How State Regulators Actually View Fundraising

Speaker 1: 0:00

Welcome to the Nonprofit Compliance Brief, where we explain charitable solicitation and multi-state fundraising requirements in clear, practical terms for nonprofit leaders and finance teams. This podcast is produced by Ironwood Registrations.

Speaker 2: 0:14

It is really great to be here today.

Speaker 1: 0:17

So today we are doing something a little bit different for this deep dive. Usually, well, when we are wading through the weeds of compliance, we are looking at the world entirely from your chair as the nonprofit leader.

Speaker 2: 0:30

Right, sitting behind the desk with that giant stack of forms.

Speaker 1: 0:33

Exactly. You know the feeling. You are the one staring at the state renewal applications, stressing about the due dates, and wondering why every single state seems to want the exact same information but in a slightly different format.

Speaker 2: 0:46

Aaron Powell It feels like I mean it feels like administrative hurdles. Just paperwork for the sake of paperwork. It can feel like this massive barrier to actually doing the mission-driven work you set out to do.

Speaker 1: 0:57

Aaron Powell It really does. It feels like a chore. But today we are going to flip the script. We aren’t going to talk about filling out the forms. We are going to talk about the person actually reading them. Right. We’re going to walk around to the other side of the desk and get inside the head of the state regulator.

Speaker 2: 1:11

Aaron Powell, which is a transition I think most nonprofit leaders never really make.

Speaker 1: 1:14

Yeah.

Speaker 2: 1:15

To most organizations, the regulator is just this black box. You feed a check and a form into the slot, and you well, you pray you get a confirmation letter back. It feels totally opaque.

Speaker 1: 1:25

Aaron Powell And when things are opaque, they feel random. You send it off, maybe you get a query, maybe you don’t. It feels like pure luck.

Speaker 2: 1:31

Aaron Powell But it isn’t random at all. And that is really the mission for this deep dive. We want to demystify that black box. Because the reality is state regulators are human beings operating under a very specific set of incentives and rules.

Speaker 1: 1:46

Right. They have a framework.

Speaker 2: 1:47

Exactly. Once you understand what makes a regulator tick, what they’re actually looking for, compliance stops feeling like a game of roulette and starts feeling predictable.

Speaker 1: 1:57

And if there is one thing a CFO or a director of development craves, it is predictability. So let us turn the lights on in that room. Who are we actually dealing with? When we say state regulators, I think there is a mental image of a bureaucrat who maybe, you know, used to run a food bank and just wants to make sure you are doing a good job.

Speaker 2: 2:19

That is the first and probably the most dangerous misconception you can have.

Speaker 1: 2:22

Yeah.

Speaker 2: 2:23

Generally speaking, the people overseeing charitable solicitation are not program officers. They aren’t social workers.

Speaker 1: 2:30

They aren’t experts in homelessness or whale conservation.

Speaker 2: 2:33

No, none at all. In the vast majority of states, oversight is handled by the Attorney General’s office or a dedicated division of consumer protection.

Speaker 1: 2:44

We aren’t talking about best practices or impact measurement anymore. We are talking about law enforcement.

Speaker 2: 2:49

We are. And that is the critical distinction. Their core mandate is not to evaluate whether your nonprofit is effective. They aren’t looking at your impact report to say, wow, they saved 10% more puppies this year. Right. Their sole focus is protecting residents, their constituents, from misleading or fraudulent solicitation.

Speaker 1: 3:08

So they view the donor not as a supporter of a cause, but as a consumer buying a product.

Speaker 2: 3:13

Precisely. Think about it like buying a used car. The state has laws to ensure the odometer hasn’t been rolled back and the engine actually runs. The state views a charitable donation the exact same way.

Speaker 1: 3:26

That is a great analogy.

Speaker 2: 3:27

They want to protect the grandmother down the street from giving $50 to a cause that claims to feed hungry kids, but is actually spending that money on a luxury condo for the CEO.

