Our favorite contributor to this blog is social venture tax lawyer Brian Ray Dinning.  Brian Ray has launched a website with basic biographical information at www.raydinning.com. Please check it out or call Brian Ray at (757) 232-2619. Thanks.

With Wal-Mart’s $4B offer for Massmart, Wal-Mart is signaling a big step into Africa. “This could mean lots of attention on BEE, social ventures and micro finance in South Africa, ” says Brian Dinning, social venture lawyer.  With the world turning toward South Africa with Wal-Mart and after a successful FIFA World Cup, it truly is focusing attention on Africa as a big emerging market.

Micro Enterprise in Kenya

To view this Powerpoint Presentation, please click on the link above.  Please contact Mr. Dinning with any comments or questions at 757.232.2619.   Thanks you

Microfinance in Africa by Ray Dinning

To view the powerpoint, please click on the link above.

Social Ventures and SRI by Sommer Dinning

Excellent Article by Sommer C. Dinning, Student at Regent University.  Please click on the link to view this Article.

Microfinance in Africa Powerpoint

To view this Powerpoint Presentation, please click on the link above.  For more information, please contact Ray Dinning at (757) 232-2619.

Social Venture Capital on the Rise

By:  Ray Dinning, JD, LLM

In 2009, social venture funds are increasing pace at an unprecedented scale. At least seven new and follow-on funds billed as social venture or social entrepreneurship funds are on track to raise over $1 billion this year

“It’s really peaked in the last six months,” says David Chen, founder of Equilibrium Capital, a planned $200 million fund focused on the cleantech and wellness sectors. Commencing in the Fall of 2008, Chen has seen a great increase in interest levels from investors in the social venture asset class.

The rise in social venture comes as institutional and accredited investors are putting significantly more money into so-called socially responsible investment (SRI) vehicles. Today, roughly $2.71 trillion—or 11% of assets under professional management in the United States—are now involved in SRI, according to the Social Investment Forum, a trade group.

Resources like Social Venture Network and social venture legal specialists like B. Ray Dinning, JD, LLM are providing guidance to the burgeoning social venture market.  Social Entrepreneurs require necessary capital but they also need guidance in proper structuring of these helpful ventures.

Structuring Social Ventures:  Choice of Legal Structure

By:  B. Ray Dinning, JD, LLM (taxation)

November 29, 2009

Part I – Introduction

This is Part One of a Four Part Series on Choice of Legal Structure for Social Ventures

 

Social Ventures and social entrepreneurship are alive and well in the for-profit and non-profit communities, universities, foundations and with social investors worldwide.  With every major MBA Program educating future business leaders about the social benefits of ventures that make money and help others and with amazing examples of social entrepreneurship by Professor Yunus and the Grameen Bank, Social Ventures are the business wave of the future.  With roughly 2/3rds of the world’s population living with an income of $2 a day, the applicability of technology and products to this burgeoning world market is a new phenomenon.  Bill Gates, Richard Branson and others are finding new ways to market products and services to this market.  Innovation is a key component to this process as products must be re-engineered to be affordable to the world market.  For example, the wind up computer, cell phones and other technology are currently being marketed and sold to this demographic group.  In Africa, this challenge is even greater and the need more prolific.  One thing is certain:  social entrepreneurship is the wave of the future in world markets.

A social venture is an undertaking by a firm or organization established by a social entrepreneur that seeks to provide systemic solutions to achieve a sustainable, social objective. The distinguishing characteristic of the social venture versus the commercial venture is the primacy of their objective to solve social problems and provide social benefits to those in need. The social venture may generate profits, but that is not its focus. Rather profits are the mechanism to achieve sustainability in providing a social benefit. The problems addressed by social ventures cover the range of social issues, including poverty, inequality, education, the environment, and economic development.

 

The challenge in this fast-paced developing area is that guidance in how these beneficial ventures should be structured is amorphous and undefined. Some have estimated that – depending on how one defines social enterprise – this activity could account for as much as 4 trillion dollars in the global economy. Social Enterprise Alliance estimates in a recent poll, 71% of respondents reported that making a determination as to the proper and best legal structure for their social ventures was the greatest challenge they faced. The pool of respondents included not just people who were starting new ventures, but also investors seeking a social return on investment (SROI) in addition to financial returns.

