Op-Ed: An Uncertain Future for ‘Dark Money’ Law

Rebecca Moll Freed, Avi D. Kelin | December 20, 2019 | Opinion
It’s unclear whether law will survive in whole or in part, while legal and constitutional challenge plays out
Rebecca Moll Freed and Avi D. Kelin

Throughout 2019, New Jersey’s political and nonprofit communities have followed the saga of the so-called “dark money” law. As we approach 2020, the future of New Jersey’s dark money law remains uncertain.

The bill (S-150), after initial veto by Gov. Phil Murphy and reported promises that the law would be subject to “clean up” after passage, was ultimately signed into law in July. The law, as passed, would require 501(c)(4) social-welfare organizations and 527 political organizations engaged in issue advocacy, lobbying and independent expenditures in New Jersey to register with and report to the New Jersey Election Law Enforcement Commission (ELEC) on a regular basis. The law was scheduled to take effect on Oct. 15, with the first reports for these groups scheduled to be filed with ELEC on Jan. 15, 2020, to disclose transactions and activity from the fourth quarter of 2019.

However, after multiple legal challenges, a federal judge in October issued a stay on the implementation of the new law. It is now unclear whether the law will survive in whole or in part, while the legal and constitutional challenge plays out.

Disclosure of political activity has been a hallmark of the U.S. political system and its campaign-finance laws for decades. In the oft-repeated formulation, sunlight is the best disinfectant. The country’s disclosure laws have, though, generally lagged behind innovations in campaign-finance law. For example, for New Jersey candidates, political parties and PACs, regular reports must be filed with ELEC to disclose the contributions made to and the expenditures made by the registered committee. But these disclosure obligations, for the most part, did not attach to other outside organizations that may have engaged in substantial amounts of New Jersey political activity.

A 501(c)(4) social-welfare organization is a tax-exempt entity that is similar in some respects to a 501(c)(3) charitable organization. One key difference is that, while a 501(c)(3) is prohibited by IRS rules from engaging in any partisan political activity, a 501(c)(4) is permitted under IRS rules to engage in partisan political activity provided that such activity does not become the “primary purpose” of the organization. 501(c)(4)s are also, in most cases, exempt from public disclosure of their  donors and other funding sources — although some 501(c)(4) organizations have voluntarily disclosed their donors in recent years. In practice, this has meant that a 501(c)(4) could raise unlimited funds from undisclosed donors and spend 49% or less of those funds on such partisan political activities as independent expenditures advocating the election or defeat of candidates.

Recent years have seen attempts to close loopholes along these lines. For example, the 2018 case of Citizens for Responsibility and Ethics in Washington (CREW) vs. American Action Network (AAN) resulted in required public disclosure with the Federal Election Commission of 501(c)(4) donors and expenditures when the organization engages in activity to influence federal elections. New Jersey’s S-150 dark money law is an attempt to impose similar disclosure requirements for organizations that are not otherwise registered with ELEC but that engage in issue advocacy, lobbying or independent expenditures.

Although a 501(c)(4) structure has become an increasingly popular entity choice in  recent years for the reasons described above, many 501(c)(4) organizations have been in existence for decades and engage in issue advocacy as their main purpose. A change in the law may have the biggest impact on these groups.

Going too far?

The question, at this point, remains whether the new dark money law goes too far under constitutional standards. For instance, the new law regulates more than just direct political activity to impose reporting obligations on groups that are involved in issue-based discussions and communications. Under current law, issue-advocacy communications do not trigger reporting of donors and expenditures. The federal judge expressed concern that such disclosure requirements would chill the exercise of the 1st Amendment right to issue-based communications.

The new law also subjects groups that are engaged in lobbying to additional registration and disclosure requirements. Similarly, S-150 places registration and reporting obligations on groups engaged in independent-expenditure activity. Because entities engaged in lobbying and independent expenditures are already subject to existing registration and reporting requirements under New Jersey law, these groups may find themselves navigating multiple contradictory reporting regimes.

Although the intent behind the dark money law is valid, the law in its current form potentially goes too far with respect to disclosure and reporting for groups that are engaging in 1st Amendment-protected issue advocacy. The law also may create a regulatory nightmare in that it overlaps with — and also contradicts — current reporting paradigms. New Jersey’s political and nonprofit communities should continue following the outcome of the federal legal challenge and other updates as to the implementation of the law to determine how best to navigate this shifting landscape.