Wharton Social Impact Conference – SF 2016

Company improve its social impact (work on influence marketing).

The 2016 Wharton Social Impact Conference in San Francisco took place on December 13, and I had the pleasure of catching a couple of the sessions during the day.

Funding Models for Maximizing Impact

Moderator Dr. Amara Enyia noted the Rockefeller Foundation’s identification of a $2.5 trillion annual funding gap to achieve the Sustainable Development Goals (SDGs) in developing countries and framed the discussion by asking how we should access private funds to fill this gap.

The Omidyar Network (ON) is a pioneer in using different legal structures to maintain flexibility in addressing social goals and having an opportunity to scale solutions. Chief of Staff Elaine Chou described ON’s use of various forms of capital along the financial-social return continuum to achieve its goals and pointed to a recent article published in the Stanford Social Innovation Review – Across the Returns Continuum – that further describes ON’s views.

In this article, we present a framework for investing across the returns continuum—a continuum that extends from fully commercial investments at one end to philanthropic grants at the other. This framework reflects our belief that there is a broad range of viable investment profiles, some of which involve a trade-off between social return and financial impact, and many of which do not.

Chan Zuckerberg Initiative (CZI) Chief of Staff Caitlyn Fox also pointed to the desire for CZI to maintain flexibility in its investments and why that led to the choice of operating as a for-profit LLC as opposed to a nonprofit private foundation. But she noted the public perception/criticism tradeoff that came with such decision. CZI’s three main focuses are education, basic science research (including for the cure of diseases), and policy (including criminal justice reform and immigration reform).

This led to further discussion of ON’s and CZI’s public policy activities, which were not limited in the way they would otherwise have been had they adopted a private foundation form. However, Ben Mangan of Center for Social Sector Leadership remarked that philanthropy (private foundations), while restricted from lobbying and political campaign intervention, could do much to support public policy initiatives, identifying the Ford Foundation as a good example. Mangan also noted that the choice of the LLC form by “philanthropists” was not a rejection of traditional philanthropy but an appropriate addition. Michael MacHarg of Mercy Corps concurred, noting that we shouldn’t vilify or pigeon-hole certain legal forms and use the appropriate forms or tools as would be most effective and efficient in carrying out the blended purpose of the venture.

Enyla raised the issue of privatization of public goods, how that might go awry, and how that would impact public-private partnerships. Mangan responded by raising the problem of greenwashing and claiming the halo of being a social venture or social enterprise – terms that are not legally or consistently defined. Public agencies choosing for-profit partners that publicly touted social goals (for marketing and political purposes) but truly only had financial goals remain a problem.

Enyla asked how funding models for impact would evolve over the next ten years. MacHarg emphasized the need for more experimentation and the support of early stage enterprises, no matter what the form. He also called out for more current expenditures and less emphasis on creating endowments. Chou returned to the idea of accepting the spectrum of actors across the returns continuum.

The panel discussed getting and using data from multiple stakeholders, including intended beneficiaries, to inform their organizations’ funding decisions and activities. This prompted a question about investing in very early-stage ventures that have no impact data to show. The panel responded by referring to traditional investment criteria, including review of the management team, as well as the venture’s theory of change and how its hypotheses could be tested. Fox also mentioned CZI looked at segments where more risk capital might be needed (e.g., funding younger scientists).

Finally, the panel discussed the need for patient capital for social innovations that might take decades. Enyla noted how policy makers were typically driven by the need to show short-term results and how that stifled the ability to pursue important project.

Impact Investing

Jon Jones of GSVlabs moderated this session exploring where we are with impact investing. Kathleen Berroth of Omidyar Network defined impact investing broadly, citing the Across the Returns Continuum article mentioned above.

The impact investing field, in our view, must move beyond the unproductive debate over trade-offs [between financial return and social impact] and instead focus on a more relevant question: Under what conditions should an investor accept a risk-adjusted below-market return in exchange for an opportunity to achieve social impact?

Victoria Fram of VilCap Investments, LLC (Village Capital’s affiliated for-profit investment fund) discussed her firm’s criteria on impact investments, all in for-profit enterprises (40% of the founders are women, 20% are people of color). Village Capital finds, trains, and invests in entrepreneurs solving real-world problems, and builds communities around entrepreneurs and their ventures to improve opportunities for growth and success.

Nelson Gonzalez of Declara is working on U.S. expansion of leAD the sports accelerator fund of the Adidas founding family. He discussed the spectrum between the “earnest” impact investors (with sincere and primary social impact goals) to the sophisticated pure financial investors putting lipstick on some old ideas (like greenwashing) and emphasized the need to create more investment opportunities in the middle.

Kunal Doshi of Capricorn Investment Group discussed some specific impact investments and how their financial and impact goals will not change even with the changing political environment. Capricorn manages the assets for Jeff Skoll, the Skoll Foundation and others who strive for extraordinary investment results by leveraging market forces to accelerate large scale impact.

Perhaps the most pressing question from the audience: How do the monies and ideas find each other? Omidyar looks for consistency with strategy though Berroth mentioned there are some funds for experimentation. Fram discussed the need for honesty and feedback when rejecting an entrepreneur, which can be of great value even if the entrepreneur’s venture is not funded. Gonzales identified the diversity issues when the focus tends to be in Silicon Valley and the coasts but optimistically asserted his belief that efficient markets would eventually fund ideas wherever they originated. Fram noted the still problematic differences between funding ventures with male founders over those with women founders.

Bonus Tweets

  • Invest Impactly: Genius is evenly distributed by zip code, opportunity is not @KaporCenter Dr Freada Kapor Klein
  • Elaine Chou: Foundation endowments spend 95% of capital on gap-widening orgs then expect 5% in grants will fix problems @TheRealFreada

SOCAP16: Additional Thoughts and Highlights


SOCAP16, this year’s iteration of the premier social capital markets (SOCAP) conference hosted in San Francisco each year, reflected a growing maturity in the fields of social entrepreneurship and impact investing. The discussions emphasized the need for inclusion of those most impacted by the problems social entrepreneurs are trying to solve. They recognized the lack of domestic investments in communities of color. They noted that incremental change was insufficient to change the culture necessary for accomplishing broader, positive social impact. They moved away from preaching on the need to collect data to discussing what data needs to be collected and how. They identified equity as inherently an economic growth strategy. And they highlighted that philanthropy, while a key partner in impact innovation and an underutilized player in impact investing, is a product of power and privilege (and, as Stanford professor Rob Reich insightfully added, an exercise of power and reminder of privilege).

Jed Emerson, originator of the term “Blended Value” and Chief Impact Strategist with ImpactAssets, talked about framing impact investing as creating a new kind of value and not as sacrificing (or not sacrificing) financial return. He also questioned the purpose of capital. You can watch Emerson’s talk at the opening plenary here. His article, SOCAP16 And Beyond: A Community of Parts and Whole, reflecting on the evolution of the conference and the urgent need for action is both illuminating and inspiring:

As we move to scale our impact and continue to embrace the ongoing mainstreaming of our vision and practices, we need to create a truly big tent that may simultaneously hold all our various parts while also ensuring we’re all a part of the same gathering and overall movement committed to impact, equity and the effective deployment of diverse types of capital in pursuit of multiple returns.



Finally, as you move through the presentations and conversations to come, both here at SOCAP16 and at home in the months ahead, I remind us there is a unique and critical urgency to our getting on with the order of the day. Black men, women and children continue to be murdered in their own communities, going about their daily lives, driving cars and playing in front yards. Women around the world continue to be objects of abuse, trafficking and economic injustice. Animals and diverse species on our planet whose interests are wrongly deemed subservient to Homo Sapiens are in some cases directly exploited through industrial farming and in other cases increasingly tipping toward permanent extinction as a result not of natural processes but of the economic, cultural and related systems we have put in place and with which we dominate our world.

Matthew Weatherley-White, Managing Director of The CapROCK Group, suggested having ESG (environmental, social and governance) investing as the default from which investors would have to opt out if they wanted to broaden their investments to include companies that exploit workers and corrupt the market.

Jonathan Jenkins, CEO of Social Investment Business, observed in his excellent article SOCAP16 – views from a reformed conference cynic:

  • People are no longer asking how the metrics should fit mainstream expectations. People are asking why we should fit the mainstream expectations when many of those are entrenched to only consider risk and return, not impact?
  • Some people are even going full circle and questioning whether we have thought about impact (the “why”) enough, in our rush to create a market place (the “how”).

