program related investments regulations for booster

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Program related investments regulations for booster goldman sachs investment banking summer analyst deadline

Program related investments regulations for booster

To be program-related, the investments must significantly further the foundation's exempt activities. They must be investments that would not have been made except for their relationship to the exempt purposes. The investments include those made in functionally related activities that are carried on within a larger combination of similar activities related to the exempt purposes.

The regulations under section contain several detailed examples of investments that qualify as program-related investments. Those examples reflect current investment practices and illustrate certain principles, including. Once an investment is determined to be program-related, it will continue to qualify as a program-related investment if changes in the form or terms of the investment are made primarily for exempt purposes and not for any significant purpose involving the production of income or the appreciation of property.

A change made in the form or terms of a program-related investment for the prudent protection of the foundation's investment will not ordinarily cause the investment to cease to qualify as program-related. Under certain conditions a program-related investment may cease to be program-related because of a critical change in circumstances, such as serving an illegal purpose or serving the private purpose of the foundation or its managers.

If a foundation changes the form or terms of an investment, and if the investment no longer qualifies as program-related, it then must be determined whether or not the investment jeopardizes carrying out its exempt purposes. The corporation enters into a management contract which gives broad operating authority to one or more unrelated persons for a term of years. The foundation and the unrelated persons are obligated to contribute toward working capital requirements.

The unrelated persons will be compensated by a fixed fee or a share of profits, and they will receive an option to buy the stock held by S or the assets of the corporation. Paragraphs a 2 ii and b , Examples 11 through 19 of this section, apply on or after April 25, Please help us improve our site!

No thank you. CFR prev next. X is a small business enterprise located in a deteriorated urban area and owned by members of an economically disadvantaged minority group. Conventional sources of funds are unwilling or unable to provide funds to X on terms it considers economically feasible. Y, a private foundation, makes a loan to X bearing interest below the market rate for commercial loans of comparable risk.

Y's primary purpose for making the loan is to encourage the economic development of such minority groups. The loan has no significant purpose involving the production of income or the appreciation of property. The loan significantly furthers the accomplishment of Y's exempt activities and would not have been made but for such relationship between the loan and Y's exempt activities. Accordingly, the loan is a program-related investment even though Y may earn income from the investment in an amount comparable to or higher than earnings from conventional portfolio investments.

Assume the facts as stated in Example 1 , except that after the date of execution of the loan Y extends the due date of the loan. The extension is granted in order to permit X to achieve greater financial stability before it is required to repay the loan.

Since the change in the terms of the loan is made primarily for exempt purposes and not for any significant purpose involving the production of income or the appreciation of property, the loan shall continue to qualify as a program-related investment. Conventional sources of funds are unwilling to provide funds to X at reasonable interest rates unless it increases the amount of its equity capital.

Consequently, Y, a private foundation, purchases shares of X's common stock. Y's primary purpose in purchasing the stock is to encourage the economic development of such minority group, and no significant purpose involves the production of income or the appreciation of property. The investment significantly furthers the accomplishment of Y's exempt activities and would not have been made but for such relationship between the investment and Y's exempt activities.

Accordingly, the purchase of the common stock is a program-related investment, even though Y may realize a profit if X is successful and the common stock appreciates in value. X is a business enterprise which is not owned by low-income persons or minority group members, but the continued operation of X is important to the economic well-being of a deteriorated urban area because X employes a substantial number of low-income persons from such area.

Conventional sources of funds are unwilling or unable to provide funds to X at reasonable interest rates. Y, a private foundation, makes a loan to X at an interest rate below the market rate for commercial loans of comparable risk. The loan is made pursuant to a program run by Y to assist low-income persons by providing increased economic opportunities and to prevent community deterioration.

No significant purpose of the loan involves the production of income or the appreciation of property. The investment significantly furthers the accomplishment of Y's exempt activities and would not have been made but for such relationship between the loan and Y's exempt activities. Accordingly, the loan is a program-related investment. X is a business enterprise which is financially secure and the stock of which is listed and traded on a national exchange.

Y, a private foundation, makes a loan to X at an interest rate below the market rate in order to induce X to establish a new plant in a deteriorated urban area which, because of the high risks involved, X would be unwilling to establish absent such inducement. The loan is made pursuant to a program run by Y to enhance the economic development of the area by, for example, providing employment opportunities for low-income persons at the new plant, and no significant purpose involves the production of income or the appreciation of property.

