The Issue
As the nonprofit sector continues to grow in size and breadth of work, innovators in the field are considering new ways to invest capital to create social impact. Some of these methods are specific to charities and foundations; others are broader and intend to create solutions without regard to the legal status of the organizations doing the work. Some require legislative or regulatory changes, while some are available within the current legal systems.
Background
Social Impact Bonds
Social impact bonds are a new way for government agencies to spur capital investment into the nonprofit sector, providing funding for social initiatives designed to save the government money. The Center for American Progress has defined a social impact bond as:
Social impact bonds were first successfully implemented in 2010 to lower the recidivism rate in a prison in the United Kingdom. Since then, there has been growing interest in the United States to replicate that investment strategy and create social impact bonds that address issues such as homelessness and education. In April 2012, Goldman Sachs rolled out a series of social impact bonds in New York City. McKinsey & Company completed a research report in May 2012 on the possible implementation of social impact bonds in the US.
Program-Related Investments
Program-related investments (PRIs) are investments made by private foundations to generate a programmatic outcome. Foundations can use PRIs to make investments that further the foundation's charitable purpose, with the potential return of capital. PRIs typically come in the form of loans to, or equity investments in, nonprofit organizations or for-profit corporations that advance the foundation's charitable mission.
In April 2012, the Internal Revenue Service proposed new regulations (REG-144267-11) that would create more examples of PRIs that foundations could rely on. Some of these new examples would codify what foundations are already doing, while others are new and provide examples that previously seemed out of the purview of PRIs. Independent Sector submitted comments on the proposed regulations on July 16, 2012.
Hybrid Organizations
Independent Sector has created a separate page for our Hybrid Position Statement.
Impact Investing
Impact investing is a term used broadly to describe investments for the purpose of creating social impact, and is not exclusive to the nonprofit sector. This type of investing allows private investors to invest in both the nonprofit and for-profit sectors to create solutions to social challenges. Examples includes investments in a renewable energy for-profit organization, an affordable housing nonprofit, or small businesses that employ marginalized populations. The investors expects to both receive a financial return on the investment and positively impact a segment of society.
Keeping Funding in the Sector
Independent Sector tracks attempts by government agencies to limit nonprofit sector capital by imposing taxes, fees, and PILOTs (payments in lieu of taxes) on the tax-exempt sector. For more information about Independent Sector's work on these issues, please visit our Legislative Agenda.
As the nonprofit sector continues to grow in size and breadth of work, innovators in the field are considering new ways to invest capital to create social impact. Some of these methods are specific to charities and foundations; others are broader and intend to create solutions without regard to the legal status of the organizations doing the work. Some require legislative or regulatory changes, while some are available within the current legal systems.
Background
Social Impact Bonds
Social impact bonds are a new way for government agencies to spur capital investment into the nonprofit sector, providing funding for social initiatives designed to save the government money. The Center for American Progress has defined a social impact bond as:
"An arrangement between one or more government agencies and an external organization where the government specifies an outcome (or outcomes) and promises to pay the external organization a pre-agreed sum (or sums) if it is able to accomplish the outcome(s)."A key attraction of the social impact bond is that it allows private investors to invest in a traditionally government-supported organization or social program. If the organization uses the private funds to successfully meet specified outcomes, the government will pay the organization a pre-agreed sum, which the organization can then use to repay the investors with interest. However, private investors must take the financial loss if the organization fails to meet the specified outcomes.
Social impact bonds were first successfully implemented in 2010 to lower the recidivism rate in a prison in the United Kingdom. Since then, there has been growing interest in the United States to replicate that investment strategy and create social impact bonds that address issues such as homelessness and education. In April 2012, Goldman Sachs rolled out a series of social impact bonds in New York City. McKinsey & Company completed a research report in May 2012 on the possible implementation of social impact bonds in the US.
Program-Related Investments
Program-related investments (PRIs) are investments made by private foundations to generate a programmatic outcome. Foundations can use PRIs to make investments that further the foundation's charitable purpose, with the potential return of capital. PRIs typically come in the form of loans to, or equity investments in, nonprofit organizations or for-profit corporations that advance the foundation's charitable mission.
In April 2012, the Internal Revenue Service proposed new regulations (REG-144267-11) that would create more examples of PRIs that foundations could rely on. Some of these new examples would codify what foundations are already doing, while others are new and provide examples that previously seemed out of the purview of PRIs. Independent Sector submitted comments on the proposed regulations on July 16, 2012.
Hybrid Organizations
Independent Sector has created a separate page for our Hybrid Position Statement.
Impact Investing
Impact investing is a term used broadly to describe investments for the purpose of creating social impact, and is not exclusive to the nonprofit sector. This type of investing allows private investors to invest in both the nonprofit and for-profit sectors to create solutions to social challenges. Examples includes investments in a renewable energy for-profit organization, an affordable housing nonprofit, or small businesses that employ marginalized populations. The investors expects to both receive a financial return on the investment and positively impact a segment of society.
Keeping Funding in the Sector
Independent Sector tracks attempts by government agencies to limit nonprofit sector capital by imposing taxes, fees, and PILOTs (payments in lieu of taxes) on the tax-exempt sector. For more information about Independent Sector's work on these issues, please visit our Legislative Agenda.
