IMPACT INVESTING
Impact investing is everywhere these days: social impact funds, environmental, social, and governance (ESG) investing, alternative energy, health care, education, and technology. These investments take many different forms, from conventional stock and bond investments in companies or sectors with positive impacts to assets that themselves are tied to social returns, such as social notes, mission-related investments (MRIs), and program-related investments (PRIs.) In every case, it is essential to make sure the investor’s rationale for the investment and their objectives are clear. Only in the context of the investor’s goals – including non-financial goals, if applicable – is it possible to determine if a particular impact investment is the right fit for the investor. Beyond that, the devil is in the details.
At Bromberger Law, we understand how to structure and support impact investments every step of the way. Our services range from preparing term sheets and conducting initial negotiations through due diligence, valuation, deal documents, closing, post-closing follow-up, and through successive rounds of finance, if necessary, to exit, if desired. We never lose sight of our clients’ goals and obligations, including their impact goals and commitments. We treat those goals as important as any other, perhaps more important than many.
It’s Still an Investment
Every impact investment is an investment, not a gift, grant, contribution, or gesture. It is an agreement between the company and investor that the company will take the investor’s capital, do something productive with it, and pay a portion of profits, if any, to the investor. For this reason, impact investments are made and analyzed largely like any other kind of investment, except that the investor's expectations will include the creation of positive social impact, and the company itself may operate differently to accomplish a social or environmental objective. When either of these things is true, it’s best to be clear about the investor’s goals and the company’s objectives to make sure there are no problems now or down the road – we know how to do that.
Mission Commitments
An impact investment is, by definition, one in which the investor reasonably expects a social or environmental “impact” alongside any financial return. What those impacts are and what it takes to create them are different in every case. For example, the business may produce a product or service that has a positive impact. Or, it may fill a key niche in an economic system. But what if the company decides to change its model? What if the niche changes? What if the company starts producing negative side effects greater than the good it does? What recourse would the investors have? How would the investors even know? We answer these questions by creating legal obligations around social mission and impact where it is reasonable and feasible, so positive behavior can be positively rewarded, and investors get the information they need to assess the impact of their investment moving forward.
Reporting and Compliance
In many cases, impact investors are required to receive specific information about the impact performance of their investments in addition to their financial performance. Understanding the metrics of impact reporting, what kinds of reports are normal, possible, or required, who does these reports and what they mean, and how to reduce the number and the complexity of reports makes a big difference and can be a huge benefit to all concerned.
Institutional Funds and Investment Policies
The investment of institutional and endowment funds is governed by special rules, including the Uniform Prudent Management of Institutional Funds Act (UPMIFA) at the state level. Many, if not all such funds have investment policies and investment managers who are familiar with these rules. But these managers may not be aware of how impact investments are treated under these rules, and existing policies may not include mission directives. We can help make sure these issues are addressed and any necessary agreements put in place.
For Those Raising Capital
Positioning and promoting an investment as an “impact” investment sounds simple. However, without the right advice, it can be difficult to satisfy the due diligence requirements of experienced investors, who will be looking for any weaknesses in your business model, your impact model, the relationship between them, and will expect transparency and accuracy in your disclosures. We can work with your company to avoid these problems by making your business model and impact clear, disclosing all risks, and giving investors the opportunity to use their capital to make money and “do well by doing good.”
Resources:
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Preparing for "After" – Legal Strategies for the New Normal for the Social Venture Circle Community
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Delaware Case Clarifies COVID’s Effect on Corporate Transactions
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Proposed Rule Would Make it Easier for Social Enterprises to Raise Private Capital
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Funders Must Take Swift and Unprecedented Actions to Support the Nonprofit Sector
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Due Diligence In Social Impact Deals — Podcast Released In Uncertain Times
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Impact Investing Term Sheets: How to Protect Mission in 2019 and Beyond (Podcast)