Accordingly, even though X is large and established, the investment is program-related. X is a business enterprise which is owned by a nonprofit community development corporation. When fully operational, X will market agricultural products, thereby providing a marketing outlet for low-income farmers in a depressed rural area. Y, a private foundation, makes a loan to X bearing interest at a rate less than the rate charged by financial institutions which have agreed to lend funds to X if Y makes the loan.

The loan is made pursuant to a program run by Y to encourage economic redevelopment of depressed areas, and no significant purpose involves the production of income or the appreciation of property. The dividends received from such investment are later applied by X in furtherance of its exempt purposes.

Although there is a relationship between the return on the investment and the accomplishment of X's exempt activities, there is no relationship between the investment per se and such accomplishment. Therefore, the investment cannot be considered as made primarily to accomplish one or more of the purposes described in section c 2 B and cannot qualify as program-related.

S, a private foundation, makes an investment in T, a business corporation, which qualifies as a program-related investment under section c at the time that it is made. All of T's voting stock is owned by S. T experiences financial and management problems which, in the judgment of the foundation, require changes in management, in financial structure or in the form of the investment.

The following three methods of resolving the problems appear feasible to S, but each of the three methods would result in reduction of the exempt purposes for which the program-related investment was initially made:. Each of the three methods involves a change in the form or terms of a program-related investment for the prudent protection of the foundation's investment.

X is a socially and economically disadvantaged individual. Y, a private foundation, makes an interest-free loan to X for the primary purpose of enabling X to attend college. Y, a private foundation, makes a high-risk investment in low-income housing, the indebtedness with respect to which is insured by the Federal Housing Administration. Y's primary purpose in making the investment is to finance the purchase, rehabilitation, and construction of housing for low-income persons.

The investment has no significant purpose involving the production of income or the appreciation of property. Accordingly, the investment is program-related. X is a business enterprise that researches and develops new drugs. X's research demonstrates that a vaccine can be developed within ten years to prevent a disease that predominantly affects poor individuals in developing countries. However, neither X nor other commercial enterprises like X will devote their resources to develop the vaccine because the potential return on investment is significantly less than required by X or other commercial enterprises to undertake a project to develop new drugs.

Y, a private foundation, enters into an investment agreement with X in order to induce X to develop the vaccine. Pursuant to the investment agreement, Y purchases shares of the common stock of S, a subsidiary corporation that X establishes to research and develop the vaccine.

The agreement requires S to distribute the vaccine to poor individuals in developing countries at a price that is affordable to the affected population, although, the agreement does not preclude S from selling the vaccine to other individuals at a market rate. The agreement also requires S to publish the research results, disclosing substantially all information about the results that would be useful to the interested public.

S agrees that the publication of its research results will be made as promptly after the completion of the research as is reasonably possible without jeopardizing S's right to secure patents necessary to protect its ownership or control of the results of the research.

The expected rate of return on Y's investment in S is less than the expected market rate of return for an investment of similar risk. Y's primary purpose in making the investment is to fund scientific research in the public interest. No significant purpose of the investment involves the production of income or the appreciation of property. Accordingly, Y's purchase of the common stock of S is a program-related investment.

Q, a developing country, produces a substantial amount of recyclable solid waste materials that are currently disposed of in landfills and by incineration, contributing significantly to environmental deterioration in Q. X is a new business enterprise located in Q.

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For example, a long-shot equity investment in an orphan drug research company could incidentally lead to significant income or capital appreciation, from the drug itself or a profitable offshoot from the research and development conducted. This alone is not conclusive evidence that a significant purpose of the investment is the production of income or the appreciation of property. Also, while the examples generally refer to the interest rate or rate of return on a PRI as being less than the expected market rate for an investment of comparable risk, the Treasury Decision notes that there is no requirement that the rate of return of a PRI must fall below an absolute percentage threshold e.

As a result, private foundations need not hesitate to make otherwise qualifying PRIs in a long-shot or a potentially highly successful business. By adding PRIs to its toolbox, a private foundation can further its exempt purposes by serving as a business incubator. The exit strategy for loans is clear. Private foundations hope to be repaid in full at maturity. For PRIs involving indefinite terms, such as equity investments, there does not appear to be any requirement to monetize the investment if, for example, the recipient becomes profitable.

In the proposed examples, a private foundation planned to liquidate its stock in a recycling collection business once it became profitable or it was established that the business would never become profitable Example However, a number of the other examples of equity investments did not require an express intention to exit.

