Nonprofit Law Prof Blog

Is the OpenAI Kerfuffle the Nonprofit Law Story of the Decade?

I’ve been stewing over the power struggle at OpenAI for a couple of weeks, not sure what to think about it. It is either the biggest nonprofit law story of the decade, or not. And, unfortunately, we may never know which it is.

For those not in the know, OpenAI is the company that release ChatGPT about a year ago, revolutionizing the public perception of how far advanced AI technology is, and deeply freaking out professors who give open-internet exams. I didn’t know before a couple of weeks ago that OpenAI is a nonprofit/for-profit joint venture, and therefore a subject of academic interest to me, even if it doesn’t end up creating the robot overlords I will one day serve.  OpenAI, Inc. was created as a 501(c)(3) organization in 2015 “to advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by the need to generate financial return.” (That’s quoted from OpenAI Inc.’s first Form 990). OpenAI, Inc. raised over $130 million in tax-deductible contributions for that mission. However, according to OpenAI’s website, “[i]t became increasingly clear that donations alone would not scale with the cost of computational power and talent required to push core research forward, jeopardizing our mission.” So, in 2019, OpenAI Inc. formed a joint venture with for-profit providers of equity capital (almost exclusively Microsoft), which is naturally called “OpenAI.” (They then began referring to the original OpenAI Inc. as “Nonprofit OpenAI,” not to be confused with a wholly owned subsidiary of Nonprofit OpenAI that serves as the “manager” of OpenAI called OpenAI GP LLC). A couple of weeks ago, OpenAI’s board fired its founder Sam Altman for undisclosed reasons. Altman was immediately hired by Microsoft, many employees and key figures in OpenAI threatened to leave (possibly to go to Microsoft) unless the board re-hired Altman, which it immediately did as part of an agreement under which most of the board would be replaced by new board members.

If this is the nonprofit law story of the decade, it’s because of the federal law of nonprofit joint ventures. First it is important to distinguish between inurement (the possibility of nonprofit insiders benefiting themselves) and private benefit (the basis of the IRS’s rules about nonprofit joint ventures). My fellow blogger posted some thoughts on the risk of inurement in the OpenAI story, an issue I have worried about in general as well. But the OpenAI story is probably not primarily an inurement story; it is more likely a story about “private benefit.” The law on private benefit deals not primarily with the risk of insiders providing themselves with financial benefits, but rather with the risk that a charity could be diverted from its core charitable mission for other reasons, including benefiting outsiders. The worry is that, even without insiders financially benefiting themselves, the charity might abandon its mission. The law of joint ventures is derived from this doctrine, and at the risk of wild simplification, that doctrine can be summed up in a single word – control. In a string of revenue rulings and court cases in the late 1990s and early 2000s, the defining characteristic of a joint venture was determined to be whether the nonprofit controlled the joint venture. If a nonprofit and a for-profit formed a joint venture to carry out the nonprofit’s charitable mission and also provide profits to other members of the venture, it is permissible so long as the nonprofit effectively controls the venture and impermissible if the for-profit partners effectively control it. There was frustratingly indeterminate litigation about what exactly constitutes effective control on the margin, but it is clear that the nonprofit has sufficient control (as a legal matter) if a majority of the board of the venture is constituted by directors who are “independent,” meaning they have no financial interest in the venture. The control question is even more clear when the day-to-day management of the venture is controlled by a company controlled by the nonprofit rather than a company controlled by the for-profit partners. The embedded assumption is that so long as the venture is controlled by disinterested board members with a fiduciary duty to the charitable mission of the nonprofit, they serve as an adequate check on the nonprofit being diverted from its charitable mission to maximize the financial gains of the partners.

The OpenAI website states proudly that, “[w]hile our partnership with Microsoft includes a multibillion dollar investment, OpenAI remains an entirely independent company governed by the OpenAI Nonprofit. Microsoft has no board seat and no control.” At least formally, OpenAI’s independent board members did not have a financial interest in OpenAI and so were unconflicted in their duty to pursue OpenAI’s charitable mission. If this is the nonprofit story of the decade, it would go like this: OpenAI was created as a nonprofit joint venture, with 130 million dollars of charitable contributions. But, when there was a conflict between the guardians of its charitable mission and Microsoft, Microsoft won. Microsoft's champion, Sam Altman, returned to continue leading the venture, and the nonprofit board members stepped down, leaving the field open to the real goal of maximizing profit. In other words, the joint venture doctrine’s reliance on formal control just doesn’t work. If we care about protecting the integrity of the nonprofit sector, we need to find another legal doctrine to do so.

