By David Lawson
Many entrepreneurs want to use their businesses to make a difference in their communities, but don’t necessarily want to start nonprofits or dedicate themselves only to charitable causes. One of the most common tools entrepreneurs use to make a difference is a type of promotion where a percentage of the receipts (or the profits) from sales of a for-profit company’s goods and services go to one or more charitable organizations. A famous example is the ubiquitous pink yogurt lids that benefit breast cancer research. These promotions can bring terrific results for both for-profit sellers and charities alike, but there are a few potential hurdles that sellers should be aware of before setting one up.
First, there is a wide variety of state laws that regulate these promotions, which are known in many states as “commercial coventures.” In most cases, both the seller and the charity are subject to state laws in each state where the seller takes active steps to sell the goods and services involved. This includes a physical presence in the state; advertising targeted to the state; and phone calls or email to potential buyers that the seller has reason to know are located in the state. Approximately 45 states require the charity to register to solicit charitable funds, although most major charities will probably already be registered. Approximately 22 states (not including Washington, but including both Oregon and California) also have laws governing the conduct of the for-profit seller – the “commercial coventurer,” in state law terms. The seller will generally be required to have a written agreement with the charity that specifies the exact percentage or amount the charity will receive and the terms of payment. In just a few states (Massachusetts, Maine, and Alabama), the seller is obligated to register with the state as a commercial coventurer, and post a surety bond. In general, compliance must be achieved before the promotion starts; in a couple of states, the agreement must be filed with the state two weeks in advance.
Second, both state and federal consumer protection laws may apply to any claims made in advertising. In general, sellers should be precise in advertising, to avoid any potential deceptive claims. For example, it is fine to say “20 percent of sales from this product go to charity” (provided that is true, as set forth in a written agreement with the charity) but it is generally not OK to say, without more information, “This product helps charity” or “This product helps end cancer.” A few states also regulate claims in advertising as part of their commercial coventurer statutes.
Finally, if a for-profit seller engages in other types of fundraising efforts for charity beyond the type of promotion described above, the for-profit seller will want to avoid retaining any commission or percentage of the funds raised. Retaining a percentage of charitable funds subjects the fundraiser to “professional fundraiser” statutes in almost every state, which impose a substantial and expensive regulatory burden. Fundraising efforts that are not through a sales promotion should be structured so that all of the funds raised go to charity.
Raising funds for charity is a fantastic way to harness the power of your business to do good in your community. But it is worthwhile to consult an attorney knowledgeable in the nonprofit or charitable area before starting a charitable promotion or fundraising effort, to avoid any regulatory surprises.