Typically, and almost by rule, the private foundation offering to make a PRI has a significant amount of leverage, and negotiating an appropriate means to exit could be one way to put that leverage to good use. Some private foundations request rulings for contemplated PRIs for absolute reassurance of a favorable determination by the IRS prior to the actual investment. This is often motivated by the desire to avoid the costly excise taxes on jeopardizing investments if the investment is later determined to not be a qualifying PRI, but the process can often take years before a response is issued if one is issued at all.

Other foundations seek a reasoned legal opinion indicating that a particular investment is more likely than not to qualify, or should qualify, as a PRI. The tax opinion is particularly important because reasonable reliance on a legal opinion can shield a foundation manager from otherwise applicable excise taxes if the investment is later found to be a jeopardizing investment and not a PRI.

The new examples in the now final Treasury Regulations are quite substantive and help to answer many of the more frequently asked questions about PRIs. Moreover, the issuance of these new examples, and private letter rulings based on the new examples, should continue to illustrate the potential of and interest in the use of PRIs by private foundations.

Send Print Report. Seyfarth Shaw LLP. Ofer Lion. Douglas Mancino. Published In: c 3. Benefit Corporations. Final Rules. Private Foundations. Private Letter Rulings. The final rules eliminate the reference to a natural disaster, recognizing that programs involving investing in foreign countries should not require a natural disaster to make them related to an exempt purpose. One comment that the IRS did not adopt, but said it would study further, was whether a private foundation can invest in a limited liability company, rather than just loan it money, as in Example These investments raise many issues that investments in corporations do not.

Accordingly, the IRS did not make changes in response to this comment but stated that it is considering addressing that issue in a separate revenue ruling. Schreiber sschreiber aicpa. The January issue marks the 50th anniversary of The Tax Adviser , which was first published in January Over the coming year, we will be looking back at early issues of the magazine, highlighting interesting tidbits. This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID Toggle search Toggle navigation.

Schreiber, J. The regulations are effective April 25, Latest News. Latest Document Summaries. Featured Articles. Most Read.

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A change made in the form or terms of a program-related investment for the prudent protection of the foundation's investment will not ordinarily cause the investment to cease to qualify as program-related. Under certain conditions a program-related investment may cease to be program-related because of a critical change in circumstances, such as serving an illegal purpose or serving the private purpose of the foundation or its managers.

If a foundation changes the form or terms of an investment, and if the investment no longer qualifies as program-related, it then must be determined whether or not the investment jeopardizes carrying out its exempt purposes. An investment that ceases to be program-related because of a critical change in circumstances does not subject the foundation making the investment to the tax on jeopardizing investments before the 30th day after the date on which the foundation or any of its managers has actual knowledge of the critical change in circumstances.

Return to Life Cycle of a Private Foundation. More In File. Program-related investments PRIs are those in which: The primary purpose is to accomplish one or more of the foundation's exempt purposes, Production of income or appreciation of property is not a significant purpose, and Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose.

Examples The following are some typical examples of program-related investments: Low-interest or interest-free loans to needy students, High-risk investments in nonprofit low-income housing projects, Low-interest loans to small businesses owned by members of economically disadvantaged groups, where commercial funds at reasonable interest rates are not readily available, Investments in businesses in low-income areas both domestic and foreign under a plan to improve the economy of the area by providing employment or training for unemployed residents, and Investments in nonprofit organizations combating community deterioration.

Investment changes Once an investment is determined to be program-related, it will continue to qualify as a program-related investment if changes in the form or terms of the investment are made primarily for exempt purposes and not for any significant purpose involving the production of income or the appreciation of property. This principle applies equally to all foreign countries. However, the final regulations do not change the reference to a developing country in Example 15, because the example illustrates PRIs in the context of microloans, which are currently more common in developing countries.

In addition, because organizations making microloans often provide loans to many individuals, the final regulations modify the example to reference loans to a group of individuals, rather than two specific individuals with identified business endeavors. When a private foundation makes an equity investment in an LLC or other entity treated as a partnership for federal tax purposes, the activities of the LLC are attributed to the foundation for purposes of determining both whether the foundation operates exclusively for exempt purposes and therefore continues to qualify for exemption under section c 3 and whether the foundation has engaged in an unrelated trade or business described in section See Rev.

As a result, investments in partnership interests by section c 3 organizations raise a host of issues that are not raised by loans or by investments in stock of corporations. These issues necessitate consideration and analysis of a variety of facts and circumstances that are difficult to summarize in examples in regulations, and hence investments by section c 3 organizations in partnership interests have been addressed primarily through revenue rulings.

