United States: Financing Of Not-For-Profit Organizations And Securities Laws

Not-for-profit organizations are in some ways financed much like business organizations. Frequently, not-for-profit organizations borrow money and grant security interests in their property. They also may generate revenue by charging fees for their services, which may support the organization's operating expenses, but which also may be retained as internally generated capital. More frequently than for-profit organizations, not-for-profits may be supported by grants, government funding, and tax-exempt borrowing through state government agencies.

In some circumstances, not-for-profit organizations can also be financed by issuing memberships or, less commonly, shares, that can be resold to or redeemed by the organization. This paper addresses problems that such financing can create under securities laws and suggests how to avoid those problems.

1. New Hampshire Voluntary Corporation and Federal Tax Provisions.

RSA 292:8 authorizes New Hampshire voluntary corporations to generate funds through "issuance of membership certificates or stock certificates," dues, fees, and by accepting "contributions to capital." Charitable not-for-profit organizations, if qualified under Internal Revenue Code §501(c)(3), are commonly supported by tax-deductible donations from supporters. Such donations do not "purchase" an interest in the charitable organization, will not be returned to members or shareholders, and upon dissolution, the organization must distribute any net assets to another 501(c)(3) organization. That is true even if the charitable organization provides for "membership" or issues membership certificates or stock in exchange for membership fees or dues.

Aside from the requirement that a §501(c)(3) organization distribute assets to another §501(c)(3) upon dissolution, can not-for-profit organizations return member or shareholder contributions as a means of financing?

The Internal Revenue Code prohibits most categories of §503(c) tax-exempt organizations from allowing any part of their net earnings to inure to the benefit of any private shareholder or individual or require them to devote all net earnings to their tax-exempt purpose (except as a recipient of the services of the organization). However, the Code does not generally prohibit §503(c) organizations from returning the contributions, membership purchase payments, or share purchase prices (in contrast to "net earnings") to members or shareholders.

Of course, not-for-profit organizations, including 501(c)(3) organizations, frequently borrow money and in exchange issue notes, bonds, and other evidences of indebtedness. As discussed below, those instruments are securities.

Under New Hampshire law, the only limitation contained in RSA 292 is found in 292:9 IV, which prohibits the distribution to a member or shareholder of amounts greater than the member's or shareholder's capital contributions of share purchase price upon dissolution of a non-for-profit corporation.

Though the prospect of financing any not-for-profit organization through refundable "equity" contributions could arise with any sort of not-for-profit venture, as a practical matter, the return of contributions or share purchase consideration rarely arises in connection with non-charitable non-for-profit corporations. The context in which it frequently arises is in the financing of recreational organizations (§501(c)(7)), and it is here that there is an intersection of tax and securities law.

2. Financing Not-for-Profit Organizations and Redeemable Contributions.

A complication that will arise if an organization sells shares or memberships with a promise or prospect of returning funds or other value to the member or shareholder is that the "sale" of that share or membership must comply with both federal and state securities laws. Generally, those laws prohibit the sale of securities unless the offering is registered with the appropriate securities regulator. Rarely will an organization want to tackle such a registration, due to cost and complexity. The solution centers on making certain that the share or membership either does not constitute a security or, if it is a security, the issuance or sale of it exempt from registration.

How does this issue typically arise? Let's say that a golf, tennis, or swim club is financed in part by the purchase by members of shares or memberships. The member is entitled to enjoy all of the facilities and benefits of membership and, in addition to the share purchase requirement, pays annual dues that go to support the operating expenses. Upon termination of membership, the member is entitled to the return from the club of the original share purchase price. May the club finance itself in that manner without running afoul of securities laws? What if the member is entitled to redeem the shares or membership for the then-current share or membership price, or book value, either of which may be higher or lower? Does it matter whether the redemption is mandatory or at the election of the club? Is there a difference if the interests are simply memberships rather than shares?

