Joan MacLeod Heminway (University of Tennessee College of the Law) has written the first, or at least one of the first, academic law articles on the application of federal securities law to social enterprises. Here’s the article abstract:
To Be or Not to Be (A Security): Funding For-Profit Social Enterprises — This article explores the federal securities law status of financial interests in for-profit social enterprise entities. When analyzed through the lens of the Securities Act of 1933 and the Securities Exchange Act of 1934, financial interests in social enterprise businesses raise both concerns and opportunities. Ultimately, the federal securities regulation status of interests in for-profit social enterprise ventures is important for choice-of-entity reasons (since the regulatory framework may impose different costs on interests in different structural business forms), for capital-structuring reasons within individual forms of entity, and for risk-management reasons at the entity level. In addition, an inquiry into the applicability of federal securities regulation to the funding of social enterprise serves as a catalyst for further thought on the optimal applicability of federal securities regulation to interests in business entities and projects.
As I recently told Joan, I wish that my students had the benefit of reading her article this spring semester during my Social Entrepreneurship & the Law Practicum course. During the course, the students drafted a legal case study for Ashoka that details the securities law issues faced by a for-profit social enterprise that uses crowdfunding to finance small solar power projects in developing countries. In the case study, the students address how the social enterprises’ capital-raising vehicle is not a “security” because it offers no expectation of financial return and offers no claim on the company’s assets in liquidation. I look forward to reading more about the application (and inapplication or exemption) of securities law to social enterprise finance. Indeed, this summer I’m supervising an independent research paper by another law student on this very issue — hopefully that will go to print and I’ll be sharing it on this blog as well soon enough.