Welcome to Social Impact Contract

We write about the impact investing space, conscious capitalism, and using money to create good. We produce and curate model legal documents that people can use to finance and implement social impact.

What Impact Investors should know about regulation A+ offerings


What Impact Investors should know about regulation A+ offerings

The Jumpstart Our Business (JOBS) Act has opened the door to new and innovative financing.  For example, social enterprises can now use platforms to crowd fund the sale of equity securities.  Another new development is an updated "Regulation A+" offering, or what some people are calling  the "mini-IPO."  This can be used as another source of funding for budding social enterprises and provide a viable exit for early stage impact investors.

Regulation A+ is Title IV of the JOBS Act, and it allows companies to raise up to $50 million from both accredited and non-accredited investors in a one year period. Title IV is limited to US or Canadian companies that are not already SEC reporting companies. Certain investment companies are also ineligible as are companies that have been disqualified under the “bad actor” rules. 

There are two different tiers with varying rules.  Tier 1 is for companies looking to raise up to $20 million in a given year.  Tier II is for annual offerings of up to $50 million. Companies who are offering between $20 million and $50 million can chose if they want to participate in Tier 1 or Tier 2.   

Tier 2 requires more rigorous reporting, such as audited financial and filing annual, semi annual and current event reports. Tier 2 investors are also limited to investing no more than 10% of their annual net income or net worth (whichever is greater) in a Tier 2 offering.  However, securities sold to “qualified purchasers” in Tier 2 offerings are preempted from state securities law qualification requirements and registration. Tier 1 investors have no limitation on how much they can invest, but offerings are still subject to state and federal qualification requirements and registration.

Companies can use Regulation A+ and then later become a fully reporting SEC company and be traded on an exchange.  As long as a company meets the requirements of the exchange (such as the NYSE or NASDAQ), it can list on one of them by registering with the SEC as a fully reporting company.  The Regulation A+ offering can also be listed simultaneously with an offer listed on an exchange, however the benefit of regulation A+ is the lesser reporting requirements, so this is not likely to be a practical choice.

We have yet to see how Regulation A+ will play out in practice, because it is so new.  But in theory it presents a viable opportunity for impact investors to get a financial return earlier when investing in smaller scale business, as many social enterprises tend to be.


Six Things Social Entrepreneurs should know about the new Title III JOBS Act Crowdfunding rules


Six Things Social Entrepreneurs should know about the new Title III JOBS Act Crowdfunding rules

The new SEC crowd funding regulations, as required by Title III of the JOBs act, open the door to what has been dubbed “retail” or “everyman’s” crowdfunding.  Instead of soliciting from limited the pool of only accredited investors, who make up a very small portion of the population, entrepreneurs can now seek equity investments from the average American without having to register those investments as securities.  

This creates a valuable opportunity for social entrepreneurs who tend to have smaller initial offerings and offer a social impact value that is appealing to a wider audience.

Social Entrepreneurs can even use crowdfunding to solicit investments in the communities they plan on helping through their business model.  Although, this is an effort to make crowdfunding easier, the new rules still impose quite a lot of restrictions in order to prevent investors from fraud.  Here are some of the basics to help get you started.  

What do the regulations do?

The regulations exempt certain U.S. companies from having to register their securities under the 1933 Securities Act, which can be an expensive and complicated process.  However, certain companies are ineligible, those companies include but are not limited to: reporting companies under the 1934 Securities Exchange Act, investment companies, private funds and companies that have not filed the Regulation Crowdfunding required reports under the 

What are your funding limitations?

Companies can raise a maximum aggregate amount of $1 million per year.  However, there are no restrictions on what type of securities companies can offer.  Those securities, save some exceptions, cannot be transferred for one full year.

Who are your potential investors?

There are no limitations on who can invest, but there are certain limitations on how much a person can invest annually based on their income and net worth. 

People whose annual income or net worth is below $100,000 are limited as follows:

·      If their annual income is less than their net worth, they can invest a maximum of 5% of their annual income or $2,000, whichever is greater of the two.

·      If their net worth is less than their annual income, they can invest up to 5% of their net worth or $2,000, whichever is greater.

If the potential investors net worth and annual income are both above $100,000, they can invest up to the lesser of:

·      $100,000

·      10% of their annual income

·      10% of their net worth

How you can reach your investors?

Investments must be made through a broker dealer registered with the SEC or a “funding portal,” which must register with the SEC and become a member of the financial industry regulatory authority (FINRA). These portals are required to provide a significant amount of relevant information to potential investors.

What information are you required to provide?

Different companies will have to provide different financial statements with varying degrees of auditing and review, depending on how much money they are looking to raise through crowdfunding in a given year.  If available companies should provide audited or reviewed financial statements for the two most recently completed fiscal year.  The actual minimums depend on how much money the company is seeking for the year.

·      If its under $100,000, they must provide at the very least they must provide certain tax documents and financial statements certified by the principal executive officer.

·      If the company is seeking between $100,000 and $500,000, then they will need to provided, at a minimum, reviewed financial statements.

·      If they seek more than $500,000, then the company will need to reviewed financial statements.  However, if the company has previous sold securities through crowdfunding before, then they will have to provide audited financial statements

What does this mean for a social entrepreneur?

Crowdfunding might present a great opportunity for social entrepreneurs.  There has been a lot of criticism that the barriers to entry are too onerous for companies and many will only use it as a last resort.  However, since social enterprises provide more than just financial return, it might be easier for them to solicit free labor to assist with the initial financial documents.  There is also a huge opportunity in an expanded market of investors, which is comprised of individuals who might be seeking more than just financial returns. 