Further evidencing the growing importance of both SOCAP and social entrepreneurship, the New York Times noted in Social Entrepreneurs Say They Face Tough Hurdles but Making Headway:

  • Attendees at SOCAP said governments are promoting social entrepreneurship and schools are teaching it, while enterprises are finding fresh, creative ways to obtain credit and financing.
  • But nearly 60 percent of experts cited [in a Thomson Reuters Foundation poll of almost 900 social enterprise experts in the world’s 45 biggest economies] a lack of public understanding, access to investment and selling to governments as the biggest challenges that could hamper growth [of the social enterprise sector].

NEO Law Group’s Michele Berger chronicled her personal takeaways from SOCAP16 here.

Additional Resources

The Best Countries to be a Social Entrepreneur 2016 (Thompson Reuters Foundation)

Success for women entrepreneurs in poor countries means enlisting men: activists (Reuters)

Hub of Impact (Huffington Post)

Impact investors: will you accept these three dares? (Bold Social Ventures)

A healthy dose of Toniic: Insights on impact investing at SOCAP16 (Toniic)



The Nonprofit Law Blog has been writing about SOCAP (Social Capital Markets) since 2010, and I am thrilled to be attending and covering the annual SOCAP conference this year.

SOCAP16 is gathering impact investors, social entrepreneurs, foundations, corporations, global nonprofits, and other valuable strangers all contributing to a vibrant marketplace for socially, environmentally and economically sustainable solutions.

SOCAP identifies itself as “a network of heart-centered investors, entrepreneurs, and social impact leaders who believe in an inclusive and socially responsible economy to address the world’s toughest challenges.” Its mission is “to create a platform where investors willing to put money into enterprises focused foremost on social return can meet the world’s most innovative entrepreneurs.” The SOCAP annual event, operated by Mission Hub LLC, a Certified B Corp, is the biggest of its type and has drawn more than 10,000 people.

SOCAP16 will highlight recurring themes from the community including:

  • Impact Investing
  • Meaning
  • Neighborhood Economics
  • Cities: Centers for Change
  • Inclusive Entrepreneurship
  • Clean Energy for All
  • Sustainable Food and Agriculture
  • Country Context

Below is a running list of highlights:


Opening Plenary

Presenters at Wednesday’s opening plenary session discussed the “how” and the “why” of social capital markets.

  • Impact At Scale – Nancy Pfund, Maya Chorengel, and David Kirkpatrick began with their journeys to scaling impact and considered how to continue the growth.
    • The vocabulary for objectively measuring impact is still emerging – Maya Chorengel
    • We have to be in this for the long haul, we are disrupting age-old industries – Nancy Pfund
    • “We need responsible stewards of capital who are committed to impact”- Maya Chorengel
    • As we look to the future, we have to ask ourselves: How do we drive policy change? How do we mentor and build the impact investing field more broadly? – David Kirkpatrick
  • Matthew Weatherley-White posed a question: what if the institutions who hold the world’s invested assets implemented ESG (Environmental, social and governance) factors into every phase of the investment process?
    • Weatherley-White suggested reframing the opt in/opt out choice: what would happen if investors were actually asked to opt in to investing in companies that exploit workers and corrupt the market, versus opting out of investing in sustainable and impactful funds?
    • Like organ donation, the prevailing view in countries that opt in is that donating organs is a move of extraordinary altruism; in opt out countries, it is seen as ordinary community behavior
    • Rather than asking investors to fight cognitive biases of opting in to contributing to socially and environmentally responsible capital markets, asking them to opt out would change the system irrevocably
  • Transformative Edge of Impact – Morgan Simon and Edward Dugger III
    • Markets are good at scaling things that are better, but better doesn’t mean fair – Morgan Simon
    • The goal of impact investing should be to create more value in communities than we take out in return
    • Impact investing is reinventing investing. How do we create the most powerful ripple effects that we can? How do we include the excluded? – Edward Dugger III
  • Jed Emerson (who has said, SOCAP is where Wall Street met Burning Man) talked about wanting to shift the focus from “how” (how to structure funds, how to measure impact, how to raise capital) to include the “why” (the purpose of capital)
    • The “why” question is a deeper, historical question that requires looking at the parts and the Whole
    • When the focus is only about the mechanics of impact investing, there is a risk of developing high functioning funds with limited impact
    • “You can’t have cheap impact. Intentionality is required”
  • When we put financial return above everything else, we’re all contributing to the world we’re trying to avoid and change. We need to do something radically different – Matt Stichcomb
    • If we want to change business, we need to change business education (who is teaching, and who is being taught)
    • Stichcomb has 6 principles of what it means to do good work. Good work.. honors nature; nourishes the whole human; invokes community; embodies integrity; strives great, not big; leaves room for the mystery.

Navigating Impact Investing: The Pursuit of Clarity and Simplicity

Debbie McCoy, Yasemin Lamy, Nick O’Donohoe, Giselle Leung, and Cathy Clark

  • For simplicity and clarity, investment teams need outcome orientation from investors. Investors sometimes do not have the “why” in mind when they choose to incorporate something other than risk and return into their investment portfolios, and can have a range of interests from broad to niche. – Debbie McCoy
  • Find lessons in past structures and unpack how these transactions came together. – Giselle Leung
  • Create patterns and simplify investment structures to core elements that others can replicate. – Cathy Clark
  • For Omidyar Network, the definition of impact is: what is the direct impact on that firm or organization’s beneficiaries? – Yasemin Lamy
  • For the Gates Foundation, impact management is more important that impact measurement. Beneficiary identification and governance are critical – Nick O’Donohoe

Impact Women Tell All

Cody Nystrom, Fran Seegull, Tasha Seitz, Johanna Posada, Nancy Pfund, and moderator Stephanie Nieman

  • Statistics show the gap between the large percentage of women who are asset owners and the small percentage of women who are investment firm partners.
  • When there are women investment professionals at investment firms, firms are 3x more likely to invest in women entrepreneurs.
  • There are more women impact investors than women who are traditional investors. Why? Is it a safer place to invest?
    • Panelists refuted. Impact investors have to hit returns like any other investor, but must optimize on two levels: returns and impact, which inherently makes the work harder.

Extinction or Extension? The Role of Corporations & INGOs in Social Enterprise

Ryan Johnson, Jitendra Kavathekar, Wendy Gonzales, Lewis Hower, Marilia Bezerra, and Kevin Connolly

  • Why should INGOs, large corporations, and social enterprises partner?
    • From a scaling perspective, partnership is critical – Kevin Connolly
    • Startups that use innovation and technology to solve problems for human beings need resources from large corporations, but also need INGOs in the field to implement their ideas.
    • Social enterprises can learn from INGOS and large corporations about the need for process.
  • In order to form meaningful partnerships, each side must get over themselves and their own agenda for the sake of coming together. Each side must be willing to experiment, innovate, and step out of their comfort zone. – Marilia Bezerra

Crowdfunding For Impact

Ken Nguyen, Eve Picker, Pitichoke Chulapamornsri, and John Katovich

  • Equity crowdfunding can help democratize investing, leveling the playing field for founders who don’t fit the mold. – Ken Nguyen
  • Municipal bonds are arguably the oldest impact investing instrument. Across the market, municipal bonds are low risk and the returns are high impact. The Golden Gate Bridge was built by municipal bonds. – Pitichoke Chulapamornsri
    • The high denomination of bonds and the opaque nature of the municipal bond market has made them traditionally inaccessible to many people.
  • Crowdfunding can and should be used not just for investment capital, but also for product marketing.

Additional Resources from or featuring Wednesday’s Speakers

Matthew Weatherley-White – The Most Fascinating Impact Investor You’ve Never Heard Of

Fran Seegull – Impact Investing: What Will It Take to Get to Scale?