 

Because so many legal disciplines are necessary to properly structure a venture which many include non-profit, for-profit and even community partners and where business principles must be modified, it is hard to find concrete guidance in how to set up and structure social ventures.  The legal areas implicated in a structuring social ventures include:  tax, non-profit, corporate, partnership, international, mergers & acquisitions, business entity formation and perhaps more.

 

Social ventures can be structured in several legal formations including, but not limited to: business for-profit corporations, nonprofit corporations, tax-exempt organizations, for-profit subsidiaries of nonprofit entities, limited liability companies, charities created by business corporations, joint ventures, and less formal structures created through financing, shareholder and licensing agreements.  New forms of business structures including the use of the L3C entity and the so-called “B Corporation” are also adding to the mix of potential business structures available to social entrepreneurs.

 

Perhaps because of our capitalistic roots and the emphasis in the United States on profit and wealth generation or simply because of the relative infancy of social enterprises and social ventures, our legal system in the United States does not provide a legal form that is designed to accommodate the particular needs of social ventures.  Obviously, public companies have, as their primary objective, the bests interests of the shareholders of the company which, to date, has allowed them to pursue “green” or eco-friendly ventures as an aside to their primary objective of producing a good or service which generates profits for the shareholders.  Non-profit organizations have social good and charitable purposes as their primary objective but many complex rules and onerous penalties exist for the organization and its directors should their profit making objectives be structured improperly, become too large or simply conflict with their tax-exempt social purposes.  Additionally, non-profits face potential donor confusion when they start to introduce the concept of “business” and “profit” to their donor base.  Thus, many pitfalls, regulatory landmines and business issues such as access to capital and modifying the traditional rules of business come into play when attempting to structure a social venture.

 

In structuring a social venture, the ideal legal structure for social enterprise would allow management to pursue the dual goals of profit and social benefit within a single venture. It would allow the venture to raise private capital and compensate investors for the use of their capital on competitive terms but also management to make business decisions that further the social mission of the venture, even at the risk of reducing profits.  This ideal legal structure would also allow donors to support the social purposes of the venture with tax-deductible contributions, provided the money they give is a gift and they do not receive anything in return. Such an enterprise could freely enter into joint ventures and other business relationships with charities or for-profit companies without jeopardizing the tax or corporate status of the participating entities or exposing management to complex regulation or potential liability. Under the right circumstances, the social enterprise itself could become exempt from paying tax on its net revenues.

 

Next, we will discuss Foundations of the social venture movement.

 

B. Ray Dinning, JD, LLM (taxation) is a United States based attorney specializing in nonprofit joint ventures, social ventures, domestic and international taxation and public private partnerships.   Mr. Dinning assisted Professor Michael Sanders with the research and drafting of the authoritative legal text in this area called “Partnerships and Joint Ventures Involving Tax Exempt Organizations by John Wiley & Sons in 1994 with later editions.  Mr. Dinning holds an Advanced Law Degree from Georgetown University Law Center in Taxation – an LL.M in Taxation.  Mr. Dinning has traveled around the world structuring social ventures from the grassroots to the Heads of State.  Mr. Dinning can be reached at (757) 232-2619.

Structuring and Implementing Social Entrepreneurship Ventures

 

 

The need for proper legal structuring of social entrepreneurship ventures in our global economy has never been greater than today. The Grameen Bank, the Bill and Melinda Gates Foundation, Starbucks Fair Trade Coffee Program and others highlight the significant social entrepreneurship projects being established in recent years.  With over four billion people living below the poverty line with household incomes of less than $2 per day, the world’s population is focused on day-to-day living and the necessities of life such as food, water, shelter and health care.

 

To combat these basic but daunting needs, social entrepreneurs must be creative to innovate new solutions, they must be organized and structured in their corporate culture and they must work in tandem with governmental, non-profit and for-profit organizations to achieve sustainable change to the world’s basic issues.  This requires detailed professional legal and accounting structuring to ensure that such ventures are established properly and transparently.  The legal and professional issues encompass significant issues in tax law, international law,  corporate and nonprofit law,  partnerships and joint venture structuring, international tax and banking law and more mundane topics such as employment law,   international dispute resolution procedures, governmental regulations, public policy concerns and a myriad of other legal issues.

 

Having spent over 17 years in researching and structuring joint ventures and partnerships with nonprofit organizations and public private partnerships has afforded me the opportunity to work with dozens of international social entrepreneurship ventures around the world – with particular emphasis and experience on the continent of Africa.  While the legal structuring is vital to the success of the social entrepreneurship project, building partnerships, relationships and alliances is equally important to the success of the venture.