The key question about the OpenAI kerfuffle then is whether that story is true. I know extremely little about what actually is happening, and the best analysis I’ve found is a podcast by Ezra Klein. The actual best coverage I’ve found is this, but because I have been a fan of Klein and his work for a long time, I care about the fact that Klein says he is not convinced by the depressing nonprofit story I just. For example, he very briefly discusses this issue (at minute 38:18) and takes seriously the idea that Altman’s return is not a concession by the nonprofit board, but instead a victory for the nonprofit in which, after the conflict, “maybe they have a stronger board that is better able to stand up to Altman.” (at 39:20). So, who knows. I assume someone is writing a book about this that will appear in a few minutes and then several minutes after that, we’ll get to watch a pretty exciting movie about it, hopefully starring Jonah Hill (who, by the way, I also think should play Sam Bankman Fried).

In addition to the question of what The Law should do about nonprofit joint ventures in the future, there is an equally intriguing question to me about what for-profit investors will do. We know that Microsoft is the primary for-profit investor in the OpenAI joint venture, and we could be tempted to think about why Microsoft agreed to make a “multibillion dollar investment” in a venture that is expressly devoted to charitable purposes rather than maximizing Microsoft’s profits. I’m guessing Microsoft rarely makes naïve or stupid multibillion dollar investments. Maybe they thought that when push came to shove, their investment gave them sufficient functional control that it would all work out, and maybe their takeaway from the kerfuffle is that they were right. If other investors conclude the same, then I think we may see a significant strain on the credibility of the nonprofit signal. (See my post yesterday if you don’t know what I mean). But what if investors take away the lesson that the kerfuffle was a loss for Microsoft, and they decide to avoid partnerships with nonprofits unless they too deeply value the charitable purpose more than their financial returns? That would be a win for the nonprofit sector.

Then, of course, the most interesting question is why OpenAI was formed as a charitable nonprofit in the first place. I’m hesitant to question Sam Altman’s charitable bona fides, but another founder of OpenAI was Elon Musk, who has very conveniently become an easily recognizable villain in the years since OpenAI’s founding. We don’t know who contributed the 130 million dollars of charitable funds that the OpenAI Nonprofit raised over the years, but one wonders what exactly these contributors were thinking. Why did Elon Musk, for example, think that a charity was a better “investment” in the future of AI technology than a for-profit company, given that he’s had some success with for-profit companies? The media coverage has a lot of speculation on that score, but I’m still unsure which of it is true and which is not. I’m looking to you, Jonah Hill, to get to the bottom of this.

Benjamin Leff

Adventures in Teaching AI in Nonprofits Class

Last month, I asked if anyone had any experience in affirmatively integrating AI into a drafting class, which is how I teach Nonprofits. I didn’t get a lot of responses, so I forged ahead blindly into unknown territory.   As a result, I had an amazing teaching moment so, I just had to share.

The supplement book I use for Nonprofits has sample Articles of incorporation, derived from the form provided in IRS Publication 557, Tax Exempt Status for Your Organization.  I asked my students to look at the provisions of the Model Nonprofit Corporation Act, West Virginia law, and the sample Articles regarding amendment Articles of Incorporation, including amending the purpose clause.  West Virginia’s Act is based in large part on the 1989 version of the Model Nonprofit Corporations Act but specifically requires article amendments to have a 2/3 director vote (See WV Code 31E-10-1003(f)). The sample Articles in the supplement did not contain any clause regarding amendments to Articles.  I asked the students to go use their favorite AI to generate a provision for amendment of Articles of Incorporation that they would add to the IRS’ form, and to report back.  I did the same and we compared notes.

I used Chat-GPT3 – a number of students used Chat-GPT4 and some used Claude.  Students quickly learned they needed to ask for a nonprofit, non-member corporation under the laws of West Virginia to narrow down the language.  My attempt at this produced the following (reprinted in full but emphasis by me:)

Section [X]: Amendment of Articles

1. These Articles of Incorporation may be amended or repealed, and new articles may be adopted, by the affirmative vote of a majority of the directors/trustees in office at any regular or special meeting of the board of directors/trustees.
2. In addition to the approval required under Section 1, any amendment to these Articles of Incorporation that would materially and adversely affect the rights or interests of the organization's stakeholders, donors, or other constituents shall also require a notice period and approval as outlined in the organization's bylaws or as required by applicable law.
3. Notice of any proposed amendment, repeal, or adoption of new articles shall be provided to the organization's directors/trustees as required by law and the organization's bylaws. Such notice shall include the text of the proposed amendment, repeal, or adoption and the date, time, and place of the meeting at which the proposed action will be considered.
4. Any amendment, repeal, or adoption of new articles shall be filed with the appropriate governmental authorities as required by law.
5. No amendment or repeal shall be made that would jeopardize the organization's tax-exempt status under Section 501(c)(3) of the Internal Revenue Code or its corresponding provision in any future federal tax law.
6. The adoption of these Articles of Incorporation, as amended from time to time, shall constitute the agreement of the organization's directors/trustees and other constituents to be bound by the terms and conditions set forth herein and in any duly adopted amendments.