Nick O’Donohoe – The Role of Big Society Capital in Growing Impact Investment

Ken Nguyen – New Impact, New Inclusion in Equity Crowdfunding


Opening Plenary

  • When you own the lens, when you own the story, when you own the power, you can tell your story better – Stephen Ozoigbo discussing the Hollywood in Focus Program
  • How does someone become the face of someone else’s cultural creation? – Devita Davison (Meet The Man Who Launched The Nashville Hot-Chicken Craze versus How Hot Chicken Really Happened)
  • We feel like what we’re doing at SOCAP isn’t political, but most people feel left out of the capital markets – Ross Baird
    • Women make up less than 5% and minorities less 1% of start-up investment
  • Deval Patrik and Jim Shelton discussed what’s next for social enterprise in education
    • “How can we transform the learning equation to empower teachers and students and improve outcomes?” – Jim Shelton
    • School desegregation was about asking children to do what adults didn’t want to do. But now, some schools are more segregated than ever. – Deval Patrik
    • Chan Zuckerberg Initiative on education: the problem has never been the kids. It’s been our inability to solve the problem. – Jim Shelton
    • Setting up a system so that the image of what success in schools looks like has clear benchmarks and transparency to the public—this is a great role for policy and government.
  • Toilet Board Coalition – business-led coalition partnering entrepreneurs, nonprofits, and government
    • 2.4 billion people are held back because of poor sanitation. Business models that deliver sanitation at scale should be supported and accelerated
    • For the next 300 million toilets installed – we need to make sure “they’re not dumb buckets, they’re smart sanitation” – http://www.toiletboard.org/
  • Rick Ridgeway, Patagonia
    • When you reduce energy, you save water, and cut back waste — you save money. You also reduce the risk of impact to the environment and harm to workers.
    • There is no business on a dead planet.
    • Don’t Buy This Jacket
  • 20% of the world does not have electricity to meet their basic needs – Dawn Lippert and Rachel Pritzker
    • The entire world is going to power, but will we burn up our planet? – Dawn Lippert

Eight Years Later: Impact Policy in the Obama Administration

Divya Kumaraiah, Rob Lalka, Mark Newberg, Jessica Yuen

  • “Impact” is a better defined concept than it was 8 years ago
  • There are now four different agencies that have “innovations funds”
  • Social impact bonds are intended to help scale high performing nonprofits.
  • The White House Office of Social Innovation (OSI) began to look at why foundations were apprehensive about granting/loaning to for-profit innovators and wanted to lower the cost of doing these transactions. OSI strived (and succeeded) to update examples in the outdated regs (Program Related Investments)
  • Standardizing PRIs and MRIs would encourage and help foundations to use them
  • State and local governments should not be overlooked with respect to impact policy

Sync and Swim: Demystifying Foundation Investors and Building the Two-Way Pipeline

Gayle Jennings-O’Byrne, John Duong, Melanie Audette, Sam Fankuchen

  • Startups should understand a foundation’s mission and how they fit before seeking funding
  • Alignment with a private foundation can give credibility to a social enterprise – John Duong
  • PRIs, as a financing tool, has not been flexed as much as it should – Gayle Jennings-O’Byrne
  • Ask yourself: how can you cultivate your network and relationships to get credible access to both investors and entrepreneurs?

Prize Philanthropy: Driving Social Change Through Contests

Phillip Denny, Juno Fitzpatrick, Sarah Koch, Ani Vallabhaneni

  • Early stage innovation competitions provide publicity to issues and connections to investors and subject matter experts – Juno Fitzpatrick
    • Critics of prize philanthropy say: “Ideas are easy but implementation is hard”; see Dump the Prizes
  • From a funders perspective, prizes and competition shed light on projects that wouldn’t otherwise be easily found – Sarah Koch
  • Student competition initiatives encourage young people to develop key entrepreneurial skills and build their networks – Phillip Denny

Am I an Entrepreneur? Challenging the Stereotypes

Kelechi Anyadiegwu, Tony Tolentino, Sheila Herrling, Monique Woodard

  • Statistics show that diverse companies are outperforming non-diverse companies
  • Traditional investors did not see the potential in Kelechi Anyadiegwu’s idea: How one 26-year-old turned $500 into $2 million online
  • Barriers to the diversity of entrepreneurs: gender bias, racial bias, homogeneity at the investor firms making funding decisions– Monique Woodard
  • While many startups fail, entrepreneurs of color have more pressure to succeed for the next person waiting behind them

2016 ABA Business Law Section Annual Meeting

Boston, Massachusetts, USA Skyline at Fan Pier.

The American Bar Association (ABA) Business Law Section is holding its 2016 Annual Meeting in Boston on September 8-10. I’m looking forward to meeting with my colleagues in the Nonprofit Organizations Committee, attending the various programs, and expressing my appreciation as one of the recipients of the Committee’s Outstanding Nonprofit Lawyer Awards.

Accelerators and Incubators

The first program I attended was titled Accelerators and Incubators, Their Clients, and the Role of the Lawyer, described as follows:

The panel will discuss variations in accelerator and incubator ecosystems in various parts of the U.S. Additional topics covered will include securities law issues related to representing early stage companies and how lawyers can cost-effectively represent them. Ethics in attorney compensation and investing in your client will be discussed.

The program began with a discussion of the differences between accelerators and incubators, noting generally that accelerators provide support over a more limited duration (average of 15 weeks); select and work with a more limited group of cohorts (average of 7 portfolio companies); are privately owned and take an equity stake in their portfolio companies (unlike with most incubators, many of which are nonprofits); and appear to be associated with a higher success rate in terms of raising capital, gaining customer traction, and exerting a positive impact on regional entrepreneurial ecosystems.

Lawyers working with startups associated with accelerators and incubators are often asked to assist with company formation, governing documents, capital raises, and general contracting needs. Understanding securities laws is critical. According to panelist Sara Stock (great name!):

Registration is a very cumbersome, time consuming and expensive process. However, luckily, the Act contains exemptions from registration under Regulation D (17 CFR § 230.501 et seq.) Regulation D contains rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC. Securities offered under any of these exemptions are referred to as private placements. How to structure the private placement is critically important, because early stage companies often do not have the funds available for a full private placement memorandum. The attorney should evaluate the situation to determine if the Regulation D exception requirements rise to the level of necessitating a private placement memorandum, or, alternatively, is the company better served with a subscription package that includes items such as: (i) instructions for completion; (ii) disclaimers; (iii) subscription agreement; (iv) instruments for the raise (i.e. form of convertible note); (v) investment considerations; (vi) investor questionnaire; and (vii) company’s business plan, projections and sources and uses.

Some common misunderstandings result from a failure to recognize that: (1) notes (evidencing the sale of debt) and passive interests in a limited liability company are securities, which will require an exemption from registration; and (2) managers that sell securities may need to ensure they fall under an exemption from registration as a broker, which may require that they do not participate in selling an offering of securities for their company more than once every 12 months (challenging if there are multiple rounds of financing).

The program also covered several ethical issues facing attorneys that work with startups at accelerators or incubators, including those associated with: (1) serving on an advisory board or as a mentor; (2) becoming an officer or director of the company1; (3) taking equity or options as compensation; (4) investing in the company; and/or (5) working on a contingent fee.

Supplemental Resources

Handout (ABA Business Law Section 2016 Annual Meeting)

How Lawyers Can Add Value for Startups (Above the Law, 2015)

Summary of the Rule 3a4-1 Safe Harbor for Sales of Securities by Officers, Employees and other Associated Persons of the Issuer (Proskauer, 2012)

What’s a Nonprofit Accelerator Anyway? (Mission Capital)


I’m particularly intrigued by the program titled Chan-Zuckerberg & Friends: Using Philanthropocapitalism to Accomplish Charitable Goals: Will Foundations Become an Endangered Species? 

This program will discuss benefits and traps regarding alternatives to traditional foundations for accomplishing social good; in particular, using LLCs, other philanthropic ventures, and non-charitable tax-exempt entities. We will discuss how these structures avoid constraints imposed on 501 (c) (3) organizations, governance issues, political impacts, and charitable oversight by state Attorneys General.

I’ve previously written about the Chan-Zuckerberg Initiative on this blog here and here and can’t wait to hear the perspectives of the outstanding panelists: William Fournier (Caplin Drysdale), David Levitt (Adler Colvin), Sharon Lincoln (Foley Hoag), J. William Callison (Faegre Baker Daniels), and Will Fitzpatrick (Omidyar Network). Professor Philip Hackney (Louisiana State University) is moderating. I’ll provide some highlights below – stay tuned.