3. State and Federal Securities Law Framework.

While state securities laws vary from state to state, many states, including New Hampshire, follow the Uniform Securities Act approach to not-for-profit organization interests.

a. Interests in not-for-profit corporations may be securities.

Under the New Hampshire Uniform Securities Act, the laws of other states, and federal law, it will often be the case that shares or membership certificates issued by a not-for-profit organization will constitute "securities"—or at least not clearly fall outside of the definition of securities. The approach to the definition of "security" that all of those statutes take is to present a broad laundry list of instruments and arrangements. Under the New Hampshire Act (RSA 421-B:1-102(53)), securities are defined to include, unless the context otherwise requires:

...any note; stock; ...bond; debenture; evidence of indebtedness; certificate of interest or participation in a profit sharing agreement; ... transferable shares; investment contract; ...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.

Similarly, under the federal Securities Act of 1933 (§2(a)(1)), securities include:

unless the context otherwise requires, ...any note, stock, ...bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, ...transferable share, investment contract, ...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.

In light of those definitions, if a not-for-profit organization intends that its membership interests not be considered a security, certainly it should not give the interest a title that coincides with one of the instruments named in the state law definition, for instance, stock. However, even if a redeemable contribution to a not-for-profit entity is not labeled "stock" or "bond," it may nonetheless constitute a security.

Given the similarities between the state and federal law definitions, the analysis of whether membership interests are securities, within the meaning of RSA 421-B:1-102(53), is essentially identical to the analysis under federal securities law. An instructive example of a not-for-profit membership that was determined not to be a security is addressed in Bear's Paw Country Club, (SEC 1980) 1980 CCH Dec. ¶ 76,426. In Bear's Paw no distributions would be made to members, and memberships would not be transferable or assignable but could be repurchased by the club for a price that might represent a gain to the resigning member. The club was not required to repurchase the memberships. The members were not promised and appear to have been told that they should not expect any economic profits from their memberships. In numerous subsequent no-action letters, the SEC staff has consistently agreed that memberships that entitle the members to no share in the profits and are not transferable do not constitute securities under the Securities Act. In many of these no-action letters, although purchasers were not assured that their memberships would be repurchased and were not promised any "profits" from memberships, they had an opportunity to sell the membership upon termination at a repurchase price that might be higher or lower than the original purchase price (for instance, all or a large portion of the then-current membership purchase price at the time of a member's termination). See Black Diamond Club, Inc. (October 20, 1986); Jacaranda Country Club, Inc. (October 30, 1986); Spruce Creek Country Club, Inc. (March 7, 1986); The Martin Downs Country Club, Inc. (December 20, 1985); Palm-Aire Country Club at Sarasota, Inc. (September 17, 1985); The Haig Point Club, Inc. (August 30, 1985); Boca West Club, Inc. (February 26, 1985); La Salle Club (October 11, 1984); Twin Herons Golf Club, Inc. (May 31, 1982) Boca Lago Country Club, Inc. (October 14, 1981).

Note that in California, a different test has been applied, with a different result. In Silver Hills Country Club v. Sobieski, 361 P.2d 906, 87 ALR.2d 1135 (1961), the California Supreme Court fashioned a "risk capital" for determining whether an investment constituted an "investment contract" and therefore a security. The risk capital test requires only that an investor has risked his capital with a fair chance of realizing an objective, without reference to any expectation or return. (In contrast, the SEC v. Howey, investment contract analysis under federal securities law requires an expectation of profit through the efforts of others,) Accordingly, in Silver Hills, the Court held that country club memberships could be securities even where a member had no rights in the income or assets of the club. Prior to the 2015 amendment to RSA 421-A, there was little reason to believe that the risk capital test would be adopted in New Hampshire, although it had not been rejected. Regrettably in my view, RSA 421-A:1-102(29) now includes a modified "risk capital" definition of "investment contract."

b. Exemptions for not-for-profit organization securities.

