LAW AND SOCIAL ENTREPRENEURSHIP

Jonathan Ng, the Global Legal Director for Ashoka, recently sent me information about a webinar that Morrison & Foerster, Jones Day, and Adler & Colvin are putting on specifically for Ashoka staff, Ashoka Fellows, and Ashoka’s contacts and partners.  Jonathan said I could post information about the webinar on this blog.  You must preregister for the webinar here.

The speakers include:  Susan H. Mac Cormac (Partner, Morrison & Foerster) R. Todd Johnson (Partner, Jones Day); David Levitt (Principal, Adler & Colvin).

The webinar is described as “a workshop on legal ‘hybrid’ structures – where social, environmental, and economic missions are embedded in one or more legal forms. . . . [The presenters will] provide detail on important corporate, governance, and tax issues – as well as operational challenges – and discuss how the various models may or may not be effective in maximizing social and environmental goals through company operations.”

I recently received an invitation to L3Cs and the Arts from Michael DiFonzo.  I will be unable to attend, but thought I would pass the information on to our readers.

The event will be held at Columbia University in New York, NY on November 16th, from 2:00pm to 6:00pm.  Admission is free for Columbia University students, alumni and all professionals from the performing arts community.  The speakers are listed here, and include attorney, L3C advocate, and author Marc Lane.

I do not know all of the speakers, but I do wish the event would have included one of the vocal L3C opponents, like Daniel Kleinberger, Carter Bishop, or Bill Callison, to give the audience a more balanced picture of L3Cs.  Edward Hwang and I tried to give a balanced account of the L3C in our University of Miami article.  We praised the purported goals of the L3C and tried to recognize its potential, but we also described the many hurdles the L3C still has to overcome.  Professor Cass Brewer also provides a balanced view of the L3C in his work, and has written on using the LLC form in social enterprise here.   Anyone interested in the L3C form, and comparing the L3C to the LLC, would do well to read all five articles linked to in this paragraph.

This is a full two-hour lecture at Harvard’s iLab on how to structure your social enterprise for impact. The lecture addresses the three types of social enterprise business models, then compares and contrasts seven legal structures including:

• Corporation
• B Corp Certification
• Benefit Corporation
• Flexible Purpose Corporation
• LLC
• L3C
• Nonprofit

This announcement comes from an editor of the NYU Journal of Law & Business:

Please join the NYU Journal of Law & Business on Friday, November 9, 2012, from 2:30-5:30 PM for our Fall Conference on the Law & Finance of Social Enterprise.

The conference will be held in Greenberg Lounge at the NYU School of Law. Deborah Burand (University of Michigan Law School) will present groundbreaking work on social impact bonds; Ana Demel (NYU School of Law) and Rebecca Leventhal (Social Finance) will comment. John Tyler (General Counsel of the Kauffman Foundation) will present work on the fundamental question whether state attorneys general should regulate hybrid entities as charities; Jill Manny (NYU School of Law) and David Spenard (Assistant Attorney General for the Commonwealth of Kentucky) will comment.

Kyle Westaway will serve as master of ceremonies and will write an introductory essay for the Journal’s Winter 2013 Special Issue, in which the principal papers and written comments will be published.

The Business Law Section of the American Bar Association is hosting the LLC Institute on October 18-19, 2012 at the Le Meridien hotel near Washington D.C. (Arlington, VA).  The entire program looks excellent, but the “Drafting LLC Agreements for Nonprofit and Social Enterprise LLCs” session on October 18 may be of special interest to our readers. 

Program Chair:

J. William Callison, Partner, Faegre Baker Daniels LLP, Denver, CO.

Panel:

Carter G. Bishop, Professor of Law, Suffolk University Law School, Boston, MA;

Cassady V. Brewer, Assistant Professor, Georgia State University School of Law, Atlanta, GA;

J. William Callison, Partner, Faegre Baker Daniels LLP, Denver, CO; and

J. Haskell Murray, Assistant Professor, Regent University School of Law, Virginia Beach, VA.

Each panelist has written about using LLCs in social enterprise and/or about low-profit limited liability companies (“L3Cs”) specifically, with varying degrees of criticism or suggestions for improvement.  The articles are available on SSRN:  Professor Bishop (here); Professor Brewer (here); Mr. Callison (here and here); and Professor Murray (here).

The Regent University Law Review’s symposium entitled “Emerging Issues in Social Enterprise” was a great success this past weekend.  The symposium consisted of a reception Friday night, two academic panels on Saturday morning, a primarily practitioner panel on Saturday afternoon, a CLE led by SocEntLaw’s own Kyle Westaway, and a gourmet three-course meal with Michael Pirron (CEO of Impact Makers, a founding Certified B Corporation) as the keynote speaker.

