A “Section 527 Committee” is a tax-exempt entity organized under Section 527 of the Internal Revenue Code to raise money for political activities other than "express advocacy" for the election of a particular federal (i.e., House, Senate, or Presidential) candidate. (Express advocacy is considered to be the domain of political action committees, or PACs, whereas 527s are technically supposed to be independent of, and unaffiliated with, any candidate.) Most 527s are run by special-interest groups and are used for raising “soft money,” which they are permitted to collect from donors in unlimited amounts, and which they can subsequently funnel to the political party (not to the candidate) of their choice – also in amounts unbound by any legal limits.
The terms "soft money" and its counterpart, "hard money," date back to the 1970s, when the financing of political campaigns was altered dramatically by the Federal Election Campaign Act of 1974 (FECA). This Act strictly limited the amount of money which any donor could give directly to any single candidate or PAC in a federal election – no more than $1,000 per year to any candidate, and no more than $5,000 per year to any PAC. Such donations – earmarked for the "express advocacy" of a specific candidate's campaign – became known as “hard-money” donations.
“Soft-money” donations, by contrast, were those given to political parties (not to candidates or PACs) for purposes other than express advocacy for a specific candidate -- e.g., “voter education and mobilization,” “issue-oriented” political advertising, “party-building” activities, and other such nebulous enterprises. Unlike hard-money contributions, there were no legal limits on the amounts of soft money that any individual or PAC can give to a party.
A footnote in the Supreme Court's 1976 Buckley v. Valeo decision defined the precise circumstances under which hard and soft money could, and could not, be used by a party to bankroll political advertising. The Buckley footnote identified a set of “magic words” which, if used in conjunction with a candidate's name in political ads, would signal that those ads would have to be paid for with hard money rather than soft. The "magic words" included: “vote for,” “elect,” “support,” “cast your ballot for,” “for Congress,” “vote against,” “defeat,” and “reject.” Many political operatives assumed that unless their advertising used these exact words, they technically were not engaged in express advocacy and thus were not bound by FECA's restrictions governing hard-money collection.
But the distinction between outright electioneering (i.e., express advocacy) on the one hand, and “voter education” or “party-building” on the other, was often difficult – even impossible – to discern. For example, as noted above, a political party was required to use hard-money contributions, which were limited and regulated, to pay for a TV ad that explicitly urged voters to cast their ballots for a specified candidate. However, if the ad simply displayed an image of that candidate without mentioning him or her by name, and simultaneously encouraged voters to support that candidate's party, soft money could be used to pay for the ad.
In 2002, the newly passed McCain-Feingold campaign-finance reform bill forbade political parties from collecting any soft money at all from individual donors. To mitigate the impact of this prohibition, the bill raised the limit on individual hard-money contributions from $1,000 per candidate each year to $2,000.
However, McCain-Feingold -- which would be invalidated as an infringement on free speech by the Supreme Court in 2010 -- failed to address the issue of 527s, which, unlike PACs, remained free to continue raising soft money. At that point, Democrats took the lead in making extensive use of 527s -- which are sometimes referred to as "stealth PACs" -- as major fundraising vehicles with which to circumvent the constraints imposed by McCain-Feingold. The Democrats reasoned that as long as they (a) refrained from coordinating their candidates' activities directly with those of the 527s, and (b) refrained from uttering the “magic words” as defined by Buckley, they could raise as much money as they wanted through 527s.
Indeed it was the Democrats -- and George Soros in particular -- who had been pushing McCain-Feingold for years. They knew the law's loopholes and weaknesses intimately, and were ready to exploit them the moment the legislation was passed.