Speaker 1: 3:38

So it is a consumer protection issue at its core.

Speaker 2: 3:41

It is 100% about fair treatment and truth in advertising. They are evaluating how you communicate, they are looking at the promises you made when you asked for the money, and then checking the bank records to see if the money actually went there.

Speaker 1: 3:54

That is a massive shift in perspective. I think a lot of nonprofits write their fundraising appeals thinking purely about inspiration. They want to move hearts. But the person reading that appeal at the AG’s office is thinking about contract law. Did you do what you said you would?

Speaker 2: 4:08

And that leads to a completely different limits test. When a regulator picks up a file, they aren’t asking if this is a worthy cause. They’re asking three very specific, very clinical questions.

Speaker 1: 4:21

Break those down for us. What is the checklist in their head?

Speaker 2: 4:24

Inquiry number one, are donors receiving accurate information? Inquiry number two, is the organization transparent about its activities? And number three, and this is the one that trips everyone up, are the fundraising practices consistent with what is disclosed in the filings?

Speaker 1: 4:40

Consistent. I have a feeling that word is going to be the major theme of this discussion today.

Speaker 2: 4:44

It absolutely is. Because look at those questions again. None of them are subjective. They aren’t asking if your mission statement is poetic. They are asking if the transaction is honest.

Speaker 1: 4:53

Which brings us to the actual paperwork itself. Registration. I think the common view is that registration is just a permission slip. You file the form, so you’re allowed to ask for money.

Speaker 2: 5:03

That is the compliance view. Please, teacher, may I go out and raise funds. But try to see it through the regulator’s eyes. To them, registration isn’t just a permission slip, it is a mechanism for visibility.

Speaker 1: 5:17

Visibility effectively meaning a census of sorts.

Speaker 2: 5:20

More like a radar system. Imagine you are the attorney general of a large state like New York or California. You have thousands of charities soliciting money from your residents every single day.

Speaker 1: 5:30

And without registration, you have no idea who is active, where they are headquartered, or who is even running them.

Speaker 2: 5:36

Exactly. Registration provides the essential beta points. It gives them the contact info, the financial summaries, the board list, it creates the architecture for accountability.

Speaker 1: 5:46

So it is less about controlling who enters the market and more about knowing who to call if something actually goes wrong.

Speaker 2: 5:52

Right. If a consumer calls the AG’s office and says, hey, I gave money to this veterans charity and now they won’t stop calling me at three in the morning, the regulator needs to be able to pull up a file.

Speaker 1: 6:02

They need a record.

Speaker 2: 6:03

They need to say, okay, we know who this is, we have their financials, and we know who sits on their board. Without that registration, the regulator is totally blind.

Speaker 1: 6:12

Okay, so they have this database, they have the radar system turned on, but here is the thing that keeps nonprofit leaders up at night, the paranoia. There is this vague sense that because we registered, there is a big brother regulator watching our every move, auditing every receipt, waiting for a typo so they can pounce. Is that reality?

Speaker 2: 6:33

I wish the state governments were that well funded, but no, that is not reality at all. This is the resource reality check we need to have. State agencies are notoriously under-resourced. They do not have the staff, the budget, or the time to actively hunt for every minor violation or typo.

Speaker 1: 6:50

Aaron Powell So there isn’t a room full of forensic accountants scrubbing every Form 990 that comes in the door.

Speaker 2: 6:56

Definitely not. They aren’t scouring the internet looking for a reason to find you. It is just not a good use of their limited time.

Speaker 1: 7:01

Aaron Powell That is a relief, but it begs the question if they aren’t hunting, how do they decide who to investigate? Because investigations do happen. We know that.

Speaker 2: 7:08

They are reactive. They rely on triggers or red flags. They wait for the smoke before they look for the fire. And do you know what the number one driver of regulatory attention is?

Speaker 1: 7:19

I’m assuming it is something financial, maybe a math error.