On the first academic panel, Professor Joan Heminway discussed securities law issues surrounding social enterprises, and briefly mentioned some of her research on crowdfunding (See, e.g., here).  Professor Cass Brewer followed with a presentation that suggested eight ways the L3C statutes might be reformed, including statutory language making explicit that investments other than program related investments (“PRIs”) would be freed from the requirement that “no significant purpose… [be] the production of income or the appreciation of property.”  On the second academic panel, Professor Lyman Johnson discussed the history of the traditional corporations, the longstanding debate over the shareholder wealth maximization norm, and corporate governance opportunities and issues presented by the benefit corporation form.  Professor Dana Brakman Reiser then discussed the Stag Hunt Game that social entrepreneurs and investors engage in when pursuing the goals of social enterprise.  She discussed the need of assurances from each group that they would pursue a blend of social purpose and private profit.  As a solution, she suggested financing social enterprises through “flypaper” – long-term (10-15 years), low-yield (below-market), convertible (upon sale of the company) debt.

The afternoon panel included Greg Bergethon (corporate attorney and CPA), Professor Marcia Narine (a Visiting Assistant Professor, with significant legal and corporate experience, at the University of Missouri-Kansas City School of Law), Michael Pirron, and Kyle Westaway.  They each described their experiences with social enterprise and ways to address the practical issues facing those in this space.  In the CLE, Kyle Westaway led the audience through the entity choice process for social entrepreneurs.  He also addressed management, tax, financing, and liability issues.  Michael Pirron concluded the symposium with a discussion of Impact Makers, and information regarding the Certified B Corporation and Benefit Corporation movements.

Professors Brewer, Heminway, Johnson, and Narine will all publish original papers with  the Regent University Law Review, and during the spring semester we will likely link to and discuss their articles.

The US Treasury and IRS are proposing a rule change involving Program Related Investments. Below is the post from Jonathan Greenblat – Director of the Office of Social Innovation.

Recently, the Obama Administration took a simple but important step that has the potential to do a lot of good in communities across the country – anything from improving education, creating opportunity in low-income communities, or keeping our water and air safe.

Traditionally, foundations have tackled our most vexing problems primarily by making grants to organizations. Foundations are required to make annual charitable contributions of at least five percent of their total assets. These overwhelmingly are done via grants and most stay very close to the five percent minimum. The remaining 95 percent of assets are maintained in an endowment and typically invested in a diversified portfolio in order to preserve or increase value to enable continued giving in the future.  The proposed rule issued by the Treasury Department and IRS would make it easier for philanthropies to make what are called Program Related Investments (PRIs).

PRIs allow foundations to put more of their resources to work to advance their charitable mission through means other than grant-making – like equity investments, loans, loan guarantees, or other investments. Despite their flexibility, PRIs historically have not been used with much frequency because of confusion as to how they work and the high costs associated with them.  For example, many foundations find it necessary to proactively seek legal counsel to confirm that an investment would qualify under the definition of charitable purpose even before using a PRI.

To address these concerns, the Treasury Department and the IRS proposed a rule that includes updated examples of how private foundations may use PRIs to fund charitable activities, which will help foundations make these investments more easily and at a lower cost. The guidelines illustrate that organizations can use PRIs to support groups working on a diverse set of issues from preserving the environment, to furthering education and scientific research, to relieving the poor and distressed.

This important update is the first in 40 years since PRIs were implemented in 1972.

The proposed rule also clarifies how foundations can use different methods such as credit enhancement arrangements to strengthen the capacity of organizations.  This approach can leverage the balance sheets of foundations, enabling “capital activation” and potentially adding significantly to their capacity to drive social impact.  Such methods can serve as an indicator to other institutional investors about the possibilities of deploying capital in creative ways to generate value and strengthen communities.

A PRI is an investment made by a foundation, which, although it may generate income, is made primarily to accomplish charitable purposes.  PRIs are novel for several reasons.  First, they provide foundations with the flexibility to fund activities serving charitable purposes in a variety of ways beyond conventional grants.  Second, such investments can be made to tax-exempt charities but also to social enterprises and conventional businesses.  And third, unlike conventional grants, PRIs can take various forms, including equity investments and low-interest loans.

These guidelines do not cover all the potential scenarios, and public comments on the proposed rule have been requested by July 18.  We hope that the proposed rule will spark a dialogue over the next two months with the philanthropic community.  Through feedback on the guidelines and an exchange of ideas, we hope to update the regulations in a manner that serves the public interest.  This additional guidance is expected to facilitate the ability of foundations to determine whether investment qualifies as a PRI, reducing the transaction costs, conserving a foundation’s resources for additional charitable activity, and increasing capital flows for charities and social enterprises that can create jobs and generate impact.