Accordingly, the Treasury Department and the IRS do not adopt this comment but are considering whether to address PRIs in the form of investments in partnership interests through the issuance of a revenue ruling. Finally, one commenter recommended that the examples be amended to demonstrate the ability of a foundation to set PRI terms at above the prime rate.

In addition, one example, Example 12, referred to the potential for a high rate of return if the recipient business is successful. Thus, the final regulations do not adopt this comment to expressly state in an example that the rate of return on a PRI may exceed the prime rate. The principles helped identify areas in which clarification through examples would be helpful. The Treasury Department and the IRS believe that each of these seven principles is adequately reflected in the new examples themselves.

Alternatively, the commenter suggested that the principles be preserved in another readily accessible place, like the IRS' Web site. In response to this comment, the IRS intends to post the principles on its Web site. A number of commenters suggested additional examples to be added to the final regulations. For example, two commenters recommended including examples involving PRIs to support news media or mixed-income housing or to lessen the burdens of government, while another commenter suggested examples involving economic development through the promotion of technology-based enterprises.

The proposed regulations contained nine new examples involving many different exempt purposes, such as scientific research in the public interest, combating environmental deterioration, and education. The Treasury Department and the IRS believe these additional examples adequately illustrate the principle that a PRI may accomplish a variety of exempt purposes. These regulations under section are not intended to provide an example of every exempt purpose, and there are many examples of exempt purposes in both regulations and sub-regulatory guidance under section c 3.

Therefore, additional examples of exempt purposes are not provided in these regulations. However, if commenters or other organizations believe additional guidance is needed under section c 3 regarding whether particular activities further charitable purposes, private letter rulings or guidance of general applicability may be requested. Accordingly, the final regulations do not adopt these comments.

One commenter recommended including an additional example of a foundation assuming certain risks to catalyze the entry of private investment capital. The proposed regulations already included two examples of a foundation assuming certain risks specifically, in the form of a deposit agreement and a guarantee to catalyze the entry of private investment capital. Thus, the Treasury Department and the IRS do not believe that additional examples are necessary to illustrate this possibility and the final regulations do not adopt this comment.

Two commenters requested examples involving investments in low-profit limited liability companies L3Cs or benefit corporations. On the other hand, one commenter approved of the lack of any examples suggesting the need for a recipient of a PRI to be an L3C or benefit corporation, noting that the IRS has not recognized L3C or benefit corporation status as relevant to the determination of whether an investment is a PRI and also noting potential concerns with and lack of universal endorsement of the L3C model.

The proposed regulations included one example involving a loan to an LLC; the results of that example would be the same if the limited liability company described in the example were an L3C. Similarly, the results of examples in which the PRI recipient is a corporation would apply equally if the recipient were a benefit corporation. The Treasury Department and the IRS see no need to amend the examples to refer more narrowly to an L3C or benefit corporation when such status is not determinative of the examples' conclusions.

One commenter noted that the example in the proposed regulations of a PRI financing medical research involved a disease that predominantly affects developing countries and requested another example involving a disease that affects developed countries but with respect to which a lack of sufficient market incentives exist for research and development of new treatments. Scientific research carried Start Printed Page on for the purpose of discovering a cure for a disease need not involve a disease predominantly affecting developing countries to accomplish an exempt purpose described in section c 3.

However, as previously noted, the PRI examples are intended to illustrate types of investments that qualify as PRIs and are not intended to address every circumstance that constitutes an exempt purpose, and thus the final regulations do not adopt this comment.

Finally, one commenter requested additional guidance regarding the circumstances under which PRIs may result in impermissible private benefit and specifically requested an example of a PRI that has the primary purpose of benefitting indigent members of a charitable class but that also benefits non-indigent individuals other than the recipient of the PRI itself. This commenter appeared to be requesting guidance on the circumstances under which private benefit conferred by an investment might affect an organization's exempt status under section c 3 rather than under which the private benefit might affect the investment's status as a PRI, and as such would be outside of the scope of these final regulations.

The effect of private benefit on exempt status is addressed in examples in regulations under section c 3 as well as a number of revenue rulings. To the degree the commenter was requesting guidance on the effect of private benefit on an investment's status as a PRI, the substantial majority of examples in the existing and proposed regulations involve some private benefit to one or more persons that are not members of a charitable class often including the recipient of the PRI itself that is incidental to the investment's primary purpose of accomplishing an exempt purpose.

