Section 527 groups face weaker regulation and looser disclosure requirements than other types of non-profit groups. Thus they are better suited for operating in the shadows, in areas of dubious legality. Section 527 groups are used for raising "soft money." This term came into being during the 1980s, as political parties sought ways to circumvent the restrictions placed upon them by the Federal Election Campaign Act of 1971 (FECA). Under FECA, any group engaged in raising and spending money for political campaigns had to register with the Federal Election Commission as a "political organization." FECA placed strict caps on the contributions they were allowed to collect. No donor could give more than $1,000 per year to any particular candidate, nor more than $5,000 per year to any particular political action committee (PAC). These highly-regulated contributions came to be known as "hard money."
Soft money came into being as a result of a footnote in the Supreme Court's 1976 Buckley vs. Valeo decision. That footnote suggested that FECA regulation applied only to groups engaged in "express advocacy" of political candidates. Political operatives took this to mean that unless they uttered the so-called "magic words" (e.g. "Vote for Bush!") they were not engaged in "express advocacy" and were not bound by FECA's rules governing hard money collection.
Political operatives began raising money above and beyond FECA's hard money limits, arguing that they did not intend to use the money for "express advocacy," but rather for "voter education," "issue-oriented" political advertising, and other such nebulous enterprises.
Buckley vs. Valeo had created a large loophole for circumventing FECA. As long as one refrained from publishing or broadcasting messages containing the "magic words," one could collect as much money as he or she wished, without regard for FEC regulations. Money raised under these circumstances came to be called "soft money."
Passed on March 27, 2002, the McCain-Feingold Act forbade political parties from collecting soft money. To take some of the sting out of the soft-money prohibition, it raised the limit on individual hard-money contributions from $1,000 per candidate each year to $2,000.
However, McCain-Feingold failed to address the issue of Section 527 "stealth PACs." It did not explicitly forbid private 527s from raising soft money for electioneering purposes. This left political operatives in a quandary. Could they or couldn't they continue to raise soft money through private 527 non-profit groups? No one was sure. But the Democrats took the lead in forging ahead, despite the legal risks. Democrats reasoned that as long as the operators of 527 groups refrained from coordinating their activities directly with the candidates or political parties, and refrained from uttering the "magic words," they could raise as much money as they wanted through 527s.
Republicans disagreed. They charged that the Shadow Party was a criminal enterprise, whose activities were akin to money laundering. However, the Federal Election Commission (FEC) declined to rule on the matter until after the 2004 election. The Republicans were left with no choice but to try to play catch-up. Republicans began building their own 527 network. But the Democrats had the jump on them. It was the Democrats - and George Soros in particular - who had been pushing McCain-Feingold for years. They knew its loopholes and weaknesses intimately, and were ready to exploit them the moment the law was passed.