There is currently a proposed bill that would fix some of this issues, including a testing the waters provision and raising the maximum annual investment from $1 million to $5 million.  It’s called the Fix Crowdfunding Act and you can follow its progress here


The power of IP in social impact investing


The power of IP in social impact investing

Intellectual property is a powerful, perhaps the most powerful, driver of economic growth in developed countries.

While "classic" tech companies like Google, Apple and Samsung dominate press headlines, it is easy to forget that more traditional companies in oil (Royal Dutch Shell, BP), automotive and car technologies (Volkswagen, GM), agriculture (Monsanto) and industrial and consumer technologies (Siemens, IBM, GE) are significant contributors to intellectual property development as well.

Strange, then, that IP licensing and research and technology are absent from most discussions about social impact investing, particularly given the transformative power of technology to produce proven economic returns.

Intellectual property deserves a much bigger role in discussions related to social impact investing. Here's why:

Intellectual property can be developed anywhere. Poor countries have the ability to create and protect intellectual property just as much as rich countries. While those technologies might not consist of shiny new phones, poor countries certainly have know how in a variety of industries, including agriculture, fishing, and medicine.

And there is no question that these technologies are protectible under intellectual property laws. Some of these technologies could be protected as trade secrets, or even patented, if the right infrastructure is in place. What poor countries often lack is the sophistication to keep trade secrets protected by a tight NDA, or to put together the deal terms for sophisticated IP licensing agreement. But the IP is usually there, waiting to be utilized.

Intellectual property can be financed. Social impact discussions often focus on creating innovative financing mechanisms or deal terms as a way of combining for-profit motives with social returns that produce a public good. Combining intellectual property with financing mechanisms creates a number of additional options for a social impact investment. For example, a fund could invest in the growth and development of a technology in a poor country and license that technology in rich countries for a significant return, while permitting the poor country to license the technology at cost or at a discount. A social impact fund could license older technologies that have little value in rich countries and provide them to industries in poor countries for cheap and ready development, perhaps obtaining a return in the poor country that sustains the development of the technology.

Intellectual property adds the z axis -- the depth -- to social impact that the x and y axes of financing may not be able to accomplish on their own.

Intellectual property is a proven mechanism of development. Companies spend billions of dollars in developing and maintaining robust intellectual property portfolios. They don't do this because they love technology; they do this because they recognize that technology brings economic returns. In other words, intellectual property development is a proven model of economic growth. Why not take this model and adjust it for social impact? Intellectual property licensing and development would seem to be a perfect way of bridging the need to create a sustainable investment model with the rewards that come from impact investing.


Measuring social impact through externalities


Measuring social impact through externalities

Social enterprises have been challenged for some time now in having a credible set of metrics to measure their impact. 

In the non-profit space, it has been common to measure impact in raw numbers: number of blankets handed out, number of school-children educated in new facilities, number of youths vaccinated, etc. 

In the for-profit context, however, measuring impact through raw consumption can be misleading, particularly if in doing so a company is simply regurgitating its revenue figures.

A better approach would be to use the economic concept of externalities as a way of measruing social impact.

An externality refers to situations when the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided.

One example of an externality is pollution. Traditional corporations often take advantage of lax environmental regulation to force waste products on society at large, offering a cheap price to consumers because the price of the pollution is not taken into account. 

Another example is labor conditions. Cheaper labor can lead to cheaper goods and services, but at a large scale will disrupt an economy by gutting stable working conditions and pay. 

An effective way to measure impact would be for social enterprises to measure the effects they are having on externalities. Take the pollution example. A social enterprise that competes with a traditional enterprise could market itself as not only providing superior quality, but also by providing the actual figures of their lower emissions counts, or even negative emissions. Unit of emissions is something that can be easily quantified, which in turn, can be used to extrapolate the effects of the social enterprises on diseases caused by air pollution or on climate change.

Similarly, in the labor context, a social enterprise can quantify the differences in wages paid -- quite an easy metric to produce -- to show the positive impact of the business. The impact of higher wages is again something that be used to extrapolate to other effects, such as family income and savings.

Once these externalities are quantified, amazing things happen in the world of social enterprise. For one, economists will begin to take note. The language of externalities has traditionally only been used by students of the dismal science. As more social enterprises adopt the language of externalities to measure their impact, economists can use these metrics and study real impact.

Once economists begin to take note, it is not a far leap for politicians and other policy wonks to get involved. Real numbers, run through real economic calculations with other real data, can lead to real policy proposals on how certain industries can and should change. Social enterprise metrics, if done correctly, can thus become the framework for shifts in policy.

Finally, adopting the language of externalities would show a maturity and strength to social enterprise that will attract talent to the field. Many entrepreneurs and investors shy away from the language of social enterprise not because they view it as being unprofitable, but because they view the field as being too fuzzy and vague in its definitions of social good and impact. Adopting an externality framework adds a precision to social enterprise, rooted in classical economics, that helps investors and founders make the business case for social impact.

Yes, this sounds like extra work for social entrepreneurs interested in impact. But no one said this was going to be easy. And there is no better way to compete with traditional for-profit enterprises then by adopting traditional economic paradigms and showing why the problem of externalities is a significant problem, perhaps the most pressing problem, in today's political and economic structures. Climate change is a product of CO2 as an externality; cancers and other health problems are the product of toxins as an externality from industrial manufacturing; direct death is an externality from fire-arm and weapons manufacturers. Everyone gets the ethical case for social enterprise. Now it's time to make the business case.