Commercial Co-Ventures Explained
A commercial co-venture is a marketing concept used by nonprofits and for-profits where there is a contractual arrangement in which a for-profit company advertises that the purchase of its goods or services will benefit a charitable cause, and the for-profit company makes a set monetary donation for each sale, or a percentage of each sale. Commercial co-ventures may also include a sale to benefit a charity, "in conjunction with the sale of a product."
Even though for profits are making a "donation" to a charity, they still receive an advertising and marketing benefit from that donation, even though that may only be an incidental benefit . For example, a shoe company might donate $1 to the Leukemia and Lymphoma Society for every pair of shoes sold, but the shoe company would receive $2.50 in media value for the promotion and placement of that campaign. The famously litigious state of Florida requires companies and nonprofits to enter into a written agreement and file an annual report with the state when conducting a commercial co-venture campaign. But not all states regulate commercial co-ventures. Some states do not have any laws regarding them. Others, like California, have laws prohibiting them unless there is an agreement in place.
Why Co-Venture Laws Differ Across States
The laws that govern commercial co-ventures are different in each of the 50 states and the District of Columbia. The reason? Because states have different laws, called "charitable solicitation registration statutes," that require specific disclosures before asking potential supporters for funds or support. Each statute is designed for the state’s particular way of regulating the solicitation of funds in order to further a charity’s purposes.
Commercial co-venture laws are unique to their states and share few similarities. Some states have laws that only regulate commercial co-ventures that seek donations in that state. Other states require anyone entering into a type of commercial co-venture agreement to comply with every state’s laws, whether the co-venture raises money in another state or not. In contrast, most commercial co-venture agreements and co-venture contracts only require the parties to comply with the laws of a single state (if any at all), so it is critical for business and charities to evaluate the requirements of every state in which they are likely to do business together.
States with Distinct Commercial Co-Venture Regulations
While most states either have no registration requirements for commercial co-ventures, or follow some form of the AAA Commercial Co-Venture Agreement, there are a handful of states with more specific co-venture regulations.
The District of Columbia’s co-venture law is unique in that the District is one of the few jurisdictions that requires the filing of a written co-venture agreement with the District’s Office of the Corporation Counsel (the "OCC"). Moreover, the District’s law also requires that the parties file a proposed agreement at least 10 days prior to entering into the agreement and prohibits the parties from entering into the agreement until 20 days after the filing of the proposed agreement. The District of Columbia also has very specific advertising regulations when a co-venture agreement is in existence, including the need to make certain disclosures. Any communications or solicitation materials disseminated in the District to promote or solicit support of the co-venture must contain certain specific disclosures, including (1) the name of the charitable organization(s) that will receive the net proceeds, (2) the percentage of the sales price or other consideration that shall be paid to each charitable organization and (3) the beginning and ending dates of the co-venture.
Alabama statute requires every co-venture to file a copy of the written co-venture agreement and a declaration with the state Attorney General 10 days before the commercial co-venture is to begin, and to send an annual "report of activity" to include total cashed checks, gross receipts and net proceeds, within 3 months following the end of the calendar year. The statute also includes certain required provisions that must be included in any co-venture advertisement or solicitation.
Indiana requires an annual report by any person who has entered into a commercial co-venture that received net proceeds having a value greater than $25,000, which must be filed within 90 days of the close of the fiscal year. Annual reports must include certain specific disclosures and be signed under penalty of perjury by the authorized officer of the charitable organization receiving the net proceeds.
Compliance Considerations for Co-Ventures
In order to maximize the positive impacts of a commercial co-venture campaign, companies engaging in these relationships must understand and adhere to the laws governing commercial co-ventures. There are a number of general steps businesses can take as part of an effective business strategy to ensure compliance with these regulations.
Most states require commercial co-venture charitable organizations to be properly registered with that state. Once a company identifies a charitable organization it would like to work with in a co-venture, the organization should be checked against the state’s list of eligible charities. If the charity is not already properly registered , it may be necessary for the charity to make a Pennsylvania charitable exemption filing or obtain a Pennsylvania charity license.
There are contract requirements imposed by the states. Some states also have strict disclosure requirements. In North Carolina, for example, co-ventures must inform each individual who makes a purchase about the percentage of the sales price that will benefit the charitable organization. Similarly, in Virginia, public disclosure is required, meaning both oral and written disclosures must be made to the public about what benefits will accrue to the organization and at what level the company will be donating a portion of its proceeds.
Reporting requirements for co-venturers and charitable organizations are also present in these states. Failure to comply with these laws can lead to steep fines and enforcement actions.
Recent Additions to State Co-Venture Laws
Over the past few years, there have been some legislative changes in state co-venture laws, some for the better and some for the worse. In recent years, North Carolina, Kansas, Pennsylvania and New York all amended their co-venture laws, though none of the changes were for the better. Fortunately, Connecticut and Colorado amended their laws to help businesses.
