Innovative Fundraising Options for Impact Investment Funds Targeting Community Challenges
Above: Capital UNTAPPED! How Professional Athletes are using their Innovation, Investing and INFLUENCE Capital to drive Impact and Business Ventures, and how the Family Office investor community can partner to elevate their projects and Return on Investments. Photo of Athletes Panel at the Opal Group Conference in July 2021 in Newport, RI with (left to right) Rick Davis of LOHAS Capital, Udonis Haslem, Shawn Springs, Daniel Puder, Santia Deck, and Tim Hardaway. Courtesy of LOHAS Capital
Fundraising for traditional investment funds is trying under the best of circumstances. The degree of difficulty for social and environmental impact funds seeking investment during uncertain times can be far higher. Nonetheless, there are innovative, albeit less traveled, paths to investment that may be well suited for impact funds.
These creative fundraising approaches come as the challenges that communities face are increasing (or, at least, are becoming better recognized), whether those are the issues of localized groups, or communities of underserved populations, or broader social concerns that cut across race, gender, and geography. A few innovative fundraising options are explored below, including Banks (under the Community Reinvestment Act), Donor-Advised Funds, and (perhaps most promising) Fiscal Sponsor Programs.
Banks and the Community Reinvestment Act
Potentially the least utilized fundraising strategy within the world of impact investing, the Community Reinvestment Act (“CRA”) can be a tool for select impact funds 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).
While CRA requirements are typically met through traditional loans, impact 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 equity investment and which can help satisfy the bank’s CRA obligations (while positioning the bank to make attractive returns).
Most banks may be unaware of these types of innovative solutions to their CRA requirements, but as an example Western Alliance Bank made a recent investment in FVLCRUM Fund, a private equity fund focused on building wealth for minority business owners. Notably, Western Alliance Bank received regulatory approval from the Federal Reserve for its investment in FVLCRUM Fund, paving the way for CRA credit and thereby satisfying the bank’s regulatory requirements while also generating both financial and social impact returns (ideal selling points for impact fund managers).
As most readers already know, donor-advised funds (“DAF’s”) are philanthropic and social impact investment tools that allow individual, family, and corporate donors 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. Due in part to their simplicity as a tax management strategy, DAF’s have exploded in use in recent years, with well over $100 billion in assets now in DAF’s.
The interesting aspect for the impact fundraising world is that DAF’s are (largely) untapped sources for investment in for-profit impact ventures, but that is starting to change; and beyond the sheer volume available, DAF’s 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/investor 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/investor to direct towards the next socially or environmentally impactful venture.
Unfortunately for fund managers, most prospective investors’ DAF operators do not currently allow their donors to use their DAF’s as (for-profit) impact investing mechanisms, and those that do typically offer only a limited selection of investment options for donors (i.e., not the particular impact fund). However, some DAF sponsors are showing greater flexibility, and DAFs can be easily transferred to other sponsors that better support donors’ impact investing goals. For impact fund managers, just letting prospective investors know that their DAF funds can be invested in the fund will likely be new information (often not offered by the investors’ financial advisors) and may provide a way for those investors to support a community issue about which they care deeply without dipping into their main portfolio.
Fiscal Sponsor Programs
Perhaps the most powerful and yet underutilized fundraising tool in the impact fund manager’s toolbox, fiscal sponsor programs can allow funds 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 DAF’s and fiscal sponsor programs can be used to invest donated capital, DAF’s 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 much more flexibility to funds regarding who can contribute and into what capital is invested. Furthermore, as an added attraction for fund managers to offer investors/donors, through the end of 2021 (at least) fiscal sponsor programs deliver substantially greater tax benefits to donors than foundations (or even DAF’s) with taxpayers able to deduct up to 100 percent of their adjusted gross income.
So, what types of investors/donors might take advantage of an impact fund’s fiscal sponsor program? There are parties that, for whatever reason, cannot (or will not) invest in an impact fund even if they ostensibly support its cause; for these parties the fund is offering a way to participate (through donated capital) that gives them immediate and meaningful tax benefits; notably this may be a good fit for corporations and foundations that voice their support but are challenged due to their internal structures to make “investments” in the fund. Also, for those parties that are investing real capital in the primary fund, the fiscal sponsor program provides a way to extract even further financial backing by tapping into their donated capital (or existing donor-advised fund) and providing them maximum tax deduction benefits.
For fund managers looking to set up these programs, it’s important to note that fiscal sponsorships have existed for many years but often have served simply as “pass-through” funding mechanisms to allow charitable capital to be delivered to select ventures (such as entertainment productions), generating tax deductions for donors in the process. It may be a better fit to identify fiscal sponsor program managers that deliver a more robust service offering geared to impact funds, providing more flexible and proactive solutions and which are set up not only to manage complex structures but also accept diverse asset classes, including crypto, real estate, business ownership stakes, etc. Ideally, the services of these program managers 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.
In summary, there are many impact funds delivering real solutions to access, affordability, and other community challenges. As these fund managers look to raise capital, they should offer prospective investors the broadest set of options to contribute and set examples for others to follow. If a fiscal sponsor program may be a good fit, contact LOHAS Capital for immediate activation to help provide investors/donors with the maximum tax benefits before they expire at year’s end.
Article by Rick Davis, Founder and the Managing Partner of LOHAS Capital and LOHAS Advisors. The LOHAS partners are thought leaders in the impact investing strategic advisory arena. Supporting investors and donors (including family offices, individual investors and their advisors, corporations, and foundation) as well as impact ventures (from funds to companies, projects, and entertainment productions), LOHAS works to champion alternative investment structures and strategies to accelerate and amplify the flow of capital to socially and environmentally impactful pursuits.