Can Form Follow Function to Create a More Equitable Financial Marketplace?

February 21, 2020 | By Lisa Hall + Andrea Levere

What will it take for impact investing to get big quickly, and can new corporate forms be a path to generating that kind of scale? Ever since the term “impact investing” was coined more than a decade ago, many practitioners expressed a desire to scale this approach in order to create more positive outcomes for people and the planet. As Fellows at the Beeck Center for Social Impact + Innovation and the Yale School of Management, respectively, we are examining the potential for philanthropic equity to enable social enterprises, of all kinds, to scale. Last week, Andrea moderated, and Lisa participated in a panel at  the Yale Philanthropy Conference, entitled The Practice of Philanthropic Equity and Equitable Finance showcasing the idea of creating a new corporate form for social ventures. 

“A new corporate form, which is neither non-profit or for-profit, could enable social ventures that combine revenue models and a charitable purpose to raise equity.”

We are intrigued by the idea that a new corporate form, which is neither non-profit nor for-profit, could enable social ventures that combine revenue models and a charitable purpose to raise equity. A new tax advantaged type of corporation could provide the subsidy needed to solve big social and environmental problems that do not have pure market solutions. While tax-exempt bonds serve this purpose in the debt markets for mission-driven endeavors related to education, housing and healthcare, there is no parallel in the equity markets. 

Non-profits are restricted in building their net asset base or equity (assets less liabilities) because of tax accounting implications of unrelated business income and the dearth of grants dedicated to this purpose. Most foundations prefer to provide project-specific grants and, in rare cases, operating support. Net asset grants are an extremely scarce commodity. A new corporate form codified in the tax code could provide a way for social ventures with proven revenue models and measurable social or environmental benefits to build a long-term net asset base, rather than rely solely on debt. 

There are four key reasons why equity is critical to scale social ventures:

1) Growth: In order to grow, organizations need capital to fund upfront investment in people, equipment and research. This type of capital is ideally in the form of equity, not debt, as modeled by venture capital. 

2) Flexibility: Having equity as a form of capital enables flexibility in repayment since repayment is subject to available cash flow and liquidity events, like the sale of a business or assets. Dividends and exits are always cash flow contingent. In contrast, debt has fixed payments and required interest. Failure to match cash flow closely to debt structures can create unnecessary financial risk in a business and lead to constrained growth or business failure.  

3) Sustainability: Equity enables organizations to weather unanticipated downturns. Non-profits often build reserves to prepare for future unexpected difficulties but typically only the largest non-profits with extensive fundraising capacity (e.g., universities and hospitals) are able to build substantial reserves. Yet even these organizations are often constrained by boards that believe every penny raised should be dedicated to the mission and not set aside for a rainy day. Reserves of even 3 – 6 months of operating expenses are rare in the non-profit sector.

4) Risk Taking: Without an equity base, social ventures have no incentive to take risk. With thin financial cushions, one wrong decision could mean the end of an organization. The ability to raise equity would create more willingness on the part of social ventures to take the risks inherent in innovation which requires managing through failure to achieve success. The problems the social sector is attempting to solve are enormous and their solutions require creativity, which by definition requires risk taking. 

For these reasons, raising equity for social ventures is critical. And where there is a clear business model that generates cash flow, it is reasonable that social ventures should be able to raise equity without the constraints of traditional capital markets, which require high returns and emphasis on shareholder maximization. Even with the recent pronouncement by the Business Roundtable that corporations should not solely focus on shareholder primacy, but rather should consider all stakeholders — we know that in the end, investors will drive what companies do. We need a new legal form of corporation which is neither for-profit or non-profit, but that allows for revenue generation and a tax advantage in exchange for charitable purpose. 

At the Beeck Center, we are working on policy recommendations that will build upon the models that have gone before including B-Corporations, Equity Equivalent investments (EQ2) and C3 structures that allow organizations to meet the objectives of a range of stakeholders. Our proposal envisions a corporate form where taxes on dividend income and capital gains to investors would be reduced, and where taxes paid by the social ventures would be less than the effective corporate income tax rate. The relatively recent passage of Opportunity Zones legislation is just one example of how the tax code can be used to create real impact in the hands of mission-aligned investors. 

Lisa is drafting a policy brief for publication in late spring, which we intend to share with the policy teams of all presidential candidates in advance of the Democratic and Republican conventions. Join us in thinking through the design of a legal model which works for social ventures and mission-driven investors. In order to reach scale in impact investing, we need to think beyond the ordinary and innovate on policy ideas outside of the box. We believe that creating a new corporate form codified in tax law is a start, please reach out to us with ideas and suggestions.


Lisa Hall is a Fellow at the Beeck Center for Social Impact + Innovation, and leads the Fair Finance portfolio. She has dedicated her 25-year career to economic justice, social impact and community development. Using the tools of impact investing and philanthropy, she has served in executive roles across multiple sectors in the United States and abroad. Follow her on Twitter @LisaGreenHall

Andrea Levere is President Emerita of Prosperity Now (formerly CFED), a private nonprofit organization with the mission of ensuring that everyone can gain financial stability, build wealth and achieve prosperity. In 2013, President Obama appointed Ms. Levere to the National Cooperative Bank’s (NCB) Board of Directors, and she is the Chair of ROC USA, a national social venture that converts manufactured home parks into resident owned cooperatives. She was the Chair of the Community Advisory Council of the Federal Reserve Board of Governors, was a member of the FDIC’s Committee on Economic Inclusion, and was on Morgan Stanley’s Community Development Advisory Board. Follow her on Twitter @alevere