In 2016, North Carolina passed SB 823, which deleted the requirement that a commercial fund raising solicitation permit must be obtained from the secretary of state, and instead imposed the requirement on non profit organizations, and established additional registration requirements for not-for-profit corporations.
In 2012, Kansas amended its co-venture law with respect to registration requirements and required that a social security number be provided. It also required the format of the annual report to be provided in a Certified Pre-Addressed Reply Envelope. The report form is provided directly to the Secretary of State and not through a website as required by several other states.
In 2009, Pennsylvania’s increase in fees for co-venture registration essentially created a de facto ban on commercial co-venture activity in the state.
In 2008, New York directed its attorney general to analyze whether "no-cost" charities or those charities that do not pass on a substantial portion of funds to the charity, should be registered to operate in the state. The bill states that if the no-cost charity is not regulated in the state that it is headquartered, the Attorney General may conduct an audit of such charities.
Another new bill in New York attempted to impose additional requirements on charities that enter into commercial co-venture arrangements. The bill sought to impose new provisions under New York Not-For-Profit Corporation Law relating to compensation of the commercial co-venturers, detailed reporting of certain activities and annual disclosure of the net monetary costs. The bill was vetoed in 2006.
In 2010, Connecticut passed a bill "enhancing charitable fundraising disclosures," which amended the Connecticut General Statutes to include a notice to employees who are to sell tickets or solicit funds for fairs and similar events, requiring the ticket seller and fund solicitor disclose to each person approached for a ticket purchase or for a contribution that the ticket sale or contribution does not constitute a purchase of participation in a lottery, unless the funds from the ticket sale or contribution are used for a lottery.
In 2010, Colorado passed HB 1040 which eased the registration requirements for commercial co-ventures by requiring only that the commercial co-venturer post a copy of its contract with the charitable organization on their website or provide it to Colorado residents on request.
No matter the impact of the legislative changes dealt with above, the Federal Trade Commission’s Guides will still apply to CVC agreements entered into after November 2011.
Creating and Structuring a Co-Venture
While setting up the historical "test" structure of a co-venture, with the commercial partner donating a share of the proceeds to a charity, and the charity doing all the work (or vice versa) may seem like a great solution to comply with the law and work effectively with the charity, the reality is that each organization needs to be willing to both do its "fair share" AND have some of the work done by all parties. Of course, there are usually 1, 2 or 3 people on staff at the charity who can do just about everything under the sun. The real issue is whether we want to compel a larger workforce to also do the work, or whether it would be better to just divide and conquer, and not start a cold war with the commercial partner.
The more "best practices" are followed, the more likely the commercial co-venture will succeed, and the less likely there will be future complications or audit issues. Some things that should be included in the agreement to help both parties, and the relationship (the charity does have a choice whether it works with you):
- Commercial co-venture agreements typically should not have a provision for an unlimited obligation from the commercial partner to donate. While some state CCV laws allow for it, others do not. Consider putting in the donation formula as outlined above in #3 below, and noting limits according to the donation’s terms or that once the Cap is hit, the commercial partner is no longer obligated.
- Any expenses that must be paid up front—goods, marketing materials, printing costs, supplies, postage, etc. —should be deducted from gross profits. If necessary, the other expenses, e.g . , overhead, direct mailing or telemarketing costs, can be pro-rated or allocated to the ratio of gross profit received by the charity.
- When calculating the net donations, the commercial co-venture should consider what expenses should be deducted from gross revenue. There are two basic choices:
- If expenses can be deducted from gross receipts, consider placing this language in the net revenue definition: "the entire amount of gross revenue received by Co-op, less and excluding the full and entire amount of all expenses paid or incurred by [commercial entity] in furtherance of [its] obligations under this Agreement, including, without limitation, all expenses of promoting, conducting and advertising the Promotion etc. in accordance with the Marketing Guidelines set forth in [Schedule]."
The marketing and promotion guidelines will, of course, be expanded beyond whatever may be placed here.
5. Try to refer to the marketing guidelines that are to be agreed upon by both parties, rather than include language that reads, "Marketing Guidelines" means that each item contained on the attached [Schedule] or any replacement schedule such that after replacement, unless otherwise specified, the replaced Schedule will be considered to be and read as the "Marketing Guidelines" for the purposes of this Agreement; provided that "Marketing Guidelines" will mean the guidelines set forth [as they relate to fundraising and non-fundraising activities] in the attached [Schedule].
Unless you fully contemplate every page of ever-changing future schedules, it’s better for everyone to refer to the attached marketing guidelines and agreement at commencement, and elaborate later. More often than not, the marketing guidelines are longer than the actual agreement.