One thing everyone in impact investment and social enterprise can agree on is that raising funding is hard, and raising funding for innovative programs and business models is even harder. Good news! Things are changing in a positive way – and you can help push the trend without ever leaving your desk.
The White House Office of Social Innovation recently announced a proposed change in the rules governing program related investments (PRIs) made by foundations. I’ve written about why this is important on the Center for Financial Inclusion blog but here are the highlights:
• PRIs can now be structured as debt, equity or guarantees, including to for-profit companies;
• Treasury has stated that taxpayers may rely on these new examples even before the ruling is finalized;
• Current legislation will remain in force and essentially unchanged, except for the addition of the new examples;
Here’s where you can help: from now until July 18th, The Treasury Department is accepting comments or suggestions on the proposed rule change here: Federal Register: PRI Examples. I urge you to read PRI Examples 11-19 and comment in support of these changes, and add any examples that you feel are missing.
I had two concerns after reviewing the Federal Register and have submitted comments that are shown below. Example 20 is intended to make explicit the concept that PRIs can be used to support structured impact investment funds and Example 21 incorporates specific reference to the permissibility of hybrid structures (B-Corps and L3Cs).
If the work you do would not be covered by Examples 11-19, consider writing and submitting an example that would provide inclusion. Comments in support of examples 20-21 below, or upgraded versions thereof, would be most welcome too! ! If we don’t make our voices heard now, we won’t have anyone to blame but ourselves for regulatory constraints on venture philanthropy.
Example 20: Fund Manager X wishes to lend or invest money in a portfolio of double or triple bottom line companies in the US or abroad through a structured financial vehicle. The target portfolio companies propose to deliver social and/or environmental returns in addition to achieving positive financial returns, but cannot attract commercial financing because one or more of the following conditions apply:
A. The business model has not yet been tested to scale
B. The business model has been tested at scale, but break-even has not yet been achieved;
C. Company revenue is positive, but the company lacks sufficient credit history or collateral to attract local market financing;
D. The social and/or environmental benefits of the business model are clear but difficult to quantify;
E. The social and/or environmental benefits of the business model appear promising but cannot yet be observed and may be difficult to quantify later;
F. The cost of serving low income populations, providing a social good or safeguarding the environment will result in sub-market financial returns compared to a relevant peer group that does not target social and/or environmental returns.
G. One of more qualified investors agree that they would provide financing to Fund Manager X, but only if a risk reduction or credit enhancement mechanism is in place.
In this example, the provision by Private Foundation Y of a guarantee, equity tranche, subordinated debt position, offsetting deposit or other similar instruments that reduce the riskiness of the fund in order to enable Fund Manager X to mobilize private investment will be considered an exempt activity.
Example 21: In any of the examples above that refer to a for-profit entity, Foundations may also consider a hybrid corporate entity such as the benefit corporation or limited liability low-income corporation to be an acceptable counter-party.
Lauren Burnhill, @Lauren.OPV