Speaker 2: 7:22

Aaron Powell You would think so. But no, it is public complaints.

Speaker 1: 7:26

Really? Just a phone call from a member of the public.

Speaker 2: 7:29

Aaron Powell A phone call, an email, a web form submission, a donor feels harassed, a donor feels misled by an ad, or very commonly, a donor asks for a financial statement, which they are legally entitled to do, and the nonprofit ignores them.

Speaker 1: 7:43

Oh wow.

Speaker 2: 7:44

That donor gets annoyed, calls the AG’s office, and suddenly you have an investigation file opened.

Speaker 1: 7:49

That is fascinating. So customer service is actually a frontline legal compliance strategy.

Speaker 2: 7:54

One of the best you can possibly have. Treat your donors well, answer their questions quickly, and you stay off the radar. But there are other triggers, of course. Inconsistent disclosures are a big one, telling the IRS one thing and the state another. But here is where it gets really counterintuitive. Significant fundraising growth is a major trigger.

Speaker 1: 8:10

Wait, success is a red flag?

Speaker 2: 8:12

It definitely can be.

Speaker 1: 8:13

That seems unfair. Congratulations on your best year ever. Here is a subpoena for your records.

Speaker 2: 8:18

It feels that way, doesn’t it?

Speaker 1: 8:20

Yeah.

Speaker 2: 8:20

But think about the math of it. Sudden spikes in revenue draw attention because they change the risk profile. If you have been raising $100,000 a year for five years and suddenly you raise $2 million, the regulator goes, Whoa, what changed?

Speaker 1: 8:37

Right. Where is this influx of cash coming from and where is it going?

Speaker 2: 8:41

Or think about very visible campaigns. If you are suddenly all over television billboards, or you have a viral social media campaign that raises $5 million in a week, but you don’t have corresponding filings in those states, that is a massive red flag.

Speaker 1: 8:55

So the paradox is that the better you do, the more visible and successful your fundraising is, the more likely you are to end up on the regulator’s radar.

Speaker 2: 9:03

Because visibility equals risk for the consumer. If you are raising a million dollars, the potential harm to the public is significantly higher than if you are raising $1,000. So naturally, the regulator pays more attention to the million dollar campaign. It is not punishment, it is just risk management.

Speaker 1: 9:19

That makes perfect sense when you frame it that way. So let us play this out. Let us say you trigger one of these red flags. Maybe you had a viral campaign and forgot to register in a few states, or a donor complained. Now the regulator is looking at you. How do they actually investigate? Do they subpoena your internal emails immediately? Do they want to see your board minutes?

Speaker 2: 9:39

Usually no. Not at first. They start with what we call a public domain investigation. And this is the part that I think really blows people’s minds. The regulator is looking at the exact same things your donors are looking at.

Speaker 1: 9:52

They are just Googling you.

Speaker 2: 9:53

Essentially, yes. They are looking at your website, they are scrolling through your social media feeds, Instagram, Facebook, LinkedIn. They are reading your donor emails if they have been forwarded to them by a complainant. Yeah. And critically, they are pulling your Form 990, which is a public document available on GuideStar or the IRS website.

Speaker 1: 10:12

It sounds so simple, but it is actually kind of terrifying. It means your marketing team and your compliance team need to be operating in complete lockstep.

Speaker 2: 10:20

That is the key takeaway here. Compliance isn’t just what you put on a state form that gets filed in a drawer somewhere. Compliance is what is observable to the world. If your website says 100% of proceeds go to the victims, but your form 990 shows 40% going to administrative costs, that is a major problem.

Speaker 1: 10:40

And that is a problem because it is public. Anyone with an internet connection, including the regulator, can see that contradiction instantly.

Speaker 2: 10:47

Right. You have created a discrepancy that is incredibly easy to prove. They don’t need a warrant to find that. It is sitting right there on your homepage and your tax return.

