State Investigations: What Nonprofits Should Know

Let’s say you find yourself in a sticky situation under intense public scrutiny: Your nonprofit has disregarded fundraising registration compliance responsibilities, and state regulators have found out their constituents are being solicited by your team without proper registration. When a compliance issue arises, regulators and nonprofit teams alike get thrown into a complicated dance—it’s no longer just paperwork filings and fees, it’s about public trust, donor confidence, and your organization’s integrity. 

This article provides insight for nonprofits about what regulatory action could look like in a worst-case scenario—where you get “caught” fundraising without being actively registered, or have registered but face escalating state enforcement (such as when a charity has severely fallen behind in submitting its renewals).

NASCO (National Association of State Charity Officials)** graciously shared state regulators’ typical enforcement actions in a presentation at their public compliance conference. What state regulators ultimately want is for nonprofits to be registered and compliant, not at the end of a pitchfork nor made an example of publicly. The following provides insight into what enforcement may look like when a nonprofit finds itself in such a pickle, and our pragmatic suggestions (not legal advice) on how you might respond… proactively, wherever possible.

How State Inquiries Relate to Fundraising Registration

Naturally, when we’re dealing with different regulatory agencies across so many different states, there’s a lot of variation across acceptable gray areas and decisive penalties. What’s defined below is what graduated enforcement looks like in a perfect world, but bear in mind that each state office (and regulator) is different. 

The process also varies between a nonprofit that was previously registered and remains on a state’s compliance radar, but fell “off the wagon” and fails to maintain annual registration, versus what it looks like when it’s not registered at all and a state discovers it has been illegally soliciting and should’ve already registered.

For a nonprofit, here’s the big picture of either enforcement issue: 

• “Graduated enforcement” happens more commonly for those who fail to maintain—A notice of expiration, late fees, possible cease and desist orders, etc. (More on this in the next section.)
• If a nonprofit has never registered before, it can involve a slightly different set of penalties that could include hefty fines or lawsuits, especially if there’s evidence of something more nefarious afoot than just dodged registrations.  

What Is “Graduated Enforcement”?

When a nonprofit gets flagged by regulators for unlawful charitable solicitation activity (could be as simple as failing to fill out the paperwork properly, if at all), they usually won’t jump directly to strict legal action. There is some breathing room shortly after regulators reach out to your team regarding why it was flagged—this is your chance to make things right. 

A “graduated enforcement” model is followed by most states, consisting of a tiered process that gives organizations a chance to correct issues before facing formal litigation.

Regulator communication escalations may be gradual, but they won’t be ignored. They generally follow these incremental steps:

1. Preventative Scrutiny  

• Informal Contact: A casual email, or phone call, asking for clarification.
• Informative Letter: A formal communication (email, letter, fax, etc.) flagging an issue.
• Inquiry Letter: A deeper concern, requesting specific documents or explanations.

2. Intermediate Intervention

• Assurance of Discontinuance (AOD): An agreement between the nonprofit and state to stop or change certain practices.
• Cease & Desist Order: A formal command to stop certain activities, such as fundraising and soliciting.

3. Litigation

• Formal Investigation: A comprehensive review, often with legal counsel involved.
• Lawsuit: The final step when all other options have failed, or the issue is severe.

Let’s be clear: Most of these escalated enforcement options won’t result from just lapsed or nonexistent registrations. They’re usually reserved for abuse of nonprofit status. However, lapses of compliance can create costly issues that don’t go away on their own.  

Nonprofits Under State Regulator Scrutiny 

Let’s say you’ve let state charitable solicitation registration fall off your radar for a few years (it’s a mouthful just to say, let alone complete—we get it), or worse, there’s been a formal complaint against your organization about misuse of funds, and the inquiry jumps to Step 3: Litigation. Regulators want answers and the public is knocking on your door for a change. Your initial reaction to the news will set the stage for how rough (or smooth) this process flows, and if escalation will happen quickly, or not at all. 

