As many of you heard, Jeff and I got an early Christmas gift this year when we learned the IRS had approved our application for tax exempt status. There are two big reasons this news matters:
1. Technical Reason: Freedom to make Mission Related Investments
Investing a charity’s assets in private companies is really complicated. Without getting too technical, we have to navigate SEC rules, state laws, and IRS regulations. As if it weren’t already difficult enough, these rules are older than the practices of the impact investing community leaving foundations to operate in the “in-between spaces”.
To understand this point requires a short bit of background. Impact Investments fall into two main categories. The first, called program-related investments (PRI), are defined by the US tax code and refer to investments that significantly advance an important mission of the investing charity without regard to the potential for financial return. The second, mission-related investments (MRI), is kind of a catch-all phrase developed by the the impact investing community to refer to investments that have a potential for stronger financial return while also being aligned with the charity’s mission. Basically, PRI’s have high mission and low-to-medium financial return, while MRI’s have mid-range mission with high financial return.
The difference may seem insignificant, but the tax code gives great benefits to a charity making PRI’s. Plus, without clarity from the IRS as to what constitutes MRI’s and how they’re to be treated for tax purposes, many foundations are reluctant to make these investments.
Out of an abundance of caution, Impact Foundation’s leadership decided to hold off on making MRI’s until we could get the IRS to weigh in on our particular plans. We have been confined to making investments that would qualify for PRI status. But with this approval from the IRS we are clear to make all variety of investments, whether PRI or MRI.
2. Personal Reason: Affirmation
Starting a foundation from scratch is scary, as with any entrepreneurial venture. And when we’ve chosen to focus on offering a set of tools that are unfamiliar to many (combining charity and investing? what?), one might wonder if we’re moving in the right direction. In fact, early on our adventure one nonprofit lawyer opined that for the IRS to approve our exemption application would require a “significant reversal of decades of tax-exemption law”. (Good thing Jeff and I suffer from an over-abundance of self confidence). Despite these hurdles, Jeff and I have felt God’s leading in the creation of Impact Foundation. And it’s nice to have this IRS ruling as another sign that we’re going the right way.
Does the world really need another foundation?
With over 1.5 million charities in the US, over 1,000 of which offer donor advised funds, one could argue we don't need another one. But Impact Foundation is truly breaking new ground in the faith-based charitable space. We do not want to replicate the excellent work being done by other foundations in the arenas of complex gift intake and traditional granting; our close ties with National Christian Foundation ensure we will not need to rebuild these systems. Rather we focus on investing charitable resources for greater impact – something other charities are reluctant to tackle. Our mission, structure, and processes allow us to do well what other foundations see as too complex. Furthermore, our small staff size and focused investment process allows us to move much more quickly than older, more established foundations. This speed is key when making venture capital and private equity investments. Finally, the IRS has granted us tax exempt status specifically to focus on investing for impact. There is a demonstrated need and customer base for this type of foundation, but until now there hasn’t been an easy way for Christians to participate.