The Office of the Attorney General (“AG”), Department of Justice (“DOJ”) of the State of California is proposing to amend certain regulations and Forms that will affect charities subject to registration in California. The Notice of Amendments to Regulations and related documents can be found here. We wrote about proposed changes to the Initial Registration Form CT-1 here and the Annual Registration Renewals here. In this post, we look at existing and proposed reporting requirements with specific references and/or application to fiscal sponsors with operations in California.
Part I, Item 3 of the Proposed Form CT-1 asks: “Does the organization share revenue or governance with any other non-profit organization (e.g., fiscal sponsorships and affiliations)? If yes, identify by name, address, and telephone.
The question is flawed in our opinion for two principal reasons. First, fiscal sponsorship is not a defined term and may have very different meanings to different parties. Second, fiscal sponsorship (as the term is used by organizations that refer to the models described by Greg Colvin in his book, Fiscal Sponsorship: Six Ways to Do It Right) describes a number of very different arrangements. In its most common forms, comprehensive fiscal sponsorship (also known as Model A) and pre-approved grant relationship fiscal sponsorship (also known as Model C), it does not involve shared revenues or governance. As I explained in an article published by The Nonprofit Quarterly:
In the comprehensive model, the party entering into the fiscal sponsorship agreement with the fiscal sponsor is generally giving up all ownership and control of the project to the sponsor and retaining only the right to enforce, amend, or terminate the agreement and have the project transferred to another qualified fiscal sponsor. In contrast to the fiscal sponsor, the other party to the agreement is not a tax-exempt entity able to directly receive deductible charitable contributions and is likely not properly registered to solicit charitable funds or assets. Most often, it’s just some form of steering committee with minimal activity of its own, which helps minimize any risk that might otherwise be borne by its members. Less often, it’s an individual who creates a project committee that is an internal committee of the fiscal sponsor and not a separate legal entity.
Fiscal Sponsorship: A Balanced Overview
In the pre-approved grant relationship model, the party entering into the fiscal sponsorship agreement with the fiscal sponsor is the sponsor’s grantee. Unlike with the comprehensive model, the project is owned by the grantee, not by the fiscal sponsor. Accordingly, the project’s assets and liabilities belong to the grantee, which is responsible for its own tax and filing obligations.
Fiscal Sponsorship: A Balanced Overview
In either of the models described above, the party entering into the fiscal sponsorship agreement with the fiscal sponsor (the “Sponsoree”) typically does not “share revenue” with the fiscal sponsor. In the comprehensive model, the revenue only belongs to the fiscal sponsor and never is controlled by the Sponsoree. In the pre-approved grant relationship model, the revenue is raised by the fiscal sponsor and then granted to the Sponsoree, assuming the Sponsoree continues to meet the qualifications required by the fiscal sponsor (e.g., the ability to use the grant for exclusively charitable purposes within the mission of the fiscal sponsor). It would not make sense if every charitable organization required to register with the AG is required to report the name, address, and phone number of every single grantee. Accordingly, grantmaking cannot be considered sharing revenue, though that is not made explicitly clear.
The reference to sharing of governance is not defined in the proposed Form, which will, if adopted, lead to widespread confusion of whether to conservatively report any governing body members common to the fiscal sponsor and Sponsoree or to report only where there is significant overlap, however that might be determined by the reporting organization (and of course there would be wide variations in reporting). It would not make sense if every charitable organization required to register with the AG is required to report the name, address, and phone number of every single organization with which it has any overlapping board members. But it’s unclear at what point two organizations have shared governance except perhaps when one organization has the right to select a controlling number of governing body members of the other organization or when the majority of one organization’s governing body consists of governing body members of the other organization.
If it is the intent of the AG to simply seek the name of every fiscally sponsored project, it might not be much different from requiring the name of every internal program and grantee of an organization. If the rationale of having a committee sign the fiscal sponsorship agreement is simply to give the committee members the collective right to eventually move the project to another qualified fiscal sponsor or other charitable organization, and to enforce the proper management of the project and/or restricted fund by the fiscal sponsor, it doesn’t make sense for the AG to require every committee members’ names. It would also be unlikely for the committee to have an address or phone number.
Where fiscal sponsorship is not done properly, however, there may be an important reason for the AG to know when another organization is exercising control over the fiscal sponsor’s assets. If this is the primary motivation behind the question, perhaps it might be reworded to ask: “Does the organization give up control of its assets to any person or organization that has not registered with the Registry of Charitable Trusts? If yes, identify by name, address, and telephone. The instructions can then state that grantmaking, other lawful transfers of assets, and delegations of management authority subject to the ultimate control and discretion of the fiscal sponsor’s board would not constitute giving up control of the organization’s assets. This question might also uncover improper donor-advised fund arrangements as well. I’ll confer with my team before submitting our comments to the AG. We hope fiscal sponsors in California will take a strong look at the proposed question and submit comments in light of its problems.