Private Foundations and Crypto

Yesterday, Axios reported that Katie Haun has raised $1.5 billion for a couple crypto-based venture capital funds that she started.

The story is interesting partly because of the sheer amount of money and partly because that sheer amount of money was raised by a woman in a field unfortunately dominated by men. Neither of those has much to do with this blog though.

Her massive fundraising is relevant to our world though because Axios reports that institutional investors, including college endowments and private foundations, are using venture capital funds like Haun's to get exposure to cryptocurrencies.

I'm not going to weigh in on the wisdom of tax-exempt organizations investing in crypto. It's probably an, if not necessary, at least plausible, asset class for a diversified investor to hold, though financial journalist Felix Salmon is skeptical of the wisdom of tax-exempts locking up their assets in these VC funds:

Yay, charitable foundations are taking millions of charitable dollars and locking them up in crypto VC funds for the foreseeable future because obviously that’s better than just giving the money to the needy https://t.co/ILrZNVewcn pic.twitter.com/Cr1zoyqVgX

— Felix Salmon (@felixsalmon) March 23, 2022

That's absolutely a legitimate concern for charitable investments, not just with respect to crypto but with respect to any illiquid investment fund with a lock-up.

But for private foundations, crypto investments may raise an additional issue: is crypto a jeopardizing investment?

The answer isn't obvious to me. As the IRS points out, the determination is made on an asset-by-asset basis, looking at the foundation's overall portfolio. And a quick Westlaw search didn't show any regulatory or agency guidance on the question (and in a quick blog post I'm certainly not going to a thorough analysis). But at the very least, there's a risk that some crypto investments by some private foundations may be categorized as jeopardizing investments.

And what is the consequence of a jeopardizing investment? Well, both the foundation itself and its management potentially face an additional tax on the amount of the jeopardizing investment. It starts at 10% of the investment during the first year.

Which is to say, it's probably worth private foundations (and, for that matter, public charities) exercising caution and careful analysis before jumping on the crypto bandwagon.

Samuel D. Brunson

Photo by Behnam Norouzi on Unsplash