LAW AND SOCIAL ENTREPRENEURSHIP

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.

Georgetown Law students from my Social Entrepreneurship & The Law practicum course will be presenting their final projects — legal case studies of two social enterprises — at Ashoka tomorrow. Here’s the invitation: Ashoka + Georgetown Law Invitation. Please note that the event is NOT open to the public to attend in person but you can listen in on Google Hangout (for details email socialenterprise (at) law.georgetown.edu).

Ashoka and Georgetown Law, along with the University of Michigan Law School and the George Washington University Law School, are engaged in a partnership to contribute to the field of social enterprise law and provide legal support to Ashoka Fellows (see more on this collaboration here). Our collaborative approach is two-prong: First, through experiential learning courses, including the transactional law clinics at each school, law students collaborate to develop and share “best practices” for the sector through production of legal toolkits and research that helps Ashoka further its charitable mission, and support the field. Second, law students at each school (through transactional law clinics) provide direct legal representation to selected social enterprises within Ashoka’s network on business, corporate, nonprofit, and other transactional legal matters. The legal case studies that will be presented at the May 9th event are part of this collaborative effort. With the legal case studies we hope to illuminate some of the legal issues that social enterprises face and identify how social enterprise attorneys are adapting current legal and regulatory regimes to fit their clients’ social purposes. The Georgetown Law students will discuss crowdfunding, securities law, corporate governance, and U.K. community interest companies, among other topics. The legal case studies will be posted on Ashoka’s new legal website (launching this summer I believe).

The Marketplace Fairness Act would force internet retailers to collect sales tax from their internet customers. This proposed legislation certainly affects social enterprises, the majority of whom are small businesses, and some of whom may compete with internet Goliaths like Amazon.com and Overstock.com. No matter what spin the Heritage Foundation tries to put on it, the Act would be a step forward in leveling the playing field so that internet retailers and bricks-and-mortar small businesses can compete on unit price and not on sales tax. When internet retailers gain a competitive advantage through a loophole in the law (and not necessarily through innovation or a superior product or service), consumers lose in the long run. A race to the bottom is not sustainable.

It’s interesting to note too that the internet retailers whose gross annual receipts in internet sales that don’t exceed $1 million are exempt from collecting sales tax. This would seem to dispel the claims of retailers like Etsy and eBay that the Act harms their individual sellers who cannot incorporate a complex sales tax system into their home businesses (if individual sellers have sales of $1 million, I’m clearly in the wrong field and will be opening up my Etsy shop soon!)

The Act, or rather, reaction to the Act also raises a broader question that I am researching right now — that is, the intersection of social enterprise, values, and politics. Etsy is a Certified B Corporation. Etsy’s mission statement includes conducting a “mindful, transparent, and humane business”. How does a social enterprise’s embrace of sustainable business practices square with opposition to a sales tax that all brick-and-mortar stores face? (Note: Etsy actually supports the Act but advocates for raising the exemption higher, to the federal definitions of “small business”).

Cross-posted at Conglomerate.

This is the first of three posts analyzing the proposed Delaware Public Benefit Corporation (“PBC”) amendments.  The posts will compare the proposed PBC amendments to the Model Benefit Corporation Legislation (the “Model”).

In a few key areas, the PBC allows more private ordering that the Model.  Perhaps the most striking difference is that the PBC does not require a third party standard for measuring public benefit (a cornerstone requirement of the Model) unless the requirement is included in the PBC’s certificate of incorporation or bylaws (§366(c)).  In some ways, Delaware’s approach in the benefit corporation debate reminds me of how it handled the proxy access debate:  expressly allow, but leave most of the details to the individual corporations.

That said, the PBC is not as flexible as the Flexible Purpose Corporation (“FPC”) (California) or the Social Purpose Corporation (“SPC”) (Washington); the PBC requires that the PBC be operated in a “responsible and sustainable manner” (§362(a)).  That broad general statement in the proposed PBC amendments, which is not present in the FPC or SPC statutes, seems to be one of the main reasons B Lab, the primary force behind the benefit corporation movement, has expressed public support for the PBC.  Whether B Lab is completely supportive of the PBC and all its deviations from the Model is not entirely clear.

Below, I compare and contrast some of the key provisions of the Delaware’s PBC and the Model.

Benefit Director.  PBC – not mentioned.  Model – required for public companies. (§302(a)).

Benefit Officer.  PBC – not mentioned.  Model – optional (§304(a)).

Benefit Report (Preparing).  PBC – no less than biennially (§366(b) & (c)).  Model – annually (§401(c)).