  • Private foundation restrictions like self-dealing and requirements of public disclosure have led to alternative ways of giving using taxable entities. However, private foundations still are very popular vehicles for charitable giving that provide substantial tax benefits to their founders/donors and a charitable mission lock on their assets after their death.
  • Taxable entities as vehicles for achieving social good may provide greater opportunities for donor engagement, flexibility (including in making investments), and earned income. And they may share common ground with nonprofits and be used to facilitate or promote microphilanthropy (e.g., crowdfunding).
  • Private foundations may have more flexibility in investments than some may think:
    • Program-related investments (PRIs). The primary purpose of a PRI is to accomplish one or more of the foundation’s 501(c)(3) exempt purposes (other than testing for public safety), production of income or appreciation of property is not a significant purpose, and influencing legislation or engaging in political campaign intervention is not a purpose.
    • Mission-related investments (MRIs). While an MRI is not currently defined by the Internal Revenue Code or Treasury Regulations, it is generally considered to be an investment for both a financial return and a social impact return (more specifically, one that advances the particular mission of the investor). IRS Notice 2015-62 generally provides that it’s not a lack of reasonable business care and prudence (and therefore not a jeopardizing investment under IRC 4944) merely because the private foundation managers consider the social impact return related to the foundation’s mission as well as the financial return the investment may produce in selecting an investment.
    • Excise tax on net investment income applies to income generated by both PRIs and MRIs. IRC 4940.
  • PRI and MRI rules:
    • PRIs (not MRIs) count toward the foundation’s mandatory distribution requirement, and PRIs (not MRIs) are not counted in the assets for purposes of determining the foundation’s 5% distribution requirement. IRC 4942.
    • Excess business holdings rules apply to MRIs (not PRIs). IRC 4943.
    • PRIs are exceptions to jeopardizing investments; MRIs are not (but see the discussion of IRS Notice 2015-62 above). IRC 4944.
    • The rules regarding taxable expenditures apply to PRIs, including the expenditure responsibility requirements. MRIs, on the other hand, are not subject to these requirements. IRC 4945.
  • Chan-Zuckerberg Initiative – still in its very early stages but with great flexibility, know little about its governance structure and internal obligations/restrictions created, know little about its exit strategy and how to avoid eventual estate taxes, entity discloses what it wants.
  • Omidyar Network – private foundation (grantmaking and PRIs) and taxable LLC (Series A and B investments), which pays for all of the expenses of both entities.
  • Public concern about philanthrocapitalism: no dedication of assets to charitable purposes beyond founder’s (or their heirs’) whims, no required transparency about use of funds.
  • Will we see new laws affecting taxable vehicles with a publicly announced social good purpose?
    • Perhaps nothing directly imposed on private taxable vehicles.
    • But likely to see continued incentives or allowances for social investments.
    • And may continue to see new laws related to deductions and solicitations.

Supplemental Resources

The birth of philanthrocapitalism (The Economist, 2006)

Using New Hybrid Legal Forms: Three Case Studies, Four Important Questions, and a Bunch of Analysis (Tax Analysts, 2012)

A Prediction for the Nonprofit Sector in 2015

Mark Zuckerberg and the Rise of Philanthrocapitalism (The New Yorker, 2015)

Economic Development as a 501(c)(3) Activity

Economic prosperity financial concept as a group of green trees shaped as growing finance pie chart as a metaphor for gradual gains in company stock or competitive wealth success.


Economic development may not immediately come to mind as an activity that furthers a charitable purpose, but it doesn’t take long to think of circumstances where helping a depressed community in its economic development can help in the relief of poverty and distress, and in the combat of community deterioration, all of which are regarded as charitable purposes. Accordingly, it is possible for a 501(c)(3) organization to provide funds and other resources to for-profit businesses to advance the purposes of economic development consistent with its charitable purpose. However, such support is limited by the 501(c)(3) restrictions against private inurement, prohibited private benefit, substantial lobbying, and political campaign intervention. For private foundations, additional rules and restrictions apply with respect to self-dealing, excess business holdings, jeopardizing investments, and taxable expenditures.

Economic Development Corporations and Incubators

Public charities that focus on charitable economic development are sometimes referred to as economic development organizations or incubators. According to a 1990 EO CPE Text (Economic Development Corporations: Charity Through the Back Door) published by the IRS:

Economic development corporations generally are established to assist existing and new businesses located in a particular geographic area through a variety of activities including grants, loans, provision of information and expertise, or creation of industrial parks. Incubators are a type of economic development corporation generally formed to provide assistance to induce new businesses to locate in communities whose economies are depressed or deteriorating, or to provide assistance to existing, emerging businesses so that they may remain in such communities. Incubators provide low-interest loans, facilities and equipment to new and emerging businesses as well as clerical and technical services in an effort to encourage such businesses to locate in the depressed areas. The services provided to the new businesses are offered by the incubator at reduced rates or even free of charge. Incubators may be set-up and/or sponsored by local and state governments, they may be affiliated with universities, or they may be an offshoot of an existing tax-exempt organization. In many cases, incubator organizations operate a “technology center” where businesses can be assisted (nurtured) through provision of business expertise, lower rental rates or pooled or shared services.

Serving a Public Interest

In addition to having a stated charitable purpose and consistent activities, a 501(c)(3) economic development organization or incubator must serve a public rather than an private interest. Any private benefit conferred upon an individual or for-profit business that is more than incidental, quantitatively and qualitatively, to the furthering of its exempt purposes is prohibited. Grants of funds or other resources to for-profit businesses must be justified as incidental to advancing the 501(c)(3) organization’s charitable purposes, which may include relief of the poor and distressed and combat of community deterioration.

The 1990 EO CPE Text stated that the following factors “are necessary” for an agent to conclude that an economic development corporation is primarily accomplishing charitable purposes despite the element of private benefit present.

Assistance is targeted (1) to aid an economically depressed or blighted area; (2) to benefit a disadvantaged group, such as minorities, the unemployed or underemployed; and (3) to aid businesses that have actually experienced difficulty in obtaining conventional financing (a) because of the deteriorated nature of the area in which they were or would be located or (b) because of their minority composition, or to aid businesses that would locate or remain in the economically depressed or blighted area and provide jobs and training to the unemployed or underemployed from such area only if the economic development corporation’s assistance was available.

It’s been more than 25 years since the above guidance was released, and additional guidance, including a more definitive test and/or examples of acceptable charitable activities that reflect the current needs and economic climate in many communities, has recently been requested by the Council of Michigan Foundations (CMF):

CMF urges Treasury to consider updating previous guidance regarding economic development as a charitable activity by providing a more definitive test and/or examples of acceptable charitable activities that reflect the current needs and economic climate in many communities. Here are two examples encountered by CMF foundation members that illustrate the requests for foundation support.


• The Chamber of Commerce is sponsoring an initiative to encourage small businesses to locate in a deteriorating section of downtown and ask the local community foundation about collecting charitable contributions from individuals and businesses. The community foundation will then make grants to assist individuals with expenses associated with establishing new small businesses provided they agree to locate in this particular area.


• A rural municipality in the Upper Peninsula desires to expand internet services to its citizens and wants to collect charitable donations to build infrastructure through a fund at the local community foundation.

Lessening the Burdens of Government

It’s possible for an economic development organization to be exempt under 501(c)(3) based on the charitable purpose of lessening the burdens of government. This involves a two part test:

  1. There is an objective manifestation by a governmental unit that it considers the activities of the organization to be its burden; and
  2. The organization’s activities actually lessen such burden of the government.

The 1990 EO CPE Text lists 7 factors that favor a lessening of governmental burdens rationale for an economic development corporation (but also states that extreme caution should be exercised before employing a lessening the burdens rationale ):

(1) There is a state statute specifically authorizing government funding of an economic development corporation to operate by assisting fledgling businesses within the state as a means to help alleviate severe unemployment.

(2) The economic development corporation was established to specifically qualify under the statute and was funded under the statute.

(3) The state statute provides that the funding is more than a mere grant but provides the state with approval authority over projects to be financed by the corporation and approval must be obtained from the state on an ongoing basis.
(4) As part of its assistance, the economic development corporation operates in conjunction with a state university. (5) The specific cities which will be the corporation’s primary beneficiaries provide officials who sit on the corporation’s board of directors in their official capacity.

(6) The commissioner of the state’s Department of Economic Development utilizes the corporation as an extension to carry out services formally conducted by the Department. The Department was unable to continue such services because of budgetary constraints and is not otherwise prohibited from providing such services.

(7) The corporation is required to provide annual reports of its activities and finances to the state government.


Obtaining 501(c)(3) Status for Economic Development Organizations (Community Economic Development Law Project)

Economic Development Organizations, Trickle Down Charity and the Private Benefit Doctrine (American Bar Association)

Chan Zuckerberg Initiative – Taxable Social Enterprise – Part 2

Young hipster man making a good-bad sign

Shortly after Mark Zuckerberg announced the social good goals of the Chan Zuckerberg Initiative and the joint pledge he made with his wife Priscilla Chan to contribute 99 percent of their Facebook shares (currently valued at about $45 billion) to the Initiative, which is structured as a limited liability company (LLC), I started getting calls from the media. They wanted to know what it meant to give money to an LLC instead of a 501(c)(3) nonprofit. I subsequently wrote a very brief article explaining the rationale for using an LLC and how the Chan-Zuckerberg Initiative was reminiscent of earlier social good efforts from some Silicon Valley titans. Since then, dozens of stories have come out criticizing and defending Zuckerberg and the couple’s use of the LLC as a vehicle in philanthropic giving.