As a result, the Treasury Department and the IRS do not believe that additional examples on this issue are necessary, and the final regulations do not adopt this comment. A number of commenters requested that the IRS adopt procedures that would allow private foundations considering a PRI to obtain determinations or guidance from the IRS regarding the PRI in ways that are more expeditious and less costly than the private letter ruling process.

One commenter proposed that the IRS create a process similar to the one established under section g for approving procedures for making grants to individuals. Section g specifically requires that procedures for making grants to individuals be approved by the IRS to avoid an excise tax being applied to such grants. Section contains no such requirement of advance approval of PRIs and hence is not analogous to section g. One commenter recommended allowing private foundations to request determinations that their investments are PRIs using Form , Request for Miscellaneous Determination, and also to request expedited review of such requests when the closing of financing of a PRI is scheduled four months or six months from the date the request is submitted.

Determination requests that are submitted to Exempt Organizations Determinations using Form are listed in section 7. Allowing determination requests regarding PRIs to be submitted to Exempt Organizations Determinations using Form as well as expedited review of such requests would require amendments to Rev. Hence it is outside the scope of these final regulations.

Furthermore, allowing a private foundation to rely on a letter ruling issued to another taxpayer would require amendments to section 11 of Rev. Certain IRS regulations, including this one, are exempt from the requirements of Executive Order , as supplemented and reaffirmed by Executive Order Therefore, a regulatory impact assessment is not required.

It has been determined that section b of the Administrative Procedure Act 5 U. Pursuant to section f of the Code, the NPRM preceding this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on business and no comments were received. Accordingly, 26 CFR part 53 is amended as follows:. The authority citation for part 53 continues to read in part as follows:. Authority: 26 U. Amend paragraph b by adding Examples 11 through Add paragraph c.

X is a business enterprise that researches and develops new drugs. X's research demonstrates that a vaccine can be developed within ten years to prevent a disease that predominantly affects poor individuals in developing countries. However, neither X nor other commercial enterprises like X will devote their resources to develop the vaccine because the potential return on investment is significantly less than required by X or other commercial enterprises to undertake a project to develop new drugs.

Y, a private foundation, enters into an investment agreement with X in order to induce X to develop the vaccine. Pursuant to the investment agreement, Y purchases shares of the common stock of S, a subsidiary corporation that X establishes to research and develop the vaccine. The agreement requires S to distribute the vaccine to poor individuals in developing countries at a price that is affordable to the affected population, although, the agreement does not preclude S from selling the vaccine to other individuals at a market rate.

The agreement also requires S to publish the research results, disclosing substantially all information about the results that would be useful to the interested public. S agrees that the publication of its research results will be made as promptly after the completion of the research as is reasonably possible without jeopardizing S's right to secure patents necessary to protect its ownership or control of the results of the research.

The expected rate of return on Y's investment in S is less than the expected market rate of return for an investment of similar risk. Y's primary purpose in making the investment is to fund scientific research in the public interest. No significant purpose of the investment involves the production of income or the appreciation of property. The investment significantly furthers the accomplishment of Y's exempt activities and would not have been made but for such relationship between the investment and Y's exempt activities.

Accordingly, Y's purchase of the common stock of S is a program-related investment. Q, a developing country, produces a substantial amount of recyclable solid waste materials that are currently disposed of in landfills and by incineration, contributing significantly to environmental deterioration in Q.

X is a new business enterprise located in Q. X's only activity will be collecting recyclable solid waste materials in Q and delivering those materials to recycling centers that are inaccessible to a majority of the population. If successful, the recycling collection business would prevent pollution in Q caused by the usual disposition of solid waste materials. X has obtained funding from only a few commercial investors who are concerned about the environmental impact of solid waste disposal.

Although X made substantial efforts to procure additional funding, X has not been able to obtain sufficient funding because the expected rate of return is significantly less than the acceptable rate of return on an investment of this type. Because X has been unable to attract additional investors on the same terms as the initial investors, Y, a private foundation, enters into an investment agreement with X to purchase shares of X's common stock on the same terms as X's initial investors.

Although there is a high risk associated with the investment in X, there is also the potential for a high rate of return if X is successful in the recycling business in Q. Y's primary purpose in making the investment is to combat environmental deterioration. Accordingly, Y's purchase of the X common stock is a program-related investment.

Assume the facts as stated in Example 12, except that X offers Y shares of X's common stock in order to induce Y to make a below-market rate loan to X. X previously made the same offer to a number of commercial investors. These investors were unwilling to provide loans to X on such terms because the expected return on the combined package of stock and debt was below the expected market return for such a package based on the level of risk involved, and they were also unwilling to provide loans on other terms X considers economically feasible.

