Vol. IV, No. 3 May - June 1996

North Dakota: Only “Worthy” Charities May Solicit in State
Lightly-populated North Dakota has moved front and center in the creation and imposition of more intrusive regulation on nonprofits. Its charitable solicitation law:

• Requires the North Dakota Secretary of State to choose which charities are "worthy" to be permitted to solicit in the state;
• Requires fundraisers to "domesticate" their corporations in North Dakota by registering to do business as "foreign corporations." Fundraisers must also provide the social security numbers of all officers and directors;
• Requires consulting firms and other fundraisers to report confidential business information &endash; such as the value of their stock, the total value of their assets, even their total annual income; and
• Apparently requires nonprofits to obtain the state's approval before retaining &endash; or changing &endash; their professional fundraiser.

The North Dakota Century Code ("NDCC") (effective July 1, 1995) states that, before permission may be granted to solicit within the state, the Secretary of State's office must investigate: the financial responsibility, experience, character, and general fitness of the applicant. If the investigation warrants the belief that the solicitations are for a worthy charitable purpose and that the applicant will conduct solicitations in accordance with the law, the secretary of state shall issue a license… [Section 50-22-01, para. 6.]

The North Dakota "Charitable Solicitation License Application" requires nonprofits to agree "not to allow any professional fundraiser/solicitor to conduct a solicitation on [their] behalf without prior approval from the Secretary of State" (emphasis added). This apparently is based on Section 50-22-02.1 of the NDCC, which states in part:

The secretary of state or the secretary's designee shall examine each initial application of a charitable organization for the right to solicit funds and each renewal application of a charitable organization for the right to solicit funds. If the solicitation is to be made in whole or in part by a professional fundraiser or professional solicitor, the secretary of state shall approve registration if the arrangement for payment conforms to the requirements of this chapter and all relevant rules. [Emphasis added.]

Apparently, therefore, the Secretary of State may disapprove the retention or change of a professional fundraiser if the "arrangement for payment" is deemed inconsistent with the statute &endash; or even with rules created by the Secretary of State. (The statute does not clearly indicate whether the Secretary of State's approval must be based on: (i) the payment to the state for registration, or (ii) payments to the fundraiser from the nonprofit.)

Fundraisers not incorporated in North Dakota must register to do business as a foreign corporation in North Dakota and pay all associated fees. By requiring the domestication of these foreign corporations, North Dakota pulls these fundraisers, over which it would otherwise have no jurisdiction, into North Dakota so that they can be threatened more effectively, and even fined or sanctioned more easily, for supposed violations of North Dakota laws.

As foreign corporations, they must file an annual report to receive permission to raise funds in the state. North Dakota also requires that foreign corporations report:

• "The value of all the property owned by the corporation wherever located" (total assets) (Instructions to File Foreign Corporation Annual Report, 9A [SFN 17156 12/95]); and

• "Total income" as reported on the federal tax return (Instructions to File Foreign Corporation Annual Report, 10.A); and

• "The total gross income the corporation derived from business operations in North Dakota during the fiscal year" (Instructions to File Foreign Corporation Annual Report, 10.B).

Washington Kills Proposed Audit Requirement
Washington State's proposed mandatory audit requirement is dead. After intense lobbying by FSC and its members, the proposed Washington State regulations, that would have forced almost all nonprofits, and their fundraisers, to file audit reports by independent CPAs, along with other new, unreasonable requirements, were rejected after a March 27, 1996 public hearing held in Olympia, Washington. The audit proposal alone would have added thousands of dollars in new costs to charities and their fundraisers (the state government estimated that the proposed new requirements would cost fundraising agencies between $4,000 and $16,000, at a minimum). Since all costs are ultimately passed along, donors would in essence pay a new "tax."

An April 26, 1996 letter by the Secretary of State's office's notified FSC that, "[t]he proposed rule making for WAC 434-120-105-130-and 255 [all the offensive sections] were not approved." FSC's key role in having the proposed rules dropped was reported in Philanthropy Monthly, which complimented FSC and its members by saying, "Bravo for initiative and a job well done."

Background on FSC Lobbying Success
After the proposed Washington State regulations were reviewed in mid-March, and in response to the abbreviated schedule (the regulations were to be implemented just two days after the scheduled public hearing), FSC rushed into action. First, FSC wrote and faxed our members, informing them of the proposed rules' adverse impact. Next, FSC drafted testimony, and retained a Washington State-based law firm to present FSC's testimony at the hearing. The firm communicated FSC's position to key government leaders and to other Washington State nonprofits.