Among the publications I spoke with about the Initiative: Fast CompanyThe Chronicle of PhilanthropyNational Public Radio (NPR), the Canadian Broadcasting Company (CBC), and Tax Analysts.

LLC Background Information

An LLC is Not a Nonprofit

  • An LLC owned by individuals is not a 501(c)(3) tax-exempt entity
    • But the LLC may very well be a pass-through entity (like a partnership or sole proprietorship) in which its profits, losses, and other tax attributes are passed through to its owners
  • A contribution to such an LLC does not allow for a charitable contribution deduction
    • But the owners may be able to take a charitable contribution deduction if and after the LLC makes a contribution to a qualified 501(c)(3) entity
    • The owners will not be able to take a charitable contribution deduction for direct contributions to, or investments in, a for-profit social enterprise (a form of impact investing); contributions earmarked for lobbying; or contributions to engage in political campaign intervention

An LLC Offers Great Flexibility and Benefits

  • An LLC can have a social good purpose and, just like any individual, can engage in charitable and philanthropic activities
    • It can make charitable contributions to public charities or to a private foundation
    • It can make charitable contributions to a donor-advised fund (allowing for an immediate tax deduction and deferred grantmaking)
    • It can make investments in for-profit social enterprises
    • It can make loans to nonprofit or for-profit social enterprises
    • It can guarantee loans made by financial institutions to nonprofit or for-profit social enterprises
    • It can enter into joint ventures with nonprofits
    • It can enter into joint ventures with for-profits without being subject to the same limitations and restrictions that would be applicable to a 501(c)(3) co-venturer
    • It can engage in lobbying without limitations that would be applicable to 501(c)(3) organizations
    • It can engage in political campaign intervention like supporting or opposing political candidates without  limitations that would be applicable to most tax-exempt organizations
  • The purposes of an LLC can be changed by its owners at any time, subject to any internal restrictions they may have created by contract
    • Accordingly, the LLC can simply turn into a regular investment vehicle at any time without public notice
  • The governance of an LLC is extremely flexible; it can be structured with just one manager or have a corporate-like board of directors
  • An LLC offers its owners limited liability protection and is a widely used vehicle for asset protection purposes
  • A privately-held LLC is not required to operate transparently to the public

A Pledge is Not the Same as a Contribution

  • An unenforceable pledge to an individual’s own LLC is not binding and is merely an expression of present intent

My Take

The LLC offers Chan and Zuckerberg a limited liability vehicle in which to organize their social good efforts. It offers the couple no additional tax benefits with respect to the deducibility of their contributions. The deduction will follow the change in control of the funds from Chan and Zuckerberg (regardless of whether held in a pass-through LLC or in their personal accounts) to a 501(c)(3) charitable entity. But a limited liability form is completely customary in any entity of that size owned by individuals.

No money has changed control yet. At this point, there is just an unenforceable pledge, albeit a very public one for an enormous amount of money. It’s fair to criticize the message (was it initially misleading or simply broadly misinterpreted as a pledge to charity?), but utilization of an LLC from which to engage in individual social good efforts is not in and of itself worthy of criticism. We’ll see a lot more of this from younger, sector-agnostic, wealthy do-gooders in the future. See A Prediction for the Nonprofit Sector.

Finally, as The Atlantic article referenced below states:

It’s too early to criticize the Chan Zuckerberg Initiative—just as it’s too early to praise it.

Recommended Reading

Mark Zuckerberg’s Philanthropy Uses L.L.C. for More Control (New York Times)

Assessing Mark Zuckerberg’s Non-Charity Charity (Atlantic)

How Mark Zuckerberg’s Altruism Helps Himself (Pro Publica)

Mark Zuckerberg wants to change the world, again. You got a problem with that? (Fusion)

5 criticisms of billionaire mega-philanthropy, debunked (Quartz)

Chan Zuckerberg Initiative – Taxable Social Enterprise

Mother holding her newborn baby's feet

Yesterday, Mark Zuckerberg published a touching letter written to his week-old daughter Max which announced the beginning of the Chan Zuckerberg Initiative. The Initiative’s mission focuses on two ideas: advancing human potential and promoting equality. And the statement that raised all the attention:

We will give 99% of our Facebook shares — currently about $45 billion — during our lives to advance this mission.

Many initially assumed the pledge from Zuckerberg and his wife Priscilla Chan was to one or more 501(c)(3) charitable organizations, but a Facebook press statement clarified that the Initiative was a limited liability company (LLC). A New York Times article explains the rationale for choosing a non-tax-exempt entity:

By using a limited liability company instead of a nonprofit corporation or foundation, the Zuckerberg family will be able to go beyond making philanthropic grants. They will invest in companies, lobby for legislation and seek to influence public policy debates, which nonprofits are restricted from doing under tax laws. A spokeswoman for the family said that any profits from the investments would be plowed back into the Chan Zuckerberg Initiative for future projects.

This is reminiscent of Google’s announcement in 2005 that it would commit one percent of its profits and equity to Google.org, a division of Google Inc. and not a 501(c)(3) organization, to advance its philanthropic efforts. A Washington Post article explains Google’s rationale for not making the pledge to a tax-exempt charity or its own Google Foundation:

By using Google.org for the bulk of its charitable giving, the company will have greater flexibility in how it deploys the funds since the affiliate will not be subject to the restrictions imposed on foundations by the Internal Revenue Service. For example, Google.org will be able to invest in projects promoting entrepreneurship in Africa that are off limits for foundations because the programs turn a profit. It will also support charitable initiatives that spread the use of technology and could be viewed as questionable for a foundation since they are closely related to Google’s business.

The Omidyar Network (started by eBay founder Pierre Omidyar) provides another example of the use of a non-exempt LLC to further philanthropic purposes. A Forbes interview of the Omidyar Network’s managing partner Matt Bannick explains the hybrid model:

At the heart of our strategy is a flexible approach to philanthropy. We embrace whatever tools necessary—including nonprofit grants and for-profit impact investments–to support high-impact social entrepreneurs and the broader environments in which they work.  Our hybrid investment approach is supported by a hybrid organizational structure:  we operate both a foundation and a for-profit investment fund under the same roof.

Deeper Dive

For-Profit Philanthropy – Dana Brakman Reiser, 77 Fordham Law Review 2437 (2009)

California Social Purpose Corporation: An Overview

The social purpose corporation is one of two “hybrid” corporate forms in California that provide alternative business entity options to entrepreneurs who want to combine profitability with broader social and environmental objectives (the other is the benefit corporation). Formerly known as the flexible purpose corporation, the social purpose corporation requires directors to consider socially responsible purposes, in addition to shareholder interests, when making business decisions.

Special Purposes

In addition to engaging in any lawful business purpose, the social purpose corporation must set out one of the following special purposes in its articles of incorporation:

  • One or more charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out.
  • The purpose of promoting positive effects of, or minimizing adverse effects of, the social purpose corporation’s activities upon any of the following, provided that the corporation consider the purpose in addition to or together with the financial interests of the shareholders and compliance with legal obligations, and take action consistent with that purpose:
    • The social purpose corporation’s employees, suppliers, customers, and creditors.
    • The community and society.
    • The environment.

Fiduciary Duties

While directors of any corporation must fulfill their fiduciary duties of care and loyalty to the corporation, directors of the social purpose corporation must also consider and give weight to additional factors, as they deem relevant, including the overall prospects of the corporation, the best interests of the corporation and its shareholders, and the purposes of the corporation, as set forth in its articles of incorporation.


Annual Report – The board must produce and send to its shareholders an annual report, containing a management discussion and analysis (the “special purpose MD&A”), along with standard corporate financial statements. The special purpose MD&A must, among other things, identify and discuss (1) material actions taken to achieve the corporation’s special purpose throughout the fiscal year, (2) the impact of such actions, including the causal relationships between the actions and the reported outcomes, and (3) the extent to which those actions achieved the special purpose objectives for the fiscal year. It must be made publicly available on the corporation’s website.

Current Report – In addition to the annual report with the special purpose MD&A, shareholders of a social purpose corporation must receive a special purpose current report within 45 days of any (1) significant expenditure in furtherance of the corporation’s special purposes, (2) withholding of expenditures in furtherance of the corporation’s special purposes, or (3) a determination that a special purpose has been satisfied or should no longer be pursued. Such reports must also be made publicly available on the corporation’s website.