Y accepts the stock and makes the loan on the same terms that X offered to the commercial investors. Accordingly, the loan accompanied by the acceptance of common stock is a program-related investment. X is a business enterprise located in V, a rural area in State Z.

X employs a large number of poor individuals in V. A natural disaster occurs in V, causing significant damage to the area. The business operations of X are harmed because of damage to X's equipment and buildings. X has insufficient funds to continue its business operations and conventional sources of funds are unwilling or unable to provide loans to X on terms it considers economically feasible.

In order to enable X to continue its business operations, Y, a private foundation, makes a loan to X bearing interest below the market rate for commercial loans of comparable risk. Y's primary purpose in making the loan is to provide relief to the poor and distressed. No significant purpose of the loan involves the production of income or the appreciation of property. The loan significantly furthers the accomplishment of Y's exempt activities and would not have been made but for such relationship between the loan and Y's exempt activities.

Accordingly, the loan is a program-related investment. Y, a private foundation, makes loans bearing interest below the market rate for commercial loans of comparable risk to poor individuals who live in W, a developing country, to enable them to start small businesses such as a roadside fruit stand. Conventional sources of funds were unwilling or unable to provide such loans on terms they consider economically feasible.

Y's primary purpose in making the loans is to provide relief to the poor and distressed. No significant purpose of the loans involves the production of income or the appreciation of property. The loans significantly further the accomplishment of Y's exempt activities and would not have been made but for such relationship between the loans and Y's exempt activities.

Accordingly, the loans to the poor individuals who live in W are program-related investments. X is a limited liability company treated as a partnership for federal income tax purposes. X purchases coffee from poor farmers residing in a developing country, either directly or through farmer-owned cooperatives. To fund the provision of efficient water management, crop cultivation, pest management, and farm management training to the poor farmers by X, Y, a private foundation, makes a loan to X bearing interest below the market rate for commercial loans of comparable risk.

The loan agreement requires X to use the proceeds from the loan to provide the training to the poor farmers. X would not provide such training to the poor farmers absent the loan. Y's primary purpose in making the loan is to educate poor farmers about advanced agricultural methods. X is a social welfare organization that is recognized as an organization described in section c 4.

X was formed to develop and encourage interest in painting, sculpture, and other art forms by, among other things, conducting weekly community art exhibits. X needs to purchase a large exhibition space to accommodate the demand for exhibition space within the community. Conventional sources of funds are unwilling or unable to provide funds to X on terms it considers economically feasible.

Y, a private foundation, makes a loan to X at an interest rate below the market rate for commercial loans of comparable risk to fund the purchase of the new space. Y's primary purpose in making the loan is to promote the arts. The loan significantly furthers the accomplishment of Y's exempt activities and would not have been made but for such Start Printed Page relationship between the loan and Y's exempt activities. X is a non-profit corporation that provides child care services in a low-income neighborhood, enabling many residents of the neighborhood to be gainfully employed.

X meets the requirements of section k and is recognized as an organization described in section c 3. X's current child care facility has reached capacity and has a long waiting list. X has determined that the demand for its services warrants the construction of a new child care facility in the same neighborhood.

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To embed, copy and paste the code into your website or blog:. Final program related investment PRI regulations 1 released and effective on April 25, illustrate the broad range of programs and investment types that can qualify as PRIs for private foundations. The original ten examples in the regulations focus on domestic situations involving deteriorated urban areas and the poor, with investments structured either as loans or purchases of common stock.

With some helpful changes, these new regulations are based in large part on proposed regulations issued in The primary purpose of a PRI is to accomplish one or more exempt purposes, including charitable, educational, scientific, and literary purposes. For example, the Treasury Decision announcing the new, final regulations notes that scientific research carried on for the purpose of discovering a cure for a disease need not involve a disease predominantly affecting developing countries to accomplish an exempt purpose.

This suggests that a PRI financing medical research involving a disease that predominantly affects developing countries, but with respect to which a lack of sufficient market incentives exist for research and development of new treatments, could also accomplish an exempt purpose. The IRS intends to post these principles on its website to serve as additional guidance to private foundations. In the new examples, the investment recipients are c 3 organizations, c 4 social welfare organizations, foreign and domestic business enterprises and foreign and domestic individuals.

That is, their status has no import as distinct from a typical LLC or for-profit corporation. The new examples confirm that private foundations can make PRIs with legal entities or individuals that are not themselves tax-exempt organizations or members of a charitable class.

