> Posted by Lauren Burnhill, Managing Director, One Planet Ventures
If social change is hard to achieve, raising funds for innovative programs that target social change is twice as difficult, but things are looking up! Recently, the White House Office of Social Innovation announced a proposed change in the rules governing program related investments (PRIs) made by foundations.
Every microfinance, social impact or environmental group that has tried to mobilize foundation resources for innovative concepts, pilots or ventures knows how difficult it is to access PRI funding. For fear of endangering their tax status, most foundations have exclusively focused on making grants to non-profit organizations.
In other words, under existing regulations, foundations believe themselves limited to making grants or supporting studies and research related to social enterprise and the impact investment industry. Yet when we look at obstacles to catalyzing private investment, there is a strong need to find actors that can change the risk profile associated with funding these activities, in order to facilitate the entry of new private investors. Foundations seem like a logical candidate to play this role, but until now, they have not felt empowered to do so.
What’s exciting about the new PRI rule change? It would allow PRIs to support a much wider array of instruments. Hybrid structures (B-Corps and L3Cs) and for-profit ventures (social enterprises, and impact investment vehicles) would be able to obtain loans, guarantees or equity from philanthropic sources to help leverage private capital. This has been almost impossible under the old rule. The amended regulations explicitly allow these sponsor and instrument options to be supported through PRIs, which should be a game-changer for all of us.
The proposed amendment to PRI regulations will empower foundations in two ways. First, the rule change offers an expanded list of permissible and “exempt” activities, together with a clarification of the principles that govern these exemptions. Additional clarity paves the way for foundations to fund a wider range of interventions without fear of excise taxes, lost exemptions or forced dissolution. Equally important, these changes should alleviate board and donor concerns with respect to their exercise of standards of care and prudence on behalf of a foundation.
Key things you need to know:
- 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;
From now until July 18th, you are invited to make comments or suggestions on the proposed rule change here: Federal Register: PRI Examples and I urge you to do so! The amended regulations are intended to be inclusive, but they may or may not cover the innovative work your organization is engaged in. If you think something is missing, now is the time to comment. I’ve written in to suggest a specific example that permits PRIs for structured impact investment funds. I also suggested that the text make explicit reference to hybrid structures rather than just non-profits and for-profits. If we don’t make our voices heard now, we won’t have anyone to blame but ourselves for regulatory constraints on venture philanthropy.
Image Credit: harmonywishes.com
Lauren Burnhill writes regularly on impact investment. Her detailed comments for the Federal Register can be found on her blog: The Money in the Middle. Lauren Burnhill is the former Chief Investment Officer of Accion, and is currently Managing Director of One Planet Ventures (OPV), a consultancy that brings creative, pragmatic thinking to triple-bottom line strategies and financial product innovation, particularly those that can improve quality of life for the working poor. Lauren has structured and managed innovative funds and ventures for decades and is known for her commitment to good governance and responsible investment.
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