FSC then faxed, wrote, and called its members again _ as well as others around the country, requesting that they send comments to the Secretary of State. Ultimately, numerous FSC members publicly joined the Free Speech Coalition's opposition to the proposed regulations. Additionally, FSC coordinated the delivery of individual letters of objection to the Secretary of State before the public hearing.

FSC Only Group to Testify Against Rules
When the public hearing took place, FSC was the only group to testify against the proposals. Our nine-page testimony included the following points:

• Individuals in the United States have a fundamental right to speak freely and to organize themselves into many different sorts of groups, independent of the state. While elected representatives forge public policy, the people must retain the opportunity to determine its direction. Governmental roadblocks that directly or indirectly deter individuals or organizations from associating together to petition the government are clearly unconstitutional.
• Many small, nonprofit groups cannot afford the lawyers, accountants, and other costs of opposing such undue and burdensome regulation. Their only choice may be to go out of business, thereby limiting the range and reach of political discourse. And the harm is not limited to small groups. Where nonprofit groups can stay afloat against this tide of overregulation, the public ends up paying the additional taxes and fees to local government, through its donations, without receiving any resulting public benefit.
• When charitable organizations are being asked to take up the slack in an era of shrinking government budgets, should not the Secretary's office examine ways to reduce regulation, instead of proposing more regulation? As a matter of public policy, charities' work should be encouraged and supported. The proposed regulations will clearly make it more difficult for new and smaller charities to deliver services. Requiring nonprofits to submit audited financial statements adds one more administrative expense at a time donors demand that charities cut such expenses and spend more on the people they are trying to help.

The representative from the Washington Attorney-General's office said he was "astonished with the flood of letters and comments he received" opposing the proposed regulations. FSC is pleased to have participated in this effort to inform the Secretary of State of the negative effect these proposed regulations would have had on the nonprofit community.

Utah Rescinds Fingerprinting Requirement
In the June 1995 edition of FREE SPEECH, we reported that, "Utah's fingerprinting requirement may be on its way out." We were right. Effective May 1, 1996 the State of Utah no longer requires professional fundraisers to submit fingerprint cards and photographs. The repeal effort began over fifteen months ago, when an FSC member organization wrote to the State of Utah objecting to the requirement. While the fingerprinting regulations were in effect, some charities removed Utahans from their mailing lists. Over the past year, FSC members and others questioned both the rationale and the legality of this requirement. The fingerprinting requirement was viewed by a commercial fundraiser as one of the most offensive regulations in the country.

Nevertheless, Utah did not lift the entire regulatory burden. The newly-revised Utah Charitable Solicitation Act adds 223 lines of new regulations, and deletes only 57. The revised Act requires, among other things, that fundraising counsel operating outside the state give the name and address of a "registered agent" and consent to service of process [Section 13-22-9 1 b vi]. Just like in South Dakota, this device of requiring the appointment of an in-state registered agent seeks to gain jurisdiction over firms not present in the state.

FSDEF Begins Fundraising Drive
The newly-created Free Speech Defense and Educational Fund (FSDEF) announced the commencement of its 1996 litigation fundraising drive at its April 10, 1996 board meeting. The FSDEF Board is establishing case selection criteria and is conducting an expansive fundraising campaign to reverse the tide of increasing state charitable solicitation regulation. FSDEF will support efforts to challenge states' jurisdiction to require the registration of nonprofits and fundraisers located outside their borders.

Shortly after announcing its fundraising campaign, FSDEF received pledges of $9,000 towards its war chest. FSDEF is exempt from federal taxation under IRC Section 501(c)(3). Inquiries and tax-deductible contributions should be directed to Ms. Edythe Ledbetter, President, the Free Speech Defense and Educational Fund, 8180 Greensboro Drive, Suite 1070, McLean, Virginia 22102.

The Free Speech Coalition, Inc. is a nonpartisan, nonprofit 501(c)(4) organization which educates, lobbies, and litigates to defend the rights of advocacy organizations and their members. FSC needs your support to continue its fight to protect the rights of citizens to associate together and exercise their First Amendment right to petition their government for redress of their grievances. Contributions to the Free Speech Coalition, Inc. are not tax-deductible.