There is a common misconception that religious and other nonprofit organizations are exempt from compliance with the securities laws. They are not. Nonprofit organizations that engage in fundraising activities involving the offer and sale of securities must comply with the federal securities laws. They also must comply with the securities laws of each state in which such activities are conducted. This Article provides an overview of the federal and state securities laws that govern the sale of securities by nonprofit organizations, and describes the actions required to comply with those laws. The following addresses the impact of the Philanthropy Protection Act of 1995 and the National Securities Markets Improvement Act of 1996 on the regulation of securities activities of nonprofit organizations.
Nonprofit organizations engage in a wide variety of fundraising activities that involve the issuance of securities. Such organizations may issue notes, bonds, and other debt instruments to raise funds
for general operations or for the construction or purchase of churches, schools, hospitals, retirement homes, or other facilities. Many national religious denominations operate church extension funds that issue notes to denominational members to raise funds to make loans to new or financially troubled congregations. Nonprofit organizations administer pooled income funds and pooled charitable trust funds. A group of nonprofit organizations also may pool their funds for common investment in a manner consistent with their shared religious or social principles or objectives. Nonprofit organizations issue charitable gift annuities and accept charitable contributions in the form of charitable remainder trusts and charitable lead trusts. These activities require nonprofit organizations to comply with state and federal securities laws.
The SEC has taken the position through interpretive releases and no-action letters that each of these activities, at least in some circumstances, involves the issuance of securities under federal securities laws. In some circumstances, however, some of these activities (e.g., the acceptance of an unsolicited donation through an irrevocable charitable trust) may not involve the issuance of a “security.” A discussion of what constitutes a security is beyond the scope of this Article. Under section 2(1) of the Securities Act, a “security” is defined as: Any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. A similar definition is contained in section 3(10) of the Securities Exchange Act of 1935 and section 401(2)(e) of the 1956 Uniform Securities Act.