Major Changes

Amendment to Articles– Any amendment that changes the special purposes of the corporation can only be approved with an affirmative vote of at least two-thirds of the outstanding shares of each class, or a greater vote if required by the articles.

Conversion/Merger– Similar to the requirements for an amendment, any reorganization that materially alters or eliminates the corporation’s special purposes requires the vote of at least two thirds of each class of outstanding shares, or more if required by the articles. These supermajority voting rights function as substantial control for even minority shareholder groups.

Derivative Actions – Any shareholders of the social purpose corporation may maintain a derivative lawsuit to enforce the duties required of the directors of the corporation.

Why Would You Form a Social Purpose Corporation?

Instead of a Nonprofit Corporation – If you are seeking investors and equity capital and/or have a plan that is inconsistent with tax exemption under IRC Section 501(c)(3).  In order to establish and maintain tax exemption under 501(c)(3), a nonprofit corporation must be primarily operated for a  charitable or other exempt purpose. If an organization plans to engage in activities that are in direct competition with for-profits, or operate in a manner that is too commercial with respect to pricing, marketing methods, sources of revenue, staffing, and use of surpluses, then a social purpose corporation may be a better choice of form. Additionally, in contrast to a nonprofit corporation, a social purpose corporation is not subject to prohibitions on private inurement or private benefit; self-dealing rules; restrictions on lobbying or political campaign activities; or 501(c)(3)-like public disclosure requirements.

Instead of a Regular (For-profit) Corporation – If you want to market the corporation’s goods and services as a social business, attract capital from social investors (including foundations), and anchor your social mission even after you exit from the ownership. For-profit corporations traditionally are organized to pursue the interests of their shareholders above all other interests. While the business judgment rule may provide broad flexibility for board members to consider other interests, this may not be true in the event of a sale of the corporation. In such event, the Revlon Rule generally provides that the board must approve a sale to the highest bidder without consideration of other factors.

Instead of a Benefit Corporation – If you want more flexibility than is provided by a California benefit corporation. A benefit corporation’s directors must advance a “general public benefit,” and must also consider a number of stakeholders, including shareholders, employees, subsidiaries, suppliers, customers, and the community, as well as the local and global environment. A social purpose corporation must only take into account its shareholders and its special purposes, as stated in its articles of incorporation. Accordingly, board members of a social purpose corporation may have fewer considerations when making decisions and less risk of liability for failure to consider required factors.

Concluding Thoughts

Although the social purpose corporation may be an attractive option for entrepreneurs who want to emphasize social impact as one of the core missions of their business, the adoption rate of the social purpose corporation has been slow. According to the California Secretary of State’s Office, since its introduction in 2012, there have been only 68 flexible purpose corporations and 9 social purpose corporations formed (as of 10/16/15).



SOCAP15 p2

Many key players in the social enterprise / impact investing space throughout the world converged in San Francisco this week for SOCAP15 (yup, that’s John Legend). I’ve been writing and tweeting about SOCAP since 2010, and I am thrilled to be attending this year. Also, a quick disclosure that some of the entities represented are our clients who are all doing wonderful work!

SOCAP (Social Capital Markets) is a world-renowned conference series dedicated to increasing the flow of capital toward social good. Our annual flagship event in San Francisco is the leading gathering for impact investors and social entrepreneurs. We take a unique approach that emphasizes cross-sector convening and gathers voices across a broad spectrum to catalyze unexpected yet impactful connections. From the leading edge to established players, SOCAP brings together global innovators, investors, foundations, governments, institutions, and social entrepreneurs to build the world we want to leave to future generations. We actively seek out opportunities to accelerate the market at the intersection of money and meaning and, in pursuit of that goal, have convened more than 10,000 people since our founding in 2008.

Conference Themes

  • Impact Investing – “It’s been a banner year for impact investing and participation across sectors is accelerating the field into the mainstream”
  • Meaning – “At a conference that declares money can be a source of positive social change and not just a measure of success, we know that meaning is the foundation for lasting impact”
  • Divest/Invest – “University endowments and leading foundations have been responding to the call to divest from fossil fuels and invest in sustainable energy alternatives”
  • Financial Inclusion – “The growth of social capital markets requires an inclusive and accessible economy, but 2.5 billion adults globally, and more than 100 million in the United States, do not have access to bank accounts”
  • Neighborhood Economics – “Let’s accelerate the flow of capital into neighborhoods and rural communities, and distribute that capital more equitably in cities”
  • 21st Century Talent – “The growing impact economy needs a strong pipeline of talent, from entry level to top executives”
  • Living in the Future – “’Past performance is not an indicator of future results’ is truer than ever in the face of accelerating globalization, climate change, technology, and demographic shifts”
  • Sustainable Supply Chains – “From Fortune 500 companies to seed-stage startups, businesses are making investments to improve the sustainability of their supply chain, resulting in tremendous positive impact and delivering long-term financial benefit”

Pre-Conference Articles

Impact Investing and Equity Pledges: The New Landscape of Corporate Responsibility (Huffington Post)

SOCAP Conversations: Echoing Green President Cheryl Dorsey and Entrepreneur Michael Wilkerson

Highlights and Resources

Running list of highlights and resources. Follow me on Twitter – @GTak – for live tweeting of #SOCAP15.


  • If you want to change society, then you must tell an alternative story. – Ivan Illich
  • Academy of Country Music song of year winner Chuck Cannon performing Money Don’t Matter
  • Q: How do you mobilize millions of people? A: First you meet one person then another and then another (Cesar Chavez)
  • According to new UBI report, social incubators have created more than 90,000 jobs over the last 5 years.
  • Meet #SOCAP15’s 9 Gratitude Award Finalists in collaboration w/@GratitudeNet who were voted up from 550 #socents, http://bit.ly/1G7CcNr
  • Learning about @thistlefarms from Becca Stevens – “you heal the women, you heal the village” http://thistlefarms.org/pages/our-mission
  • Smartest thing entrepreneurs have come up with – working w/ people with character #CharacterIsScalable – Xavier Helgesen


Opening Plenary

  • The value of @SOCAPmarkets: valuable strangers become unlikely allies when meeting between silos.
  • Leading by example – #SOCAP15 – no panel without women panelists; query why more social investments in Africa than in African Americans
  • When systems are broken, there are opportunities to create better systems. It’s a very American thing to do. http://thenextsystem.org
    • 400 wealthiest people in U.S. have more wealth than bottom 180 million combined (worse than in medieval era) – Gar Alperovitz
    • Prisoners in U.S. – 8x more per capita than any other country
  • Nation’s diversity is its greatest strength; we’re not taking advantage of this Trader PlanetAngela Glover Blackwell
    • “We are a nation in which racism has been built in – exclusion has been built in.”
    • “We won’t change the system without power, politics & policy.”
  • 40% of profits go into finance; it’s the most powerful force in the world and we can use it as a tool for impact
    • “Workers are a tool to often to create capital; capital instead can be a tool to empower workers” Brendan Martin
    • “What role do we play in finance to help communities determine their own destiny?” – Aaron Tanaka
  • No problem can be solved from the same level of consciousness that created it. – Albert Einstein BALLE’s Michelle Long on systems change
    • “We have a lot of problems to fix but most of all we have to fix ourselves” – Pope Francis
  • Only when we can demonstrate market returns will institutional investors bring $ to the table – Lisa Hall
  • More and more of the best solutions are hybrid – the problems is most available funding is either commercial or philanthropic. – Ann Mei Chang USAID
    • Impact investing needs to effectively measure social impact and standardize hybrid instruments to make them easier to access
    • Uncomfortable perspective: perhaps funding isn’t moving fast enough to make this movement the catalyst we need
  • Employees with strong sense of purpose at least 4 times more likely to be engaged with their jobs, 3 times more likely to stay with their company; and their companies outperform peers by 10 times – Cheryl Dorsey
  • Bill Drayton of Ashoka says having one skill is no longer enough in our world of rapid change

Driving Social Innovation to Scale with Global NGOs

  • Innovation is just a path, impact is the destination – Chang

Local Investing is Impact Investing: the New 10x on Your Money

  • New Oregon Community Public Offering law – raise up to $250K from ALL Oregon residents Hatch

Lawyering for Impact

  • Choosing right #socent entity first is very important, incl in seeking out the capital with the right “patience” BUT form always follows function
  • When choosing among corporation, LLC, benefit corp, Certified B Corp, nonprofit corp, etc. – need a knowledgeable lawyer at start (not enough versed on all of these possible forms)
  • Create mission anchors through entity form, governing docs, impact deliverables (contractual), trademark/brand ownership (in tandem structures)

Blended Capital to Support Early Stage Entrepreneurs

  • How does a social funder demand specific impact metrics w/out unduly burdening entrepreneur’s business? Need new tools.
  • Revenue sustainability must anchor the impact – must be up-front and come with viable plan if grant funding part of the long-term plan
  • Entrepreneurs must be prepared to explain to investors why the business isn’t simply a bad one and must understand that the first investor isn’t a sucker.