Here’s what nonprofit leaders should do right away:

• Determine who needs to be looped in: Board members? Senior leadership? Key staff?
• Assign leadership for the response: Is this PR’s role? Legal counsel? HR? Does the board oversee the investigation?
• Create a response plan: Define the scope and timeline for any investigation, and plan out internal/external communications.

Tip: Process is everything. Plan ahead for the worst-case scenario. Be thorough, be clear, and document each step.

If the issue becomes public, the state charity regulator (often the Office of the Attorney General (OAG)) will likely:

• Expect a call from leadership.
• Receive public records requests from the press and donors about the organization.

To determine next steps, they’ll immediately begin assessing:

• Compliance history,
• Existing public filings, 
• Jurisdiction and potential legal paths,
• Who is expected and able to act,
• Cooperation level of the organization, &
• Nature of alleged issues.

Why Investigations Matter (and Who Cares)

Now the heat’s on—the previously determined process for initial reaction has been followed to a T, but transparency is key in how a subsequent investigation is handled. From regulators to donors, and even internal board members, everyone has a set of expectations for accountability. 

From the OAG’s Perspective:

• They expect full cooperation & transparency from the nonprofit throughout the regulatory process.

From the Public’s Perspective:

• They’ll want to ensure the board is taking the situation seriously.

From Inside the Organization:

• Understand exactly what happened and who was involved.
• Decide what internal changes or corrections need to happen.
• Most importantly, rebuild trust with regulators, donors, staff, and the public through transparency and accountability.

Worst case scenarios haunt us all, but in the nonprofit world it could mean the loss of progress in the mission field. Silence and delays while backpedaling to make sense of a mess will only make things worse. Be proactive, transparent, and willing to collaborate to find the best-case solution. Compliance isn’t just about rules, it’s about reputable trust; the one thing you can’t afford (literally $$$) to lose.

Reputation is the Carrot, Investigation is the Stick 

Following the designated rules and regulations surrounding solicitation is not a very shiny “carrot,” so what’s the “stick”? 

Failing to initiate and maintain annual state charitable solicitation registration responsibilities breaks the law. That action (or inaction, in terms of registration) is not without consequence. It’s incredibly easy for concerned citizens to report unregistered charities, which could: 

• Put your 501(c) status at risk, 
• Hold your board members personally liable, 
• Add fines and penalties to your overall process, and 
• Lose donors, or grants, or the right to fundraise in set jurisdictions.

While this list of losses may sound dire, remember what we said before: what the states ultimately want is for nonprofits to be registered and compliant, not prevent their ability to fulfill their mission or levy punishment. Most states will work with you if you’re upfront about all solicitation activities and show a desire to be in compliance.

Affinity is a Third-Party Compliance Provider

Affinity Fundraising Registration offers a variety of charity registration solutions, specifically for nonprofits looking to complete all state charitable solicitation registration requirements, both initially and annually. Our most popular plan, the Full Support service, takes care of all your registration needs with expert reviewers and streamlined software to help get registrations done with minimal hiccups.

Need help navigating your compliance status? Affinity has been in the game for almost two decades—fill out our online form for a free estimate of fines and fees.

**“Thank You!” to NASCO for their supportive transparency in providing the information that served as the basis for this piece.

Disclaimer

The information provided on this page is intended purely for educational purposes and should not be construed as legal advice. Every effort has been made to ensure the accuracy and completeness of the information up until the published date. However, laws related to fundraising registration are subject to change, and variations may occur between states. Furthermore, the interpretation and enforcement of these laws can often be complex, and the specifics of your situation can impact how the law applies.

Affinity Fundraising Registration is not a law firm and, as such, cannot provide legal opinions. For all specific legal questions or concerns, we strongly recommend consulting with a qualified attorney who is experienced in nonprofit law and compliance. Hiring a legal professional ensures that your organization is fully aware of its obligations under the law and can act accordingly to remain compliant. 

By using this site, you acknowledge that Affinity Fundraising Registration holds no liability for any consequences, legal or otherwise, resulting from actions taken based on the information provided on this page.