I have recently read more than one article about nonprofit IPOs as a capital-raising method. Of course, a nonprofit does not have shareholders and cannot distribute its profits. Instead of an initial public offering, “IPO” stands for “immediate public opportunity.” An IPO in the nonprofit context means that a donor receives a “social innovation share” in the nonprofit: every X amount of money the donor donates entitles the donor to cast one vote for board director elections. Using the term “IPO” is certainly a way to grab attention and solicit donations in a sector that increasingly prizes innovation. However, there is one legal issue (and possibly more) of which nonprofit directors and officers should be well-advised. Under Delaware law, where the certificate of incorporation of the corporation is silent with respect to members, individuals who have the right to vote for board members of a nonprofit are considered to be “members.” (DGCL Section 102(a)(4)). Therefore, in conducting a nonprofit IPO, a nonprofit may be inadvertently anointing the IPO participants as legally-defined members with certain default statutory rights . It is also unclear what would happen in Delaware if a corporation that has members (and therefore references those members in its certificate of incorporation) then conducts an IPO that allows donors to participate in director elections. Are those new donors considered “members” with the same rights of members stated in the certificate of incorporation?
To resolve this, any nonprofit thinking of engaging in an IPO would be well-advised to first think through the ultimate fundraising objective and closely analyze whether the IPO participants will be considered members under state law. If the nonprofit decides to move forward with the IPO, the nonprofit should amend its certification of incorporation to clearly define who constitutes a member, whether participants in the IPO will be considered members, and what rights these members have.