Benefit Report (Public Posting).  PBC – optional (§366(c)).   Model – required to post benefit report on company website; if no website must provide the benefit report for free to anyone who asks for a copy (§402).

Identification of Specific Public Benefit Purpose(s).  PBC – required (§362(a)).  Model – optional (§201(b)).

Minimum Ownership for Shareholder Standing in Derivative Lawsuits.  PBC – 2%; or if the PBC is publicly traded then the lesser of 2% and $2 million in market value (§367).  Model – 2% (§305(b)(2)(i)).

Third Party Standard.  PBC – optional (§366(c)).  Model – mandatory (§§102 & 402).

Third Party Certification.  PBC – optional (§366(c)).  Model – optional (§401(c)).

The only area above where the PBC is less flexible than the Model is in requiring the identification of specific public benefit purpose(s), which will be discussed in the next post on director guidance.

Over at the American Constitution Society’s blog, I just posted some thoughts about how advocates can use corporate law to advance workers’ rights. Social enterprise falls clearly into this category. There are many social enterprise business models in which “social” is synonymous with employees. FareStart, a Seattle restaurant, is an obvious example (I’ve had the pleasure of eating there). FareStart’s employees are homeless and disadvantaged individuals, and are part of a culinary job training and job placement program. The restaurant operates purely for the benefit of its employees. But it seems to me that there are many other social enterprise business models—those where employees are not the beneficiaries—that loose sight of workers’ rights in their own operations because they are so focused on making an impact on some other constituency, like communities in developing countries, or the environment.

Here are my brief thoughts on this issue from the ACS blog:

“Despite the small trend towards social enterprise and “stakeholder governance,” the movement seems to engage environmental and philanthropic concerns far more than worker concerns. For example, social impact reports of companies tend to highlight environmentally-friendly business operations like recycling, low water usage, and carbon-neutral footprints. These reports also highlight corporate giving to charitable causes. Rarely do they discuss the livelihoods of their own workers. The worker voice is absent from social impact reports, or if the worker voice is included, it is only to highlight some minimal effort to engage and support workers—like paying a minimum wage—which only legitimizes a subpar standard. Unions and worker rights groups should challenge prioritization of other stakeholders by engaging with those who claim to support corporate law reforms to “make business better”. The worker voice needs to be inserted into the social enterprise movement, promotion of the benefit corporation statute, and into social impact reporting.”

In some ways, this is an issue similar to one that has been discussed for a long time in the nonprofit world—that is, low salaries and general mistreatment of nonprofit employees. Because the nonprofit employee is working for a charity, it is assumed that she (and it usually is a “she”) will work long hours for little money and no benefits. Let’s hope that type of thinking has not migrated to the social enterprise world. Social enterprises need to remember than “social” does not just mean societal impact; it’s an issue that is much closer to home than that.

Professor Haskell Murray (Regent) has been busy!

First, his most recent article, Defending Patagonia: Mergers & Acquisitions with Benefit Corporations, will be published soon in the Hastings Business Law Journal. In the article, Professor Murray analyzes whether and how the Revlon and Unocal line of cases will be interpreted and applied to mergers and acquisitions involving benefit corporations. This is completely unchartered territory, so Professor Murray cleverly uses Patagonia, a well-known benefit corporation, as an example to illustrate his analysis. The article is very interesting and informative, and it may be found on SSRN here.

Second, Professor Murray and his wife, Katie, just welcomed their first born into the family! David McGahan Murray was born healthy and happy on April 3, 2013. Young David weighed in at a solid 8lbs 9oz, so all the NFL scouts have been alerted. Congrats Haskell and Katie!

The Ewing Marion Kauffman Foundation and the University of Missouri-Kansas City (UMKC), in collaboration with the United States Association for Small Business and Entrepreneurship (USASBE), are sponsoring the 2013 Midwest Symposium on Social Entrepreneurship from May 20-21 in Kansas City, Missouri. This Symposium will offer a forum for academics, as well as interested practitioners, to (i) advance their understanding of social entrepreneurship, (ii) exchange knowledge and experience regarding entrepreneurship in general, and (iii) shape the future of the emerging field of social enterprise.

The Symposium begins with Opening Remarks at 8:30 a.m. on Monday, May 20, followed by morning and afternoon workshops, as well as presentations at a luncheon and early evening reception that day. The Tuesday, May 21, schedule includes a morning workshop, luncheon presentations, and, in the afternoon, a business plan competition showcasing socially entrepreneurial initiatives developed by students participating in The Aaron L. Levitt Social Entrepreneurship Challenge. All workshops and events will take place at the Ewing Marion Kauffman Foundation Conference Center (4801 Rockhill Road, Kansas City, Missouri, 64110). As linked above, further information and registration details may be found here.