 

Professor Jeffrey Sachs, economist and founder of Earth Institute at Columbia University argues that the world must begin “mobilizing global science and technology to address the crises of public health, agricultural productivity, environmental degradation and demographic stress confronting these countries. In part this will require that the wealthy governments enable the grossly underfinanced and under empowered United Nations institutions to become vibrant and active partners of human development.”  See Center for International Development at Harvard University dated August 14, 1999 (Speech of Professor Jeffrey Sachs).

 

Thorough innovation and creative application of existing business models to the problems of the poor has led to major leaps in social entrepreneurship in recent years. “In many cases it is an individual-driven thing, where a passion for change leads to remarkable and sustainable results” (Bessant & Tidd, 2007, pp. 300).  For example, Professor Mohammed Yunus, Founder of the Grameen Bank and Nobel Prize Winner used creativity and innovation to create a micro finance bank of the poor.  His efforts have ignited the quest to encourage innovation to solve the world problems faced by four billion people.  For example, Massachusetts Institute of Technology has instituted its IDEAS Competition to promote innovation to aid world issues.  The year’s MIT Yunus Challenge “calls for innovative small-scale energy storage solutions to help alleviate poverty. Solutions must address the needs of people living on less than $2 per day.”

 

One of the greatest challenges to innovation and social entrepreneurship is that the profitmaking objective driving business and the implementation of capital to make money is not the primary motivation in social enterprise.  As Bessant and Tidd note, “Social entrepreneurs are “concerned in some way with making the world a better place.” While social entrepreneurship is rapidly gaining momentum in universities and government sectors worldwide, mobilizing capital is obviously a challenge in social entrepreneurship as capital markets generally require a satisfactory return on investment.  This requires the social entrepreneur to make their project attractive to capital markets mainly by showing the social impact and public relations benefits. To overcome these obstacles, the social entrepreneur must be more vigilant, structured and professional to attract necessary capital.

 

As the social entrepreneur, once seen as a dreamer or frugal missionary, becomes more business-like, professional and structured, capital providers will follow.  For example, the Government of Scotland recently launched its “Social Entrepreneurs Fund is aimed at individuals who want to set-up and run a business with a social and/or environmental purpose.  The fund will provide financial and business support to help get new enterprises off the ground.”  Additionally, through innovative ideas, traditional capital models can be granted incentives to fund social ventures.   For example, on July 1, 2009, South Africa enacted a provision which promotes the creation of social entrepreneurship venture capital funds for micro enterprise and small business funding.  Provision 12J to the Income Tax Act allows for a 100% tax deduction to South Africa individuals and businesses which invest in new venture capital funds which promote social entrepreneurship.  Here, a traditional funding source, private venture capital, was given creative incentives to pay for new social enterprise businesses.  The incentive is that the individuals receive both the investment and a 100% tax deduction.  Thus, innovation plays a significant role in the implementation of capital and funding sources into social entrepreneurship ventures.

 

Partnerships are another key factor in utilizing innovation in social entrepreneurship.  In a 2002 Report entitled “Working for a Sustainable World”, President Bush and then Secretary of State Colin Powell noted that “Partnerships are Key” in addressing the world’s needs in a meaningful and sustainable manner.  Working for a Sustainable World – US Government Initiatives to Promote Sustainable Development (August 2002).  President Bush notes in his report that government must promote partnerships with nonprofits, universities, for-profit business and science and technology to achieve sustainable results.  President Bush also emphasizes that the nonprofit sector provided over $4 billion into sustainable development and social entrepreneurship and that only through partnerships can these resources be harnessed into lasting change in tackling the world’s basic needs.

 

Veritas Venture Capital is a new venture capital company established to provide micro finance loans to SMMEs (small, mid cap and micro enterprise) companies in South Africa.

According to B Ray Dinning of OneFIveTen Coalition, “micro enterprise is the key to bringing families to the first rung of the economic ladder.” Quoting Jeffrey Sachs of Earthwatch Institute and Columbia University, Dinning encourages businesses in the US and worldwide to “get involved” in Africa.

Through micro finance loans of $500 to $1000 which are generally made to four to six women, jobs can be created, businesses fostered, skills learned and families fed.

Contact Brian at (757) 232 2619 to find out more about micro finance, OneFiveTen Coalition and Africa