Impact Investing Archives - socentlaw

UCONN SOCIAL ENTERPRISE AND ENTREPRENEURSHIP CONFERENCE │ STORRS, CT │ APRIL 23-24, 2015

Cross-posted at Business Law Professor Blog.

At the end of next week, I will be at the University of Connecticut School of Business and the Thomas J. Dodd Research Center for their Social Enterprise and Entrepreneurship Conference.

Further information about the conference is available here, a portion of which is reproduced below:

In October 2014, Connecticut joined a growing number of states that empower for-profit corporations to expand their core missions to expressly include human rights, environmental sustainability, and other social objectives. As a new legal class of businesses, these benefit corporations join a growing range of social entrepreneurship and enterprise models that have the potential to have positive social impacts on communities in Connecticut and around the world. Designed to evaluate and enhance this potential, SE2 will feature a critical examination of the various aspects of social entrepreneurship, as well as practical guidance on the challenges and opportunities presented by the newly adopted Connecticut Benefit Corporation Act and other forms of social enterprise.

Presenters at the academic symposium on April 23 are:

Mystica Alexander, Bentley University

Norman Bishara, University of Michigan

Kate Cooney, Yale University

Lucien Dhooge, Georgia Institute of Technology

Gwendolyn Gordon, University of Pennsylvania

Gil Lan, Ryerson University

Diana Leyden, University of Connecticut

Haskell Murray, Belmont University

Inara Scott, Oregon State University

Presenters at the practitioner conference on April 24 are:

Gregg Haddad, State Representative, Connecticut General Assembly (D-Mansfield)

Spencer Curry & Kieran Foran, FRESH Farm Aquaponics

Sophie Faris, Community Development, B-Lab

James W. McLaughlin, Associate, Murtha Cullina LLP

Michelle Cote, Managing Director, Connecticut Center for Entrepreneurship and Innovation

Mike Brady, CEO, Greyston Bakery

Jeff Brown, Executive Vice President, Newman’s Own Foundation

Justin Nash, President, Veterans Construction Services, and Founder, Til Duty is Done

Vishal Patel, CEO & Founder, Happy Life Coffee

Anselm Doering, President & CEO, EcoLogic Solutions

Dafna Alsheh, Production Operations Director, Ice Stone

Tamara Brown, Director of Sustainable Development and Community Engagement, Praxair

JOB POSTING: DIRECTOR, HARVARD BUSINESS SCHOOL, SOCIAL ENTERPRISE INITIATIVE

“Harvard Business School (HBS) is now accepting applicants for the role of Director, Social Enterprise Initiative. HBS pioneered the concept of “social enterprise” with the founding of its Social Enterprise Initiative in 1993. From the outset, SEI adopted a problem-focused approach toward understanding the management and leadership challenges facing organizations involved in creating social value regardless of whether their structure is as a nonprofit or for profit and regardless of where they operate on the spectrum from a grant-funded organization to a commercial enterprise. As the Initiative commemorates its 20th anniversary, it has established a significant role within the HBS community through the engagement of its key constituencies—faculty, students, alumni, and practitioners. For more information, visit: http://www.hbs.edu/socialenterprise.”

More information about the position here.

CROWDFUNDING SOCIAL ENTERPRISE │ 7/12-13/13 │ BOULDER, CO

The following professors will be presenting on Crowdfunding Social Enterprise at a conference hosted by Leeds School of Business at University of Colorado-Boulder and the Ewing Marion Kauffman Foundation (July 12 to 13, 2013 in Boulder, CO):

Deborah Burand (Michigan)

Steven Dean (Brooklyn)

Joan Heminway (Tennessee)

Christine Hurt (Illinois)

Haskell Murray (Regent moving to Belmont August 2013)

Dana Brakman Reiser (Brooklyn)

The panel is scheduled for 2:30 p.m. to 3:45 p.m. on July 13, 2013.  The abstract of the panel is below:

Crowdfunding and social enterprise both grow from populist roots. In the eyes of proponents, the emergent legalization of crowdfund investing in the United States (through, e.g., the 2012 enactment of the Jumpstart Our Business Startups Act) and the increasing examination and adoption of separate forms of social enterprise entity (including, e.g., Delaware’s current consideration of benefit corporation legislation) hold promise to bring the benefits of capital finance and commercial enterprise to the masses. Given the common foundations of the crowdfunding and social enterprise movements, it seems logical to consider funding social enterprise by reaching out to the crowd.  Is a marriage of the two upstart phenomena—namely, the use of crowdfunding to finance social enterprise—a match made in heaven or an ill-fated pairing? This panel features five papers, each of which explores topics at the intersection of crowdfunding (including crowdfund investing) and social enterprise as a means of teasing out some of the relevant considerations.
 

REPEAL IRC § 4944 TO ENCOURAGE INVESTMENT IN SOCIAL ENTERPRISE

A while ago, I posted to this blog a short (mildly humorous???) story illustrating how certain federal income tax rules generally prohibit “risky” investments by private foundations, even when those investments have potential for tremendous social or environmental benefit. The so-called “jeopardizing investment” rules of IRC § 4944 impose a minimum 10% (with a possible 25% additional) tax on investments by private foundations that “jeopardize the carrying out of [the foundation’s] exempt purpose.”