Muhammad Yunus will be speaking at Georgetown on April 17th. Although it is a free event, tickets are required and the event is sold out. For those who still want to watch, it will be webcast here. I will be attending the event in person and hope to post some reflection on his talk after. To preview his story, here’s an HBR interview with Yunus last December.

DR. MUHAMMAD YUNUS
Nobel Peace Prize Laureate & Founder of the Grameen Bank

Wednesday, April 17, 2013

Dr. Yunus will be offering a lecture at Georgetown University on

“Social Business and Microcredit for Women’s Empowerment and Poverty Alleviation”

With remarks by:

Melanne Verveer
Executive Director, Georgetown Institute for Women, Peace and Security &
Former U.S Ambassador-at-Large for Global Women’s Issues

Ann Van Dusen
Director, Georgetown School of Foreign Service, M.A. in Global Human Development Program

3 p.m. to 4 p.m.

This event will be webcast at http://webcast.georgetown.edu

Brought to you by The Yunus Centre, The Georgetown Institute for Women, Peace and Security and The SFS M.A. in Global Human Development Program

As we all continue our analysis and search for a definition of social enterprise that captures the movement’s spirit while also being accurate, I thought that I’d share CrowdImpact’s definition of a “social enterprise business” below (note, this definition only covers for-profit businesses and not non-profits). I like this business definition so much so that I may adopt it for my Social Enterprise & Nonprofit Law Clinic at Georgetown. The definition below (1) acknowledges that a social enterprise is more than it’s choice of legal entity and (2) prioritizes the commitment to make both an internal and external impact.

There is one aspect of this definition that I take issue with, and this is an issue that I have been trying to reconcile whenever I describe social enterprise as well. Most descriptions of social enterprise include a statement like “the primary purpose is not to make money.” I think that people knowledgeable about social enterprise understand this to mean the following: “the primary purpose is not to fatten the pockets of already wealthy owners and investors.” Because for many social enterprises, the purpose precisely is to make money or redistribute wealth – e.g., to make money to reinvest in the social enterprise’s impact efforts, or to facilitate wealth creation opportunities for low-income people or people at the bottom of the pyramid.

With that caveat, here is CrowdImpact’s Definition of a Social Enterprise Business:

A Social Enterprise business has:
1. Internal Impact in the way they treat employees, engage in production, select materials, and other factors.
2. External Impact in what they contribute to the environment, their community, and/or humanity.
3. Legal Accountability in their incorporation documents, mission statements or stated values.

Other things that help you define if your company is a for-profit social enterprise:
• It generates revenue through the sale of products and/or services.
• It applies entrepreneurial approaches to addressing social, environmental and human justice issues.
• Its purpose is beyond making money. It incorporates higher goals for the improvement of the environment, humanity and/or community.

There will be two panels on social enterprise law at the upcoming ABA Business Law Section Spring Meeting in Washington, D.C. Details below. Law students can register for this conference for free!

You’ve Been Asked To Set Up A Social Entrepreneurship Organization – A How To Primer

Social Entrepreneurship options include LLCs, parallel nonprofit/business entities, LC3s, benefit corporations and social impact bonds. A
distinguished panel will discuss those options and the governance issues these choices present. Where are other jurisdictions are heading?
We’ll end by discussing how to promote public buy-in of the public benefit these organizations promote.

Program Chair and Moderator:
David Tang, Attorney, Gowling Lafleur Henderson, Toronto, Ontario, Canada

Speakers:
William H. Clark, Jr., Partner, Drinker Biddle & Reath LLP, Philadelphia, PA
Bart Houlahan, Co-Founder, B LAB, Berwyn, PA
Robert Keatinge, Of Counsel, Holland & Hart LLP, Denver, CO
Stephen Lloyd, Senior Partner and Head of Department, Bates Wells & Braithwaite, London, United Kingdom
Marcus S. Owens, Member, Caplin & Drysdale, Washington, DC
Allen Sparkman, Attorney, Sparkman & Foote, Houston, TX

Friday, 4/5/13, 10:30 AM – 12:30 PM Georgetown, Concourse Level, Washington Hotel

Governance of Nonprofit Organizations Joint Meeting

Speaker:  Alicia Plerhoples, Associate Professor of Law and Director of the Social Enterprise & Nonprofit Law Clinic, Georgetown University Law
Center, Washington, DC. Professor Plerhoples will speak on “Representing Social Enterprise, Facilitating Mission-Driven Corporate Governance.”

Saturday, 4/6/13, 3:30 PM – 4:30 PM Columbia 2, Terrace Level, Washington Hilton