Instead, such recipients serve as the instruments through which the private foundation furthers its exempt purposes. The new examples also clarify that PRIs involving below-market rate commercial microloans to poor individuals in developing countries, to enable them to start small businesses and become economically self-sufficient, provide relief to the poor and distressed Example The proposed regulations included a similar example involving loans to poor individuals in a developing country which had experienced a natural disaster, but the new regulations eliminate that extraneous reference - no natural disaster required.

The new regulations make clear that there are no limitations on the financial structures that can be used to make PRIs. In addition, the Treasury Decision suggests that any of these structures, which could involve the private foundation taking on certain risks, may be used to catalyze the entry of private investment capital, so long as the PRI is made for a qualifying purpose.

The IRS is considering issuing a revenue ruling to provide additional guidance regarding PRIs involving such investments. Although the production of income or appreciation of property cannot be a significant purpose of a PRI, the new examples make clear that the potential for a high rate of return on an investment does not preclude its qualification as a PRI.

For example, a long-shot equity investment in an orphan drug research company could incidentally lead to significant income or capital appreciation, from the drug itself or a profitable offshoot from the research and development conducted. This alone is not conclusive evidence that a significant purpose of the investment is the production of income or the appreciation of property.

Also, while the examples generally refer to the interest rate or rate of return on a PRI as being less than the expected market rate for an investment of comparable risk, the Treasury Decision notes that there is no requirement that the rate of return of a PRI must fall below an absolute percentage threshold e.

As a result, private foundations need not hesitate to make otherwise qualifying PRIs in a long-shot or a potentially highly successful business. By adding PRIs to its toolbox, a private foundation can further its exempt purposes by serving as a business incubator. The exit strategy for loans is clear. Private foundations hope to be repaid in full at maturity. For PRIs involving indefinite terms, such as equity investments, there does not appear to be any requirement to monetize the investment if, for example, the recipient becomes profitable.

The Gates Foundation has also made PRIs in biotech start-ups as part of its commitment to the development of new vaccines, therapeutics, and diagnostics for infectious diseases that disproportionately affect individuals living in developing countries. Some of the most promising research and new product development in biotech emerges from technology platforms in early-stage, venture capital-backed companies.

However, biotech firms understandably face pressure to focus on commercially attractive markets. In some instances, the foundation has supplemented the investments with grants to fund the research and development of particular high-priority products. Building on global advances in mobile communications and digital payment systems, the Gates Foundation seeks to provide affordable and reliable financial tools for digital cash transfers and savings.

Poor people in Bangladesh face significant barriers to accessing financial services. Because their transactions are mainly cash-based, they confront high risks and costs in storing, sending, and receiving money. Moreover, their limited access to financial services increases the costs for formal institutions, such as governments and companies, to transact with the poor, disincentivizing them to do so. These businesses bring tools, knowledge, influence, and money to the table.

When opportunities arise—when there is a chance to involve businesses that would not otherwise participate—we seek to create those incentives and encourage businesses to take action that does the most good for the most people. Video: The Stanford Center on Philanthropy and Civil Society hosts a discussion motivated by this article and others in the series. For most PRIs, the [Gates] foundation has deep expertise in the neglected disease, cause of poverty, or educational challenge that the company is working to overcome.

PRIs are not typical investments. The program teams work in tandem with a team of investment experts and lawyers to negotiate term sheets and agreements, address the legal complexities involved in PRIs, and support the investments post-close. The foundation also reserves the right to withdraw its investment if the agreed-upon charitable purposes are not being fulfilled.

Its hypothesis is that leveraging resources through collaboration with private investors and for-profit entrepreneurs can drive high impact. Would this happen without us? Grants are by far the main form of foundation funding of nonprofits. Aside from some PRIs in the form of low-interest loans and guaranties to help purchase a building, for example , nonprofits have not been the recipients of investments, and certainly not of equity investments, because they cannot have owners.

PRIs are conceptually and legally distinct from two other kinds of socially-minded investments that foundations can make: mission- related investments MRIs and socially responsible investments SRIs. As long as a foundation complies with the Treasury regulations, it is free to adopt its own procedures for making PRIs. Private foundations making PRIs face several major internal organizational questions centering on initiating the investments, conducting due diligence on their charitable and financial prospects, and monitoring and supporting the investments after they are made.

In some foundations, these matters lie mainly outside the grantmaking programs and are handled by a separate investment team. In others, a program team is primarily responsible for the entire investment process, in consultation with investment professionals or intermediaries. Lawyers play an important role in both cases, drafting agreements and ensuring compliance with US Treasury regulations, securities laws, and other legal standards.

