New California Regulation Poses Threat to Nonprofits Not Properly Registered

venus flytrap - dionaea muscipula with a trapped fly

Effective as of January 1, 2016, new regulations related to administrative enforcement of violations of the Supervision of Trustees and Fundraisers for Charitable Purposes Act go into effect. We wrote about the regulations when they were first proposed (see our post explaining our opposition to the regulations here).

Also read Erin Bradrick’s article in the Nonprofit Quarterly:

California’s New Regulations: The Start of a New Problematic Trend in State Charity Oversight?

Now that regulations are set to become law, all nonprofits operating and/or raising charitable funds in California must be prepared to comply and stay in compliance with the registration requirements. Failure to comply can result in suspension or revocation of a nonprofit’s registration status, and operating while suspended or revoked can potentially result in dire consequences, including, in worst case scenarios, personal liability of board members and forced distribution of the nonprofit’s assets to another nonprofit.

Registration and Annual Reporting Requirements

The California Office of the Attorney General (“AG”) describes the registration and reporting requirements (applicable to most 501(c)(3) and 501(c)(4) organizations except religious organizations, educational institutions, and hospitals) as follows:

The Supervision of Trustees and Fundraisers for Charitable Purposes Act (Government Code sections 12580-12599.8) requires registration and annual reporting by all charitable nonprofit corporations, unincorporated associations, trustees, and other legal entities holding assets for charitable purposes. The law’s application is not limited to entities that are tax exempt under section 501(c)(3) of the Internal Revenue Code. With very limited exception, the Supervision of Trustees and Fundraisers for Charitable Purposes Act applies to any person/entity holding money or property for charitable purposes, including entities that are tax exempt under other subsections of 501(c), entities that are not tax exempt, and for-profit entities that hold assets for charitable purposes. … Nonprofit religious organizations, educational institutions, and hospitals are exempt from the registration and reporting requirements.

Suspension or Revocation by the AG

Registration status refused, suspended, or revoked for:

  • Misuse of charitable assets
  • False or misleading statements and/or conduct in connection with a solicitation for charitable purposes
  • False or misleading statements in a requiring filing with a government agency, including the AG, IRS, and Franchise Tax Board (FTB) – Note that the omission of material information in a required filing, like a redacted schedule of contributors (Schedule B, Form 990) filed with the AG, constitutes a false or misleading statement.
  • Failure to comply with statutory Standards of Conduct applicable to directors and managers

Registration automatically suspended for:

  • Nonprofit’s tax-exempt status is suspended (which can happen with missing a single filing) or revoked (which will happen automatically with missing required filings for 3 consecutive years) by the IRS or FTB
  • Nonprofit fails to file with the AG an annual registration renewal (Form RRF-1) together with a copy of its Form 990 for 3 consecutive years
  • Nonprofit corporate status is suspended or revoked by the California Secretary of State (which can happen with missing a single filing of a Statement of Information)

Prior to suspending an organization, the AG will first mail a notice to the registrant identifying what is needed to resolve the suspension. If the AG does not receive the information needed to resolve the suspension within 30 days of the issuance of the notice, the registration is suspended. This notice will only be helpful if the AG has the current address of the organization on its records.

Registration automatically revoked (without further action by the AG) if:

  • Nonprofit has been suspended for one year.

Potential Penalties for Operating While Suspended or Revoked

As a result of operating while suspended or revoked, directors may be held personally liable and the AG may direct the nonprofit’s funds be distributed to another nonprofit. While the AG has informally told us that it would not take such actions except in egregious cases, it has the authority to use its discretion without any further evidence of misconduct. When you factor in that more than 100,000 nonprofits operating in California are not in compliance with the registration requirements and the AG is now going to make a push at compliance, it’s now critical for nonprofits to comply with all of the registration and reporting requirements with the AG, the California Secretary of State, and the FTB. As Erin writes in the Nonprofit Quarterly article:

Section 999.9.3 of the regulations provides that, if an entity that is required to register with the California Attorney General’s Registry of Charitable Trusts has had its registration suspended or revoked, “[m]embers of the board of directors or any person directly involved in distributing or expending charitable assets [while the organization is suspended or revoked without the written approval of the Attorney General] may be held personally liable” for the amounts of such expenditures. The same Section goes on to provide that “[t]he Attorney General may direct a registrant whose registration has been suspended or revoked to distribute some or all of its charitable assets…to another charitable organization or into a blocked bank account.”

Make sure you file (unless you’re exempt from the filing requirement):

California Nonprofits

  • Form CT-1 (initial registration) or Form RRF-1 (registration renewal) together with a Form 990 with the AG every year
  • Form CT-694 (annual solicitation financial report) with the AG for each year in which more than $1 million was collected in contributions from donors in California
  • Form 199 or 199-N with the FTB every year
  • Statement of Information (Form SI-100) with the Secretary of State every two years (or earlier if updating certain information)

Out-of-State Nonprofits Operating in California

  • Form CT-1 (initial registration) or Form RRF-1 (registration renewal) together with a Form 990 with the AG every year\
  • Form CT-694 (annual solicitation financial report) with the AG for each year in which more than $1 million was collected in contributions from donors in California
  • Form 199 or 199-N (if the nonprofit is recognized by the FTB as tax-exempt) or Form 100 (if the nonprofit is taxable) with the FTB every year
  • Statement of Information (Form SI-350) with the Secretary of State every year (or earlier if updating certain information)

Out-of-State Nonprofits Fundraising Residents of California

  • Form CT-1 (initial registration) or Form RRF-1 (registration renewal) together with a Form 990 with the AG every year
  • Form CT-694 (annual solicitation financial report) with the AG for each year in which more than $1 million was collected in contributions from donors in California