Staying Legal While Advertising Good Deeds

 In Startup Corner

Navigating the Laws Around Cause Marketing

Suppose that you wish to support a particular charitable cause with your business. You will probably
want to identify your brand or a particular product line with the cause and let your customers
know that you will donate some portion of revenue or profits to the cause. In addition to the
social or environmental impact from your donations, recent studies have shown there are some
compelling “business” reasons for a business to pursue such a “cause marketing” campaign. A 2010
found that 86% of worldwide consumers feel that business needs to place at least equal weight on
societal interests as on business interest and another study that year determined that 90% of consumers
want companies to tell them the ways they are supporting causes. According to a 2008 study of
American consumers, 79% would be likely to switch brands (assuming equivalent price and quality) to a
brand associated with a good cause.

Several of our clients, including Cultivate Wines and Altruette, are making their commitment to
charitable causes and donations a core aspect of their business and their marketing appeal, and we have
had the opportunity to help them understand and comply with numerous state laws applicable to cause
marketing. The bottom line is that “cause marketers” are operating in state-regulated terrain. Nearly
every state has its own laws to deal with the solicitation of funds for charitable causes and in most
states “cause marketing” is to some extent regulated. The key is making a statement to consumers that
some portion of the price they pay will go to a charitable cause. If a business simply wants to donate
some percentage of its revenue or profits to a good cause and does not tell its consumers that it is doing
this as part of its sales solicitation, it is generally free to pursue this path without being subject to the
charitable solicitation regulations (although the business should be aware that there are certain limits
on tax deductability of donations – for instance a maximum of 10% of a C-corporation’s net taxable
income). If a business, however, induces sales with a statement that such sales will benefit a charitable
cause/nonprofit, under many state laws it is considered a “commercial co-venturer.”

The various states each have their own specific requirements and regulations for commercial co-
venturer. Many state commercial co-venturer regulations are relatively easy to comply with – the
most basic requirement in most states is that the business should be very specific in its advertisement/
sales disclosure regarding what dollar amount or percent will benefit the charitable cause. This is, for
instance, the approach in Colorado (and Colorado in fact only actually requires this if a co-venturer
expect that more than 50% of the sales will be in Colorado). A handful of jurisdictions (notably Maine,
Massachusetts, Alabama, D.C. and Illinois) require state registration of co-venturers. In California, a co-
venturer can avoid registration if it ensures that its contracts contain some very specific requirements
(the co-venturer has to ensure, for instance, that it pays the charitable cause every 90 days and must
include very specific written disclosures to its customers). In states that require registration, the fees
tend to be approximately two or three hundred dollars annually, co-venturers generally have to make
certain annual financial disclosures to state regulators, and often have to post a bond. In addition, there
are many states that require co-venturers to have written contracts with the charitable organizations
and require co-venturers to file these contracts with the state attorney general’s office. Numerous states
have particular requirements of what to address in the contracts between co-venturers and
charitable organizations.

The trickiest aspect to state compliance for co-venturers involves cause marketing over the internet.
Suppose a business sells products over the internet and the website indicates that a certain percentage
of sales will be sent to a charitable cause. The business is in theory soliciting customers in every state
(and even worldwide), so is it subject to the regulations of every state? The time and cost of compliance
in every state would not be a significant burden relative to sales for a large company like Proctor &
Gamble, but could potentially be prohibitively costly and burdensome for a small web-based startup.
Stay tuned! We will explore this issue further in a future post.

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