.innovincent.com as they are scheduled.
While the transparency and fraud prevention goals of HB 187 are admirable, the negative impact this bill will have on Delaware nonprofits far outweigh the benefits. Should you have any concerns about HB 187, please contact your state legislator. The Delaware House Economic Development/ Banking/ Insurance/ Commerce Committee will be holding a hearing on HB 187 on June 4, 2014 at 2:20 pm at Legislative Hall in Dover and Innovincent encourages all nonprofits with issues regarding HB 187 to attend or have a proxy or representative attend on their behalf.
For more information about ways your nonprofit can voice its concern about HB 187 before the Delaware General Assembly, please contact Charles Vincent of Innovincent at firstname.lastname@example.org or by visiting www.innovincent.com.
This alert should not be construed as legal or tax advice or legal or tax opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer or tax advisor on any specific legal or tax questions you may have concerning your situation.
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Any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code or for the purpose of promoting, marketing, or recommending any transaction or matter addressed herein.
Corrected Version (5/28/14): This version corrects the references to the donor reporting requirements which have been taken out of the latest version of the bill, HS 1 for HB 187, as well as the change to the record keeping requirements from five years to three years.
 Other problems with the bill, such as how and to what extent the Department of Justice will prosecute out-of-state actors found in violation of HB 187 are outside the scope of this alert but should be considered as well.
 A complete list of all states with charitable solicitation laws and their general requirements can be found online: http://www.nacua.org/nacualert/docs/CharitableSolicitation/2013_JurisdictionalRequirementsCharitableSolicitation.pdf.
 There are several charitable organizations exempt from the various reporting requirements of HB 187, including, for example, certain education groups as well as alumni, trade, or professional organizations with persons who have a right to vote as a member. See § 2504D(b). The exemption issue is outside the scope of this alert, but the sheer number of exceptions raises an important issue as to why there are so many when HB 187 purports to provide "pertinent information to the public thereby enabling them to make informed decisions as to which charitable causes to support; and to safeguard the citizens of Delaware against fraudulent and misleading charitable solicitations, thereby enhancing public confidence in legitimate charitable organizations." § 2502D.
 "The Unified Registration Statement (URS) represents an effort to consolidate the information and data requirements of all states that require registration of nonprofit organizations performing charitable solicitations within their jurisdiction." The Unified Registration Statement, www.multistatefiling.org (last visited May 27, 2014).
 The definition of "gross revenue" in HB 187, see § 2503D(10), creates additional problems that are outside of the scope of this alert. To use one example to illustrate the problem with how HB 187 defines gross revenue, income from investments (interest and dividends, realized gains and unrealized gains) are considered revenue in accordance with U.S. GAAP. Thus, even if the nonprofit has more than $1 million in investments, but less than $1 million in, for example, individual donor gifts or state grants, it may still be subject to HB 187's audit requirements. See also Pete Kennedy, Sometimes It's Good To Be Last, Delaware News Journal (April 24, 2014) (discussing HB 187 and its audit requirement, concluding that "the reality is that when an entity is audited voluntarily, as is the case today, they are much more likely to be attuned to the quality of the audit and the value they are receiving from it. In an environment in which audits are compulsory, the audit can become thought of as a commodity where quality and value are much less important").
 Debra Blum and Holly Hall, Donations Barely Rose Last Year as Individuals Held Back, Chronicle of Philanthropy (June 17, 2013), available at http://philanthropy.com/article/Fundraisings-Recovery-Could/139801/. Nationwide, individual giving as a percentage of disposable personal income has stayed at 1.9 percent since 2008. Indiana University Lilly Family School of Philanthropy, Giving USA 2013: The Annual Report on Philanthropy for the Year 2012 at 38 (2013).
 The Association of Fundraising Professionals' Code of Ethical Principles prohibits contingency based compensation. See Association of Fundraising Professionals, Code of Ethical Principals and Standards 21 ("Members shall not accept compensation or enter into a contract that is based on a percentage of contributions; nor shall members accept finder's fees or contingent fees."), available at http://www.afpnet.org/Ethics/EnforcementDetail.cfm?ItemNumber=3261.
 Commercial co-venturers are defined as "a person who, for profit, is regularly and primarily engaged in trade or commerce other than in connection with soliciting for charitable organizations or charitable purposes, and who conducts charitable sales promotions." § 2503D(6).
 "Charitable sales promotions" is not defined under the statute and thus the plain and ordinary meaning of the term applies. Here, charitable sales promotion is construed to include any giveaway items or discounts where the business's name is provided in conjunction with the charitable event.