Speaker 1: 10:58

This brings us back to that word you mentioned earlier, consistency. It sounds like the regulator is basically playing a giant game of spot the difference.

Speaker 2: 11:06

That is a great way to put it. They are cross-checkers. Imagine the regulator sitting at their desk. They have your charitable registration application on one screen, they have your renewal submission on another, they have your Form 990 on a third screen, and your website open on a fourth.

Speaker 1: 11:20

And they are just looking for where the stories diverge.

Speaker 2: 11:22

They are looking for alignment. Does the financial data in the renewal match the 990 exactly? Does the description of the program on the website match the mission statement you put in the registration?

Speaker 1: 11:34

And what happens if the numbers don’t match?

Speaker 2: 11:36

Then they have questions. And look, sometimes it is just an honest error. Sometimes the fiscal years are different or the accounting method varies. Maybe you used cash accounting on one form and accrual on another. But to a regulator, inconsistency looks like evasion, or at best, incompetence.

Speaker 1: 11:54

And neither of those is a good look for a trusted public charity.

Speaker 2: 11:57

No, not at all. Inconsistency creates confusion. And confusion breeds suspicion. If you can’t get your basic numbers to match across public documents, how can they trust you with donor funds? On the flip side, consistency signals organizational reliability. When the story in your 990 matches the story on your website, which matches the story in your state filings, the regulator assumes you know what you are doing. They trust you. They close the file and move on to the next one.

Speaker 1: 12:24

So let us talk about the consequences. We have established that they aren’t actively hunting you down, but if they find an inconsistency during this spot the difference game, what actually happens? I think people imagine the FBI kicking down the door and seizing the servers.

Speaker 2: 12:40

It is rarely that dramatic. Again, we have to look at the regulator’s ultimate goal. They are not in the business of shutting down charities. They don’t want to hurt the beneficiaries of your mission. They don’t want to take food away from the food bank. Their goal is corrective compliance.

Speaker 1: 12:54

Corrective compliance. That sounds a lot friendlier than an enforcement action.

Speaker 2: 12:59

It is. They want you to get it right. They want you to come into compliance. If you respond to an inquiry promptly, if you own the mistake and fix it, they are usually satisfied. They prefer organizations that cooperate. They are not looking to punish you just for the sake of punishment.

Speaker 1: 13:15

That is reassuring. It sounds like they are willing to work with you if you are acting in good faith. But I want to circle back to something we touched on a minute ago. Growth. We said success is a trigger. As a nonprofit grows, does the leash get tighter?

Speaker 2: 13:28

I wouldn’t say the leash gets tighter, but the expectations definitely rise. It is about organizational maturity.

Speaker 1: 13:34

What does that mean in practice? What is the difference between a small shop and a big player in the eyes of a regulator?

Speaker 2: 13:42

It means that if you are a small local charity raising $50,000, a minor paperwork error might be seen as a learning opportunity. The regulator might send a letter saying, hey, fix this next time. But if you are a multi-state organization raising $50 million, that exact same error is seen as a governance failure.

Speaker 1: 14:03

Because at $50 million, you should know better.

Speaker 2: 14:06

Exactly. You have the resources, you have the staff. You probably have a CFO and outside council. As you expand geographically and financially, regulators expect your internal controls to expand too. You can’t run a multinational operation with the same back-end systems you used when you were working out of a garage.

Speaker 1: 14:21

That seems totally fair. But it implies that compliance is a moving target. It is not just something you set up once during incorporation and walk away from.

Speaker 2: 14:29

It is absolutely a moving target. And this brings us to a really important theme for this deep dive, something that connects everything we have discussed today.

Speaker 1: 14:38

What is that?

Speaker 2: 14:39

Compliance tends to expand alongside fundraising growth. And organizations that review requirements periodically avoid most problems.

Speaker 1: 14:48

I want to repeat that because it feels like the thesis statement of this whole conversation. Compliance tends to expand alongside fundraising growth, and organizations that review requirements periodically avoid most problems. It is not a static thing.