To comment on the proposed rule for PRIs, please visit the Federal Register.

Over the last year, I’ve been lecturing at Harvard Law and Stanford Law about structuring social enterprises for impact. I always have people asking me to see the slides, but have never publicly shared the slides. Today I’m releasing those slides to the public.

This is meant to be an introductory presentation that touches on the possible legal structures for social entrepreneurs. The presentation discusses Corporation, B Corp Certification, Benefit Corporation, Flexible Purpose Corporation, L3C and Nonprofit legal structures. Within each legal structure, the presentation touches on Formation, Management, Taxation and Capital.

Click below to access the presentation. Leave your feedback in the comments section. Thanks!

Originally posted in Wall Street Journal

BY: KYLE WESTAWAY

You may have noticed the emerging class of “social entrepreneurs” who are creating companies that seek profit but also are devoted to a social purpose, to create long term, sustainable value.

Social entrepreneurs believe a business can be a part of the solution to some of the world’s greatest challenges. It’s this kind of thinking that has given rise to such mission-driven companies as Better World Books, TOMS Shoes, D-Light Design and Warby Parker, to name a few.

But, until recently, social entrepreneurs would find themselves in the position of choosing whether to organize either as a for-profit company or a nonprofit organization. The problem was that sometimes a company would be too much of a business to be a nonprofit. Yet, it also might be too mission-driven to be a for-profit.

Fortunately, there are a few innovative legal structures designed for entrepreneurs who are driven as much by mission as money. The cost of using one of these new legal structures will vary depending on lawyer fees, but generally those fees shouldn’t exceed more than $10,000 for a start-up with fewer than 10 employees.

Here’s an overview:

L3C

Ideal for: companies that want to blend traditional capital with “philanthropic” capital, such as from foundations

Available to start-ups in: Vermont, Michigan, Wyoming, Utah, Illinois, North Carolina, Louisiana, Maine and soon in Rhode Island.

The Low Profit Limited Liability Company is a new class of LLC for mission-driven companies.

An L3C offers the same liability protection and pass-through taxation as an LLC. But it must be organized primarily for a charitable purpose – and secondarily for profit. Unlike a traditional nonprofit, it may distribute its profits to owners.

The L3C is designed to attract both traditional investment and a very specific type of philanthropic money called Program Related Investments (PRI). PRI is capital – in the form of equity or debt – from a foundation to a for-profit company that is doing work in line with the charitable purpose of the foundation.

BENEFIT CORPORATION

Ideal for: companies that want to create a measurable positive impact while and providing greater transparency to the public

Available to start-ups in: Maryland, Vermont, Virginia, New Jersey, Hawaii, California and soon New York

The Benefit Corporation is a new class of corporation with a corporate purpose to create public benefit, a broader fiduciary duty and is transparent about its overall social and environmental performance.

By definition, it must operate for the general public benefit – defined as a material positive impact on society and the environment. Every benefit corporation is required to publish an assessment using an independent, third-party assessment tool. To create a material positive benefit, a benefit corporation operates in a manner that not only creates value for the company’s shareholders, but also its community, environment, employees and suppliers.

The structure also calls for a high level of transparency and accountability. Within 120 days after the end of each fiscal year, a benefit corporation is required to publish a “Benefit Report,” which states how it performed that year on a social and environmental axis.

FLEXIBLE-PURPOSE CORPORATION

Ideal for: companies seeking to do good on their own terms

Available to start-ups in: California

The Flexible Purpose Corporation a new class of corporation that creates the maximum amount of flexibility for socially/environmentally conscious companies. It is designed for businesses that want to pursue profit along with a special purpose of its own designation.

The structure allows the designation of a special purpose that the company will pursue in addition to profit. For example, a flexible purpose corporation might be a for-profit developer that has a special purpose of building a public park in each of its developments.

This type of corporation must issue an annual report that is available to the public and provides details on the following: the special purpose; the annual objectives that it has set to achieve its special purpose; the metrics used to gauge the success of the special purpose; how it has achieved or fallen short of the stated objectives; and how much money was spent in furtherance of the special purpose. But it does not require any measurement against an independent third-party standard.

This fall you have not one, but two, opportunities to attend a live lecture about the legal structures for social enterprise in New York City. Click on the date below for more details.

October 11th / 7:00 PM / Skillshare HQ

November 8th / 7:00 PM / General Assembly 

Class Description:

Have a great idea for social innovation, but trying to figure out whether it should be a nonprofit or a for-profit? Have you heard something about these new hybrid legal structures but can’t figure out what the heck they do? If so this course is for you! We’ll be digging into:

• 501(c)(3)
• L3C
• Benefit Corporation
• B Corp Certification
• LLC
• Corporation

photo: elsonpro