Community Foundations as Leaders of Place-based Investing

  • Community foundations deploying all resources to build community wealth Mission Investors
  • To Find Real Prosperity, Community Foundations Are Exiting Wall Street HuffPo – M Long


  • Women own nearly half of all investable assets in the US
  • “Community members are not just stakeholders, they are the holders of solutions.”
  • “We don’t need any more new ideas or new money, we need better coordination and use of resources”
  • We think it is our fiduciary duty to track the social and financial performance of everything we are holding – Clara Miller, FB Heron Foundation
  • Tidal transfer of wealth in the next decade to women and millennials who will invest with their values – SSIR


Morning Plenary

  • Overall complexity of #impinv’s language and products is confusing to new entrants, says Christine Looney, Ford Foundation – simplicity needed
  • Next phase of #impinv: ease, suitability, liquidity; it’s got to be easier to do these deals – Debra Schwartz, MacArthur Fdn
  • Q: How do we include more mainstream financial advisors in the conversation, not just foundations talking to foundations?
  • Match-making for the supply & demand for #ImpInv is not enough in this market. We need to work on market making first
  • Fiduciary duty: what type of care, to whom and over what period of time?

LRNG: a New Model for Learning and for Changing Social Systems

  • LRNG will focus on what young students want and need, not what adults want to give them – Julia Stasch
  • The Show Me Campaign | elevating (not just highlighting) practices of great teachers – John Legend [Ed. Did you know John was a management consultant with Boston Consulting Group?]
  • Important demographics: Average American 42 yo; Average Latino 26-27 yo – Maria Teresa Kumar

How to Create a Phenomenal Giving Experience

  • Educating/engaging members/donors/advocates on issues impacting women around the world & best practices in #philanthropy – Jackie Rotman, SparkSF


  • “What’s completely outperformed its bench mark: investing in women and girls.”
  • “Don’t be in love with your solution, be in love with solving the problem.”
  • 49% boomers, 70% gen X, 85% millennials; 40% more women then men – want to invest with social & environmental returns
  • Are we at risk for impact washing with new trad investor entrants? The industry needs to be vigilant at how we measure results
  • Consumer activism and shareholder advocacy should go hand-in-hand – e.g., Amazon – Taren Stinebrickner-KauffmanSumOfUs
  • Strongly consider: nonprofit impact may be bigger than for-profit impact (esp in changes made through advocacy, campaigns)
  • Recap from Devex – Breaking down silos at the intersection of meaning and money (video)
  • SOCAP Recap: OPTIMISM … With a Dash of Skepticism – Next Billion



  • “The best 5 minutes of #SOCAP15 for me was this conversation on access to capital for diverse entrepreneurs http://ln.is/www.youtube.com/spZVm” – Evo Heyning
  • Defining impact: depth or breadth as scale? Business pushes breadth measured quantitatively, need to prioritise qualitative depth
  • Blending Public, Private & Philanthropic Capital for ‘Deep Impact’ via @impactalpha #SOCAP15 http://bit.ly/1Ml2suu
  • The consequences of impact investing on philanthropy HuffPo
  • If there’s a market solution for a social problem, use a for-profit; leave donations for nonprofits to address problems without a market soln’s – Bill Strathmann, Network for Good (Network for Good ‘converted’ from nonprofit to for-profit in a manner to preserve its soul and mission)
  • “Opportunity is about shared privilege”
  • “Humility, relationship & listening (what’s needed to heal racism). We have to value humans as much as profit.” – Nikki Silvestri
  • “The resolution will be financed.”

Social Impact Bonds: National Summit on Quality in Home-Visiting Programs

Risk and reward balance

I’ll be at the Fifth National Summit on Quality in Home Visiting Programs in Washington DC on May 7, 2015 participating on a panel discussing social impact bonds and pay-for-success financing. I’ll be joined on the panel, moderated by Lauren Schumer, The Pew Charitable Trusts, by:

David Juppe, Department of Legislative Services/Maryland General Assembly
Elizabeth Lower-Basch, Center for Law and Social Policy
Rhett Mabry, The Duke Endowment

Risk and Reward

Social impact bonds (SIBs) represent a form of pay-for-success financing.

In the Pay for Success model, governments partner with private sector investors who provide up-front funding to promising service providers. Investors only receive a repayment from the government if the service provider’s work is measurably successful. Because governments pay only if the programs work, the PFS model has the potential to more effectively allocate taxpayer dollars while increasing funding for programs that deliver improved social outcomes. – The Social Impact Bond Technical Assistance Lab (SIB Lab) at the Harvard Kennedy School

While SIBs provide for a mechanism in which governments can shift the risks of “unsuccessful” programs to the investors, they generally do so at the cost of paying more for “successful” programs. Typical profit-motivated investors will presumably develop strategies to mitigate the risks to maximize their opportunity for profits. Accordingly, SIBs must be seen as not merely a form of public-private partnership in which the interests of the government and investors are aligned to produce a favorable social outcome, but also one in which their respective interests are competing at selecting appropriate programs, metrics, parties, and payments.

For example, it would make little sense for governments to pay more for low-risk, high-social return programs that they should have simply funded directly. In contrast, it would make more sense for governments to pay more for high-risk, high-social return programs. Typical investors, on the other hand, will look for low-risk opportunities and/or mitigate the investment risks by negotiating metrics, terms, and conditions that favor their interests over the public interest. What will be required initially for the overall success of SIBs as a social financing strategy are true social investors who are willing to take on more risk for a less-than-market-rate return relative to such risk in exchange for advancing a social good.


What You Should Know About Social Impact Bonds, Gene Takagi

Social Impact Bonds: Overview and Considerations, Elizabeth Lower-Basch

Testimony of Dr. David B. Juppe, U.S. House Committee on Ways and Means, Subcommittee on Human Resources Hearing on Social Impact Bonds, September 9, 2014

Transcript for Pay for Success Social Impact Finance: South Carolina Home Visiting to Improve Health and Early Childhood Outcomes, March 11, 2013 (including comments from Rhett Mabry)

Quotes from Additional Resources

Social Impact Bonds: Lessons Learned So Far, Federal Reserve Bank of San Francisco

PFS contracts introduce several potentially valuable components: performance measurement, performance-based pay, an intermediary with management talent, financial resources for successful nonprofits to expand, and new program models. A subset of these components may be sufficient for, or may explain a large portion of, an intervention’s successful outcome. If the model is successful, we may not be able to tell the relative contributions of each.

Consider investments in prenatal health care. Such investments may produce short-term benefits such as improved infant and maternal health and lower health care costs, but they may also produce longer-term benefits such as reduced special education spending, reduced crime during teenage years, and increased adult earnings. While it would not make sense for a SIB contract to pay out over two decades as results become apparent—the feedback loop between management practices and results would be too long to be useful—it might be possible to design a SIB that paid out based upon short-term results that are predictive of longer-term benefits. It will be interesting to see whether any governments are willing to make payments based on these potential longer-term benefits.

How Will Governments Scale Pay for Success Contracts That Work?
In designing initial PFS contracts, it is important to have a vision for what will happen at the end of the contract if the project is successful. Clearly, it would be a bad idea to have the contract conclude, have services shut down, and then start the process of figuring out what comes next. But it is also not remotely possible to specify a plan for scaling up a successful intervention several years ahead of time since what is learned along the way will be critical to designing any follow-on plan. In practice, a sensible approach may be to write explicit deci- sion dates about contract extensions and scaling into the original contract with sufficient lead time to allow for effective expansion. For example, if the initial contract is for six years, then by the end of the fourth year a decision would be made about years seven and eight. Another question is whether follow-on contracts should assume the same PFS model or whether the government could simply contract directly for the now-proven program model. Ideally, the government will maintain capacity to measure impacts rigorously during successor contracts regardless of their setup.