In the event that an interest issued by a not-for-profit organization constitutes a security, for the reasons discussed above, it is important that the interest issued by the organization come within an exemption from registration. The relevant New Hampshire exemption is found in RSA 421-B:2-201(7), which exempts:

A security issued by a person organized and operated exclusively for religious, educational, benevolent, fraternal, charitable, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association, and not for pecuniary profit, no part of the net earnings of which inures to the benefit of a private stockholder or other person, or a security of a company that is excluded from the definition of an investment company under section 3(c)(10)(B) of the Investment Company Act of 1940; provided that such issuer shall have filed with the secretary of state a notice, on a form prescribed by the secretary of state, together with a copy of all offering material used in such offering of such security, at least 30 days before the first issuance under such offering. With respect to the offer or sale of a security offered under this exemption, upon the receipt of such notice of such an offering, the secretary of state may require that the availability of this exemption be limited by classifying securities, persons, and transactions, imposing different requirements for different classes, specifying the scope of the exemption and the grounds for denial or suspension, and requiring the issuer to file a notice specifying the material terms of the proposed offer and sale and copies of any proposed sales and advertising literature to be used. The exemption shall become effective if the secretary of state does not disallow the exemption within 30 days of the filing of such notice and other required information.

What exactly does the "exclusively for" requirement mean, and is it similar to the Internal Revenue Code requirement that "no part of the net earnings of which inures to the benefit of" requirement? Unfortunately, there is no New Hampshire case law on the topic. However, the exemption under Section 3(a)(4) the Federal Securities Act of 1933 is worded similarly to the state securities law exemption for securities issued by religious, charitable, social or athletic organizations. Section 3(a)(4) of the Securities Act reads:

Any security issued by a person organized and operated exclusively for religious, educational, benevolent, fraternal, charitable, or reformatory purposes and not for pecuniary profit, and no part of the net earnings of which inures to the benefit of any person, private stockholder, or individual, charitable and fraternal organizations....

Note that the federal exemption does not expressly include "social" or "athletic" purposes, and "fraternal" has been construed by the SEC not to include athletic or recreational purposes, regardless of the absence of a profit motive. See Western American Communities (SEC 1981) 1981 CCH Dec ¶ 76,844.

In SEC v. American Foundation for Advanced Ed. of Arkansas, 222 F.Supp. 828, 831 (W.D.Louisiana, 1963), the court held that "the existence of a single non-educational purpose will destroy the exemption...if it is of a substantial nature" (emphasis added) and determined that debentures issued by an not-for-profit corporation were not exempt from securities registration requirements because profits were returned to debenture purchasers and therefore the "exclusively for" requirement was not met. In SEC v. Children's Hospital, 214 F.Supp 883, 888 (D. Arizona, 1963), the court wrote that the federal registration exemption is not available "when, in essence, the issuing institution is either organized or operated for what is substantially a non-charitable purpose" (emphasis added). The Children's Hospital court discussed the construction of the "exclusively for" requirement and determined that there must be a substantial non-charitable (or non-fraternal, etc.) purpose for the exemption to be inapplicable. Id. at 889.

From these cases, one may conclude that the "exclusively for" language in the New Hampshire exemption would not be read literally such that an insubstantial non-for-profit or private benefit would render the exemption inapplicable. But note that the New Hampshire exemption is not self-executing and requires filing with the Bureau.

Finally, note that a determination of whether or not membership interests are securities is important because if they are, the anti-fraud provisions of the state Securities Act apply to them, regardless of whether or not they are exempt from registration under the Act. As a practical matter, the anti-fraud provisions, if they apply, will require that an organization not make any material misrepresentations in connection with the sale of the memberships nor omit any material facts needed to make any representations that are made not misleading.

Also have in mind that if membership interests are being offered or sold to residents of states other than New Hampshire, the securities laws of those states will also apply. The New Hampshire exemption for securities issued by social or athletic organizations comes from the 2002 Revised Uniform Securities Act, which has been adopted in one form or another in many states.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.