Member Post: Proposed Regs Good News for Program-Related Investments

April 23, 2012

Knowing the ins and outs of the latest public policy decisions and how they affect foundations is important for both grantmakers and those funded by them. In this post, MCF member Hazen Graves of Faegre Baker Daniels Foundation relays an important update on program-related investments, a tool used by many grantmakers.

On April 19, 2012, the U.S. Treasury Department published proposed regulations that underscore the breadth and flexibility of the program-related investment (PRI) rules that govern private foundations. The regs affirm that:

  • If an activity is charitable in the U.S., it will likely also be charitable if conducted outside the U.S.
  • Alleviating poverty and improving deteriorated urban areas are not the only charitable purposes that may be served by PRIs.
  • The recipient of a PRI may be the means by which the PRI serves a charitable purposes, and need not itself be a member of a charitable class.
  • A potentially high rate of return on an investment does not disqualify it as a PRI.
  • PRIs may be structured in a variety of ways, including as loans, equity investments, credit enhancements and loans in combination with equity.
  • PRI recipients may be individuals, for-profit businesses, 501(c)(3) charities and non-501(c)(3) tax exempt organizations.

The proposed regs supplement the existing 10 examples with nine more, concluding that each qualifies as a PRI. In each, the terms accepted by the foundation had been rejected by commercial investors.

Example 11:  Foundation buys shares in a for-profit corporation to induce it to develop a vaccine that would not otherwise be financially viable, requiring the company to distribute the vaccine in developing countries at an affordable price, and to publish its research results.

Ex. 12:  Foundation buys shares in a rural recycling business in a developing country, on the same terms as commercial investors. The business could not find sufficient commercial investors to be viable. The venture is high risk and offers potential for a high return.

Ex. 13:  Same as Ex. 12, except foundation makes a below-market loan and receives shares of stock in exchange for the discounted interest rate. The same terms had been rejected by commercial investors.

Ex. 14:  Foundation makes a below-market loan to a major employer of poor individuals to promote recovery from a natural disaster.

Ex. 15:  Foundation makes low-interest loans to poor individuals to allow them to start small businesses following a natural disaster.

Ex. 16:  Foundation makes a low-interest loan to an LLC that operates a coffee business. Loan proceeds must be used to train poor farmers, who are the LLC’s suppliers, in environmentally sustainable water management, cultivation, pest control and farm management techniques.

Ex. 17:  Foundation makes a low-interest loan to a 501(c)(4) community arts organization for new exhibition space.

Ex. 18:  Foundation makes a designated deposit to a below-market account at a commercial bank to secure the bank’s construction loan to a 501(c)(3) child care organization.

Ex. 19:  Foundation guarantees a bank loan to a child care organization for construction of a new facility, and enters into a reimbursement agreement with the organization.

All PRIs must of course meet the general requirements of IRC §4944 that the primary purpose of the investment is charitable, that financial gain is not a significant purpose of the investment, and that the investment is not intended to influence legislation or any political campaign.

While these regulations have not been finalized, private foundations are entitled to rely on them until final regulations are published. Treasury is accepting comments on the proposed regs through July 18, 2012.

For more information, visit the Faegre Baker Daniels website.