Uncovering
Buried Treasure
Fundraising for traditional enterprises is trying under the best of circumstances. The degree of difficulty for social and environmental impact ventures seeking investment during challenging times is far more arduous. Nonetheless, there are innovative, albeit less traveled, paths to investment that may be well suited for impact enterprises, funds, projects, and entertainment productions.
Innovative Paths to Investment
These sources of capital fall on a spectrum from commonplace (though hard to access) to unorthodox and virtually never utilized. We explore a few options below, including:
Donor-Advised Funds
Fiscal Sponsor Programs
Banks (under the Community Reinvestment Act)
Donor-Advised Funds
For those not already familiar, donor-advised funds (“DAFs”) are philanthropic and social impact investment tools that allow donors (individuals, families, corporations, etc.) to fund special accounts through DAF “sponsor” organizations. Donors receive immediate U.S. income tax deductions and maintain allocation privileges over the fund’s distribution.
While adoption of DAFs started slowly, capital is aggregating quickly, and DAFs have become a leading tool for donation and investment in the social and environmental impact sectors. According to the 2022 Donor-Advised Fund Report of the National Philanthropic Trust, assets in DAFs now total over nearly $230 billion, with over $65 billion in new DAF contributions in 2021 alone.
Notably, there are now nearly 1.3 million individual DAFs across the U.S., up from just over 1 million in 2020. Contributions to DAFs have also continued to increase as a percent of total individual giving over the last decade.
*Source: 2022 Donor-Advised Fund Report, National Philanthropic Trust
Donated Funds as Investment Capital
While DAFs have typically been used for charitable donations and philanthropic grant-making, astute donors recognize that by directly investing DAF capital in for-profit companies, funds, projects, or productions, DAFs can become extraordinary vehicles for achieving meaningful social and environmental impact while also generating attractive returns. In fact, if managed correctly, DAFs can become impact investing venture capital funds for donors, serving as either their first steps into the impact investing world or enhancing the work they are already doing with their traditional portfolios.
DAFs are an ideal impact investment tool because they are completely risk-free – the funds have already been donated so no financial returns to the donor are expected – but investments from a DAF that generate real financial returns can flow back into the DAF so that (like with a traditional investment portfolio) that capital is available for the donor to direct towards the next socially or environmentally impactful venture.
Unfortunately, most DAF operators do not currently allow their donors to use their DAFs as (for-profit) impact investing mechanisms, and those that do often offer only a limited selection of investment options for donors. At LOHAS we work with our clients to position their investment opportunities optimally for the engagement of donors and the receipt of DAF funds.
Fiscal Sponsor Programs
A potentially powerful tool for social or environmental impact funds (or social impact entertainment productions/slates), fiscal sponsor programs can allow fund managers to take in investment from tax-attractive donations from a variety of contributors, attracting more capital while delivering meaningful financial advantages to supporters.
Although both DAFs and fiscal sponsor programs can be used to invest donated capital, DAFs are better suited for individual (or corporate) donors that want to advise on the distribution of all funds in their DAF; however, for those parties that would like to establish ongoing support for an impactful fund or cause (and defer investment decisions to others) a fiscal sponsor program may be a better fit. This distinction makes fiscal sponsor programs ideal for impact fund managers who are already guiding the investment of funds, and a fiscal sponsor program offers more flexibility to funds regarding who can contribute and into what capital is invested as well as greater tax deduction benefits to donors/investors.
With the right program manager, a fiscal sponsor structure can be activated immediately and be attractive to both parties that have already invested in a fund (and are seeking a way to support the cause further while garnering tax deductions) as well as parties that have not invested but see this as a way to contribute and obtain tax offsets without tapping into their portfolios. In a similar vein, a fiscal sponsor offering may also be a good fit for corporations and foundations that voice their support for the fund’s mission but are challenged due to their internal structures to make “investments” in the fund.
The services of a fiscal sponsor program manager should extend beyond back-office activities to front-office support with messaging and proactive outreach to groups that may be most aligned with the fund or its cause. To learn more about LOHAS’ fiscal sponsor program for impact fund managers, contact LOHAS today for immediate activation.
Banks and the
Community Reinvestment Act
Perhaps the least utilized strategy within the world of impact investing, the Community Reinvestment Act (“CRA”) can be a tool for select social impact ventures to seek investment from banks. Among the many regulatory requirements for banks in the U.S., CRA obligations ensure that banks participate positively in their communities, including lending to underserved populations or businesses in the areas that the bank serves. Not meeting CRA benchmarks can lead regulators to impede certain bank activities (like acquisitions).
Innovative Offering for Banks
While CRA requirements are typically met through traditional loans, social impact venture or private equity funds that invest in solving similar societal challenges can become “CRA certified” which opens the door (through a specialized third-party structure) to accepting investment directly from banks that can come either in the form of loans or direct equity investment and which both satisfy the bank’s CRA obligations (while positioning the bank to make attractive investment returns).
Most banks are unaware of these types of innovative solutions to their CRA requirements, but LOHAS works with its client ventures to develop and structure these types of offerings and support the ensuing discussions and deal arrangements with target banks.
How LOHAS Helps
Identification of sources of alternative investment
Repositioning of investment to be acceptable to new investors
Strategies to appeal to identified investors and donors
Outreach to engage targeted investors and donors
Ongoing management of requirements of impact investors
New Avenues to Investment
At LOHAS we help our clients think outside the traditional investment box to explore alternative fundraising strategies that complement current activities and serve as sources of capital to empower impact enterprises, funds, projects, and productions.