Speaker 2: 15:02

No, it is not. It is a living, breathing part of your organization. Yeah. You can’t just set it and forget it in year one. As your fundraising strategy evolves, maybe you start using professional solicitors, maybe start a commercial co-venture, maybe you expand digital ads to entirely new states. Your compliance strategy has to evolve right alongside it. If you review those requirements periodically, you’re going to catch those growing pains before they ever become regulatory issues.

Speaker 1: 15:27

That is really the mindset shift, isn’t it? Stop treating compliance like a one-time punishment or a box to check during startup and start treating it like an integral part of your growth strategy.

Speaker 2: 15:38

Absolutely. It scales with you. It protects the value of the brand you’re actively building.

Speaker 1: 15:42

So let us boil this down. We have a listener who is maybe the CFO or the director of development. They are listening to this on their commute and they want to keep the regulators happy. They want to stay off the radar and sleep well at night. What is the cheat sheet? Give us the practical takeaways.

Speaker 2: 15:57

I would synthesize it into four main steps.

Speaker 1: 15:59

Okay, let us take them one by one. Step one.

Speaker 2: 16:02

Step one, maintain accurate public messaging. Before you launch that next big campaign, look at it through the eyes of a consumer protection lawyer. Is it true? Is it accurate? Does the impact you are claiming actually match where the dollars are going? If you claim all proceeds go to a specific program, verify that your accounting actually reflects that exact allocation.

Speaker 1: 16:25

So vet the marketing copy for truth, not just catchiness. That protects you from the misleading solicitation trap. What is step two?

Speaker 2: 16:33

Keep your filings aligned. Ensure the story in your 990 matches the story in your state renewal. Do that cross-checking yourself before you ever hit submit. Don’t let the regulator be the first one to notice a discrepancy between page 10 of your tax return and page 2 of your state registration.

Speaker: 16:50

That is a great tip. Be your own auditor. Catch the typo before they do. Step 3.

Speaker 2: 16:56

Respond to inquiries promptly. If a regulator sends a letter, answer it. Ignoring it is the fastest way to turn a minor inquiry into a major costly investigation. Showing you our responsive bills that trust we talked about, it shows you aren’t hiding anything. Even if you need more time to gather the information, write back and say that. Silence is always interpreted as guilt.

Speaker 1: 17:17

And finally, step four.

Speaker 2: 17:19

Periodically review the scope of your fundraising. Just like we said, compliance expands with growth. Once a year, maybe right before your renewal season kicks off, sit down and ask, where are we fundraising now? Have we started email campaigns in new states? Have we hired a professional solicitor? Are we doing anything different this year than we did last year? Make sure your registrations match your current reality.

Speaker 1: 17:39

It really is about transparency over technicalities.

Speaker 2: 17:42

That is the perfect way to sum it up. If you focus on being transparent with your donors and the public, the technical rules usually take care of themselves. The forms are just the vehicle for that transparency.

Speaker 1: 17:54

This has been such a helpful reframing. It takes the fear out of the process. When you realize the person on the other side of the desk isn’t a monster, but just someone trying to make sure the public isn’t getting ripped off, it feels a lot less adversarial.

Speaker 2: 18:07

That is the goal. When viewed through the regulator’s lens, compliance becomes less about paperwork and more about maintaining public trust. And honestly, that is what every nonprofit wants anyway. Without trust, you can’t raise money and you can’t fulfill your mission.

Speaker 1: 18:23

Clarity and consistency make the process manageable. Here is a final provocative thought for you to explore on your own. If transparency is the ultimate goal, how might making all your compliance documents easily accessible and visible on your own website change the way donors and regulators perceive your organization’s reliability? It is worth considering. If you found this discussion helpful, you can find additional compliance guides and visual resources at Ironwood Registrations.com. Thanks for listening.