Fact Sheet: Social Impact Bonds in the United States, Center for American Progress

At this early stage, SIBs are most appropriate for areas in which:

* Outcomes can be clearly defined and historical data are available

* Preventive interventions exist that cost less to administer than remedial services

* Some interventions with high levels of evidence already exist

* Political will for traditional direct funding can be difficult to sustain

 Building Networks Is Essential to Investment in Social Impact Bonds, Center for American Progress

The foundation staff also pointed out that potential collaborators should not assume foundations are exclusively interested in using any one type of capital: They have the ability to make grants, which require no payback; program-related investments, or PRIs, which are investments that focus on a charitable mission and range from 0 percent to below-market rate returns; and mission-related investments, or MRIs, which intend to achieve a market-rate return while advancing the foundation’s mission. Internally, most foundations split investment and grant-making functions into separate departments, which might mean different decision-making processes and priorities.

As conversations about social impact bonds continue, it is helpful to understand what drives potential collaboration among investors. Since each institution has multiple ways in which it could participate, it is not useful to make assumptions about whether or how any one organization would want to collaborate. Taking time to get to know an organi- zation’s mission, staff talent, available capital, appetite for risk, relationship with gov- ernment, and sustainability goals can help bridge the perception gap among potential investors. Participants at our discussions highlighted the role of networks in identifying expertise and understanding the bigger picture beyond the individual SIB transaction. Beyond access to financial capital, investors have intellectual and often community capi- tal that can be helpful in assessing whether to enter a deal.

Social Impact Bonds: Inside a Social Impact Bond Agreement, Center for American Progress

These challenges mean that the agreement itself—the contract signed by the government agency and the external organization—is critically important to the success or failure of a Social Impact Bond. Among other things, the contract will define the relationships and responsibilities of all the parties in this unusual arrangement, will set out the circumstances under which the external organization can expect to earn their payment, and will determine when either the government or the external organization can terminate the agreement. Writing the agreement well will help guarantee transparency and cooperation between the government and the external organization, help protect the vulnerable populations that the agreement serves, and make better outcomes possible.

Defining Terms in a Social Impact Bond Agreement, Center for American Progress

The contract should also place some restrictions on the government. In most SIB agreements this will include clauses prohibiting the government from exerting control over the external organization’s strategy or day-to-day operations. The contract should also prevent the government from intervening in the external organization’s selection of subcontractors and investors, though subcontractors will be held to the same standards as the external organization itself.

The Bottom Line: Investing for Impact on Economic Mobility in the U.S., Ascend | The Aspen Institute

Pay-for-success contracts are not appropriate for bleeding-edge innovation; they typically work best to scale up proven, battle-tested interventions.

For social service providers, social impact bonds represent a sea change not only in the amount, but in the kind of available capital. Payment in advance eliminates the challenge of meeting expenses while waiting for government reimbursement. Since investors are repaid based on outcomes, not inputs, unrestricted funding is not tied to specific program components and can be spent on what works best. With costs covered in full, providers can focus on services, not fundraising. All of that is intended to help high-performing nonprofits with proven interventions thrive, not merely survive.

 The Finalization of Urban Policy in the Age of Obama, Journal of Urban Affairs

The record on SIBs reveals several implications of the financialization of urban policy, that is, of aligning urban policy with the requirements of the funding mechanism. First is the pitfall of program selectivity. The tendency to fund programs that correspond to the underlying logic of SIBs is evident in the emphasis to date on programs designed to stem juvenile and adult recidivism and reduce use of healthcare and homelessness services. The aim of these programs is to reduce “subprime” behaviors that increase costs to governments and to use the cost savings to repay private investors and program needs that do not correspond to this logic are unlikely to be funded. A second and related problem is the monetization of outcomes. Because the aim is to reduce the cost of government programs rather than to address social issues per se, program success is defined in terms of cost reduction rather than the substantive effect on the underlying problem. As a consequence, programs that address a pressing social need but can’t directly be linked to cost reduction won’t be funded through SIBs. Third is the measurement problem arising from the assumption that changes in outcomes (e.g., reduced recidivism, lower healthcare costs) can be directly and causally attributed to the program intervention—a confidence in social science methodology that may be seriously misplaced. Ironically, given the logic of program evaluation, a positive outcome in the target population must exceed outcomes in the comparison population, so an improvement in the comparison population that could reasonably be considered a success for society as a whole would be deemed undesirable for investors. Fourth, SIBs’ reliance on independent evaluators to certify program success is likely to engender the same market-based pressures that bedeviled the bond rating agencies that certified the credit-worthiness of mortgage-backed securities prior to the economic collapse of 2007.

Social Impact Bonds: Phantom of the Nonprofit Sector, The Nonprofit Quarterly

It’s a public policy bet that has legislators of both parties and at the national, state, and local levels hopeful that private capital will somehow discover and fund public policy solutions that wouldn’t come to the fore without SIBs. It is a bipartisan dream built on a belief in the efficacy of the free market system that hasn’t borne much social progress fruit in recent years and rooted in a disparaging view of public servants, who have accomplished more than most free market true believers might ever guess.

Social Impact Investment, Building the Evidence Base, OECD

Social impact investment can potentially provide new ways to more efficiently and effectively allocate public and private capital to address social and economic challenges at the global, national and local levels. While these innovative new approaches will not replace the core role of the public sector or the need for philanthropy, they can provide models for leveraging existing capital using market-based approaches with potential to have greater impact. However, given that social impact investment is a nascent field, concrete evidence is needed in terms of its impact to date. In particular, further work is needed to demonstrate the gains from the social impact investment approach compared to existing social service delivery models.

While the social impact investment market has been growing significantly and has drawn increasing interest and attention, it is still in the early stages of development (Kohler et al, 2011) and is only a small share of the global capital markets today (Saltuk et al, 2014). While difficult to measure for a variety of reasons including the lack of clear definitions and the diversity of sectors and approaches across geographies, the social impact investment market potential has been estimated to be significant. This is due to growing interest among foundations and mainstream investors as well as an intergenerational transfer of wealth, estimated at USD 41 trillion that is expected to take place over the next 50 years with nearly USD 6 trillion of that expected to be directed towards social issues (Rangan et al, 2011).

Social impact investors, as well as targeted policies, can play a role in improving the effectiveness of social ventures (Jackson and Associates, 2012). Social impact investors can help social delivery organisations by providing not only financing but perhaps more importantly, support on strategy, management and growth (Bannick and Goldman, 2012). [Ed. Query the problems this can pose as well.] Helping social entrepreneurs grow their ventures to scale is the key to maximizing impact (Koh et al., 2012). The success of social impact investment is reliant on the long term sustainability and performance, both social and financial, of the impact organizations, for-profit and not-for-profit, in which the investments are made (Bannik and Goldman, 2012).

Despite the increased interest among institutional investors, securing commitment from traditional investors continues to be a challenge. The approach to institutional investors needs to be structured in way that works for them and in a language they can understand. Initiatives, such as GIIN, ANDE and SOCAP, which build links between mainstream and social impact investors, can help to create awareness and increase interest. Institutional investors also have certain legal requirements which can create barriers to social investing (Wood et al, 2012).

The lack of efficient intermediation in the social impact investment market translates into higher transaction costs caused by fragmented demand and supply as well as complex deal structuring (Freireich and Fulton, 2009). The early stage of ecosystem infrastructure development impedes the dialogue between investors and social ventures, which makes it difficult to break down historical barriers between philanthropy and investment (Freireich and Fulton, 2009). Platforms are needed to provide accessible distribution systems and offer comparable product performance (Jackson and Associates, 2012). This will also allow better matching of investor and investee risk/return profiles.


Opinion: Can Social-Impact Bonds Really Have Big Impact, The Chronicle of Philanthropy

I fear that even skilled nonprofits and intermediaries will have trouble translating great ideas into contracts that really provide the right incentives. When you look at how the parties do the accounting, how they measure “savings,” how they decide what the return should be and to whom at various break points, it gets inelegant, to say the least. – Clara Miller, President, F.B. Heron Foundation

Opinion: Social-Impact Bonds Need to Focus on Results, The Chronicle of Philanthropy

But financial savings are not our primary motivation, nor are they what brings our government, nonprofit, and investing partners to the table. Rather, progress toward social outcomes is the key motivator — supporting people in their efforts to get and keep jobs, build healthy families, improve educational opportunities; in short, finding ways to help our society’s most vulnerable reach their potential. Yes, the potential cost savings for government in the long term are compelling, but only because it offers a path to meaningfully solve or reduce problems that have stubbornly persisted even in the face of decades of effort. – Tracy Palandjian, CEO, Social Finance