PRIs at the Gates Foundation are handled collaboratively by two separate teams. A PRI team, with expertise in private equity and venture capital, structures the transaction and evaluates its financial risk. The PRI team brings to bear many of the same analytic skills and tools that a commercial investor would.

The process begins with a program officer who is responsible for grantmaking in the subject area of the PRI. The committee includes representatives from program teams across the foundation as well as the chief financial officer and the general counsel.

This group is responsible for reviewing each proposed deal to ensure that its potential for charitable impact justifies the investment risk as well as the significant burden that each investment places on foundation resources. On the basis of its assessment of charitable impact and investment risk, the committee makes a recommendation, which incorporates diverse technical and charitable perspectives and ensures that the scarce resources of the PRI and legal teams focus on the highest-impact opportunities.

If the committee recommends pursuing the deal, the investment is reviewed by the president of the applicable division Global Development, in the case of bKash. The multi-stage review process leading to a PRI at the Gates Foundation is aided by several critical tools and concepts, described in the sections that follow. The Gates Foundation has systematized several practices that tend to ensure or amplify the direct charitable impact of the PRI:. Unlike some impact investors who demand competitive rate-of-return along with social impact, the Gates Foundation never makes PRIs for the purpose of achieving financial returns.

The foundation invests even though it is likely to lose capital. This approach is consistent with the concept of additionality as well as conditions for PRIs under the tax code. The foundation is realistic about the types of often high-risk and low-return investments that it makes on behalf of its beneficiaries.

Overall, the foundation anticipates approximately a 10 percent loss on its PRI capital. In other words, for each dollar invested, 90 cents will ultimately be returned. The Gates Foundation takes specific steps to quantify the expected loss on each investment. Pricing the Risk Share gives the foundation flexibility to undertake a variety of types of investments that individually may have expected losses ranging from percent such as equity to support a very early-stage, high-risk technology in an uncertain market to as little as 1 percent for example, guaranties that result in tens of millions of dollars in savings for global health funders but have low likelihood of being called.

And sharing the financial risk ensures that a program team is appropriately engaged to pursue and assess the charitable impact. Unfortunately, this does not offer a clear standard. Rather, it leaves private foundations struggling to find a balance between investing on such unfavorable terms as to result in an impermissible private benefit to the company or other shareholders, and investing on terms that are so favorable that financial return appears to be a significant purpose of the investment.

Given this delicate balance, the Gates Foundation obtains a legal opinion from a tax attorney experienced in private foundation law in connection with each PRI. How does the Gates Foundation determine whether and how much to fund a potential partner, and whether to structure its support as a grant, a PRI, or some combination of these?

The foundation believed that such a platform would allow the bank to offer greater financial inclusion for the poor, but also understood that the venture would accumulate millions of dollars in operating losses before breaking even. BRAC Bank, which was required to own a majority of bKash for the latter to receive licensure, was unlikely to support a loss-making venture that would impair its legally prescribed capital reserve.

It was hoped that if bKash could replicate the scale of other mobile payment platforms, most notably M-Pesa in Kenya, the company would accelerate cash digitization and financial inclusion for the benefit of the poor in Bangladesh. By the end of July , bKash was serving more than 4. It had become the market leader in Bangladesh. The and grants to Enclude had been essential to get the venture started, but all of the parties involved recognized that bKash now needed actual investments. For the Gates Foundation to achieve these goals when investing in a startup in a developing country almost always requires a subsidy, which is inherent in the type of support provided through grants and PRIs.

Because bKash was not ready to attract commercial investors, Gates Foundation staff had no doubt that it required a subsidy to thrive and grow. The question was how much. The underlying economic principle is self-evident: the total subsidy should be the amount of capital needed for the company to reach a market-sustainable level of risk-return that would attract commercial capital, and must be justified by the public good created by the subsidy. More subsidy would waste resources that could be devoted to other charitable purposes, create a risk of distorting the market, and possibly even confer an impermissible private benefit.

Ultimately, application of the principle to particular cases is a subtle judgment that draws on the combined expertise of the program and PRI teams. Grant funding had been the appropriate vehicle when bKash was just starting. Its millions of dollars in operating losses would have deterred BRAC Bank from participating in the initiative.

These activities included improvements in data collection, pilot programs with nonprofit partners, and exploring interoperability with other banks with the ultimate aim of broadening access for those most in need.