In my prior post, I hypothesized a private foundation considering an early-stage investment in a company developing an inexpensive, solar-powered car. I further hypothesized that the private foundation’s manager reasonably and rationally believed that an investment in the car company could have substantial environmental benefits. Further, the investment was on fair terms and involved no self-dealing or other economic benefit to the private foundation’s insiders. Unless the purchase of stock in the car company qualified under the narrow program-related investment exception, however, the investing private foundation could be subject to a 10% (and possible additional 25%) penalty tax under IRC § 4944. Moreover, the investment in the solar-powered car company could be penalized even though an outright grant by the private foundation to benefit environmental causes clearly would be permissible (and even encouraged).

Thus, from a tax standpoint, a private foundation manager seeking to support environmental causes is better off investing in BP and then giving away returns to Green Peace than making a “risky” investment in a solar-powered car company—even when that investment might have a much larger and more lasting positive impact on the environment. This makes no sense.

Actually, the most compelling illustration I can provide as to why the “jeopardizing investment” rules of IRC § 4944 ultimately make no sense comes directly from the implementing Regulations. Specifically, Reg. § 53.4944-1(c) provides:

A is a foundation manager of B, a private foundation with assets of $100,000. A approves the following three investments by B after taking into account with respect to each of them B’s portfolio as a whole: (1) An investment of $5,000 in the common stock of corporation X; (2) an investment of $10,000 in the common stock of corporation Y; and (3) an investment of $8,000 in the common stock of corporation Z. Corporation X has been in business a considerable time, its record of earnings is good, and there is no reason to anticipate a diminution of its earnings. [Imagine BP.] Corporation Y has a promising product, has had earnings in some years and substantial losses in others, has never paid a dividend, and is widely reported in investment advisory services as seriously undercapitalized. Corporation Z has been in business a short period of time and manufactures a product that is new, is not sold by others, and must compete with a well-established alternative product that serves the same purpose. Z’s stock is classified as a high-risk investment by most investment advisory services with the possibility of substantial long-term appreciation but with little prospect of a current return. [Imagine Y or Z as our solar-powered car company.] A has studied the records of the three corporations and knows the foregoing facts. In each case the price per share of common stock purchased by B is favorable to B. Under the standards of [IRC § 4944], the investment of $10,000 in the common stock of Y and the investment of $8,000 in the common stock of Z may be classified as jeopardizing investments (emphasis added), while the investment of $5,000 in the common stock of X will not be so classified. B would then be liable for an initial tax of [$1,000 (i.e., 10 percent of $10,000)] for each year (or part thereof) in the taxable period for the investment in Y, and an initial tax of [$800 (i.e., 10 percent of $8,000)] for each year (or part thereof) in the taxable period for the investment in Z. Further, since A had actual knowledge that the investments in the common stock of Y and Z were jeopardizing investments, A [the foundation manager] would then be liable [personally] for the same amount of initial taxes as B.

WHAT??? So the investment in Y is “promising” and at a “favorable” price, but still subject to a penalty tax? The investment in Z has “the possibility of substantial long-term appreciation” and is at a “favorable” price, but likewise is prohibited? Er, okay, let me get out my crystal ball and discern between a “promising” or “substantial long-term” investment and a “jeopardizing” one. Suppose that in the above example X corporation represented Enron instead of BP? In hindsight, an investment in Enron would have been the ultimate jeopardizing investment, but it would have been perfectly fine under IRC § 4944. Oh, and that’s not all! Incredibly, if Y’s “promising” product (e.g., an inexpensive, solar-powered car) would benefit the environment, then even if the investing private foundation’s mission was protecting the environment it could be penalized under IRC § 4944 for buying stock in the company.

The federal income tax rules thus support a bizarre paradox for private foundations: a foundation can give its money away to an organization supporting the foundation’s mission, but if it makes a risky but “promising” investment in support of its mission, the foundation faces the threat of penalty taxes.

If a private foundation is not engaged in self-dealing or otherwise benefitting its managers and other insiders, why do we care how its money is invested? The rules presume that a “risky” investment is a waste. But for whom is a “risky” investment a waste? Where does the “risky” money go? Does it just vaporize into thin air? No, it goes to pay third-parties for services, or products, or ideas, or research, or whatever. From my perspective, nothing would be better than the Gates Foundation spending its billions on risky, unproven, but promising investments potentially benefitting the environment, education, and healthcare. Can you imagine the jobs that would be created? Can you imagine the innovations that might result? At worst, the money spent goes to work in the broader economy rather than being stockpiled. Who says such risky expenditures are “jeopardizing investments”? The only real jeopardy is to social enterprise companies that could use the money to take reasonable and rationale risks for the benefit of us all.

We need to fix this.  Let’s repeal IRC § 4944.

VIDEO: WSJ Interview with Jacqueline Novogratz on Impact Investing

Wall Street Journal interview with Jacqueline Novogratz