Risks of improperly filing as a commercial co-venturer

If you know your company meets the requirements for being a commercial co-venturer (CCV), you might be wondering: what are the potential downsides of not registering properly? What happens if I’m not legally compliant? 

If you are a business selling your product or service online and you:

• Have a working partnership or agreement between a for-profit and a nonprofit;
• Fundraise for a charitable cause;
• Use the nonprofit's name and likeness in advertising; and
• Operate in states that have CCV requirements

Then you are a commercial co-venturer and subject to myriad state regulations.

As a CCV, your business can be legally compliant by doing the following:

• Register the for-profit and nonprofit relationship in every state in which you solicit donations.
• Establish a contracted relationship with the nonprofit.
• Disclose the relationship and the economics of donations to potential donors.
• Keep accurate records, particularly of donations to each charity.
• Regularly update state filings, including campaign reports and annual reports.
  

Not filing the proper paperwork for a CCV can expose the business – and sometimes the nonprofit partner – to a variety of risks.

Here are some of the potential risks:

Risks of improperly filing commercial co-venturer paperwork

1. Legal penalties

In many jurisdictions, there are specific regulations governing charitable promotions.  Failing to adhere to these can result in fines, penalties, or other legal actions against the commercial entity.

Many states are doubling down on regulatory enforcement. The California Department of Justice recently ordered a cease and desist order against a popular charitable fundraising company for not properly filing the correct CCV paperwork. We believe this fine is the first of what will be a regular regulatory occurrence with the California Department of Justice. The penalties from the California Department of Justice are eye watering: $1,000 for failing to register as a CCV, plus $100 per day for each missing report per nonprofit. A business that is raising money with cause marketing for multiple charities (say, five) can incur penalties of $17,500 in the first week alone.

2. Loss of public and consumer trust

State filings and cease and desist orders are public filings.  Transparency is crucial when partnering with a charitable organization.  Misrepresenting or failing to disclose the nature of the partnership or the exact benefits to the charity can lead to a loss of public trust, damaging the reputations of both the business and the nonprofit.  A public filing that infers that you aren’t playing by the rules with a nonprofit and giving them their funds is disastrous.

That same California DOJ cease and desist order included the following language: “Sample Company, LLC must immediately disperse all charitable assets within its possession, custody or control to charitable organizations for which the assets were raised…”

A customer reading this immediately thinks your business was keeping money donated on your site instead of giving it to the charity. And a donor on your site will be furious. This is the exact opposite effect you were trying to achieve by engaging in cause marketing with your business.

3. Potential for litigation

If you have an inadequate contract between your company and the nonprofit, it can lead to a misrepresentation or misunderstanding of the partnership. This misunderstanding could lead to litigation from disappointed donors, other businesses, or the charity itself.

Any form of litigation involving mismanagement of charitable donations is a public relations disaster. 

4. Loss of charitable funds 

States want to make sure nonprofits do their part to assure legal compliance as well.

If the proper paperwork isn't filed and there's a legal infraction, any funds raised might be held up, refunded, or even forfeited, depending on local laws and regulations.

5. Revocation of charitable status for the nonprofit

“Good Standing” status for a nonprofit is often contingent on a lack of judgments, state regulatory actions, and other administrative actions.

If you’re the nonprofit involved, and you don't ensure your for-profit partners are compliant, you risk investigations that could compromise your charitable status or lead to other penalties. 

6. Damaged relationship between company and nonprofit

Without proper paperwork, the terms and conditions of your CCV partnership might be unclear. This can lead to disputes and potential litigation over disagreements in profit sharing, the use of branding, and other aspects of the partnership. It’s a regulatory requirement for a CCV to have a contract between both parties, but it’s also a great idea for clarity in the relationship. If you’re on the same page, the business relationship will last longer!

7. Regulatory scrutiny

Both your business and the nonprofit may come under increased scrutiny from regulatory bodies if the partnership isn't properly documented.

Regulatory scrutiny can lead to additional legal compliance costs and potential disruptions to your operations.

8. Tax implications 

Improper documentation can lead to financial implications. For example, your businesses might miss out on tax deductions or face penalties if the disbursements to charities cannot be proved to be compliant and documented for tax purposes.

‍

Regulatory implications for commercial co-venturers are THE hot topic for businesses and nonprofits facilitating online donations.

Based on requests from our customers, we offer a commercial co-venturer regulatory solution that helps customers assure they are compliant and meet their state’s regulatory requirements.