This article from the L3C's designer had some interesting points. http://www.worth.com/Editorial/M oney-Meaning/Philanthropy/Opport unities-Exposures-Philanthropy-C haritable-Returns.asp

We are now discussing the possibility of securitizing PRIs with several brokerage houses. If philanthropic investors had pools of L3Cs to trade, they could spread their risk, with the added benefit of greatly reducing the cost of due diligence, because it would need to be performed by just one securities underwriter instead of a dozen foundations, each investigating for its own purposes.

It is likely the IRS would accept this due diligence as prima facie evidence that the buyer is in compliance with all the rules governing PRIs. The more sophisticated these instruments become, the easier they will be to use and justify.

So this gets to my question on how the State law satisfies federal law. As an ex Wall Street guy I doubt there will be much of a market for securitization as the fees the issuer will want will take up much or all of the profits the L3C will generate. But groups like Good Cap or Calvert may do it further their general purpose. I can also see some very interesting possibilities for Kiva and the ebay version of kiva.

And it seems that there is a bit of a leap of faith about the IRS as apposed to a sophisticated legal argument. My gut, having read nothing more than the links I have posted, is that there may have to be some test cases and possibly requests for private letter rulings from the IRS, so it may take a while before foundations except the L3C as a PRI shortcut.

As per the idea of having a captive or related foundation to pass on individual donations, my gut is that the IRS would take the conservative road and call that a related party transaction which would thus prohibit the related foundation from passing tax exempt donations.

It looks like the registration process will be really easy, and I cant see any reason why at TEN we would not form and L3C and then move our existing business into it, but Ill be running that by a lawyer before I make such a move.

John Berger The Emancipation Network http://www.madebysurvivors.com/

John wrote:

I have not read a copy of the legislation yet, but based on press reports I think entities like mine (The Emancipation Network) would want to seriously consider registering as an L3C in Vermont.

As a Vermonter, I am ambivalent about this line of reasoning. First, the state needs businesses that add value to the state economy, and as such the legislation is intended to boost the prospects for community development through, say, home grown agricultural enterprises that provide a social return on investment (for example, farms and the preservation of landscape as heritage in my book) or, as one state rep puts it, "downtown redevelopment, low-income housing, energy initiatives and work force development."

So my question would be, "What does Vermont get for registering companies like Emancipation Network"? I don't mean this to be crude or unsympathetic to the good work of EN. Rather, to point out the intent of the legislation.

I am sure that with the new law will come regulatory concerns, and perhaps some kind of oversight agency will be needed to make sure that companies aren't moving to the state for legal shelter, without an interest in the state's economic growth agenda.

Alternatively, there could be the view that either way, its good for Vermont. I'm not convinced of that, yet. Rather, I feel folks who like the L3C concept work to enact similar laws in their state, using the resources of Americans for Community Development and Vermont's legal precedent as a launching pad.

What do you think?

This sounds promising, but as you said a lot more clarity is needed. As test cases and new models roll out it will prove out various ways to (and not to) use it.

Lars, its very common for corporations or partnerships to register in the state that they think offers them the most benefits and there is competition between the states to get these registrations. This does not mean the state expects the corporations to actually move there, although that is part of the reason. For example, Delaware is very popular because of the shareholder and investor protection they offer that other states don't.

Hi John, I understand it may be common elsewhere, for example in the financial sector. I am not certain it is in Vermont's interest to become the Delaware of L3Cs. Again, I think its important to consider both the context and intent of the legislation. Corporations have been excellent, traditionally, at exploiting loop holes. Our secretary of state doesn't currently have a proposal for regulating these corporations, which will be important to ensuring the intent of the law is seen through.

I agree about the lack of regulation or even better constraints in the the law. As it exists now I am concerned that it is just wishful thinking that foundations or the IRS will trust the structure.

Well, as far as I can see it, the only option is for you and Sarah to actually move here, thus netting the state the business too ;)

According the Council on Foundations, L3C isn't likely to happen at the IRS without Congressional legislation.

The thing that bugs me about that link Lars, is that there is this assumption that PRIs are hard for a foundation to do and that the IRS requires extensive paperwork, etc. Thats just not true, the IRS standards are clear and all extra work is just being created by Foundation bureaucracy. So I have to agree that absent federal law changes, or some leadership from the foundation community, the L3C in and of itself is probably more of a discussion starter than a solution.

However, the L3C would I think make it easier to explain to our customers what a hybrid model is.

If students of others wanted to make local collections for specific families in need, is that legal or does it need a licence

The donations are not tax deductible or at least you cant give a receipt saying they are tax deductible. Im my state you need to register to solicit donations for a tax deductible entity, but I dont know if you have to register if you are just helping someone out.

I think local banks often have shells that are set up to support this kind of thing, but this is on only a guess as in my area anytime someone does those "john has cancer and needs $" drives they seem to do it through a local bank. No idea if that is deductible though.

If it were run by a church it could be.

I am confused by schools and colleges. And I am not talking about the tax angle as much as what you have to certify as an entity if you are colecting for a cause.

obviously most american schools do fundraisers for themselves; this web seems to suggests that schools can do fundraisers for microcredit banks http://ymci.org/en/about

Just because a school does a fundraiser does not mean thats a tax exempt donation. Some private schools are non profits and some public schools have partner non profits (like PTAs) that can solicit tax exempt donations. But I think most schools just take donations as non-exempt.

yes john but I am still trying to ascertain something simpler than the tax issue- ie what places etc empower collection for a cause; so if I am eg suggesting to first year college students they could start fundraising for social businesses development in their local community, are there legal issues to look at?

There are legal issues but simple ones. They have to be doing what they are saying they do. They cant say something is tax deductible if its not, and in many, perhaps all States, to solicit funds for tax deductible entities they have to register with the state. I do not know if you have to register to solicit funds for non tax deductible purposes.