In witness whereof, the undersigned, being the duly appointed Secretary of [Organization Name], hereby certifies that the foregoing Amendment Clause is a true and correct copy as adopted by the board of directors/trustees on [Date].

[Signature of Secretary] [Printed Name of Secretary] [Date]

Please note that this draft is provided for general informational purposes and should be reviewed by legal counsel familiar with West Virginia nonprofit laws before being included in your nonprofit's Articles of Incorporation.

As you can imagine, this prompted a whole  bunch of questions about substance and drafting alike.  I had to explain a Secretary’s Certificate and all of the apparatus at the end of the proposed provision. We talked about Frankenstein drafting and how you’d need to coordinate these new provisions with other parts of your Articles and Bylaws, such as notice provisions and quorum and voting procedures.  Of course, we also discussed that you shouldn’t let the IRS draft your state law documents to begin with.

But of note, Chat-GPT3 got West Virginia law wrong in allowing  a majority vote on the amendment.  If you didn’t know that – or you didn’t bother to check it – you’d have a state law compliance issue and some nice malpractice.

While the obvious error was an eye opener to students, what came next was even better.  We talked about the provision that considered allowing donors, stakeholders, and constituents to approve article amendments, and the later statement that constituents were bound by the Articles.  The students figured out pretty quickly what a nightmare such a procedure would be and how the language proposed by AI was terrible in any event.  I have to admit that I felt pretty gaslit by AI in that moment - where was this language coming from?  Why would AI suggest it?  After all, AI theoretically pulls from collected knowledge so was there some state that required such a thing (most certainly not West Virginia, by the way) and I didn’t know about it?

So the students said… let’s ask it.  And we did, in real time.  I had no idea what the response would be and was somewhat filled with a foreboding dread of my imposter syndrome about to be laid bare, TBH.  And here is the first part of its response to the question, “Why did you include the language in paragraph 6 about stakeholders?”

I apologize for any confusion caused by the inclusion of the term "stakeholders" in paragraph 6 of the previous drafts. In nonprofit corporations, especially those with non-membership structures, the term "stakeholders" might not be as commonly used as in for-profit businesses. The term "stakeholders" could refer to individuals, groups, or entities that have a vested interest in the organization's activities, impact, or outcomes. However, the use of this term might not be necessary or appropriate in all contexts.

After the laughter died down, we tried again, “Why do you need to show amendments to the articles to donors?” – again, the first part of the response:

I apologize for any misunderstanding. Generally, nonprofit organizations are not required to show their amendments to the articles of incorporation to donors. Donors typically contribute to nonprofits based on their mission, impact, transparency, and financial accountability. While transparency is essential, sharing amendments to articles of incorporation with donors is not a common practice.

It was a beautiful thing, in real time, to have AI apologize to the class for bad drafting - twice.  But I couldn’t have asked for a better teaching moment!

Triumphantly, eww

Nonprofits With LLMs

This morning I learned that Khan Academy is a tax-exempt organization.

I've known about Khan Academy for years not, of course. I assume everybody who has a child in grade school (or who is or recently was a child in grade school) is familiar with Khan Academy. It's an educational website. My kids have Googled it occasionally for help with their math homework. (Heck, it's shown up in my Google searches as I've tried to help them with their math homework--my senior year of high school, I decided that it would be a good idea to take music theory instead of calculus, which makes my junior year of high school the last time I took a math class.) Apparently it has tutorials for other subjects, too, but I don't think I've ever used it for anything that wasn't my kids' math.

Yesterday, CNN reported that Khan Academy is expanding the reach of Khanmigo, its large language model (LLM: not to be confused with a masters in law, or LL.M.) tutor.

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Teaching Nonprofits in the Era of ChatGPT

First of all - let me say how excited I am to be back blogging.  As some of you may know, I have been the Associate Dean for Academic Affairs for the last five years, and as a result, I had to step back from blogging as well as many other things.  Sadly, efforts to clone myself failed miserably.  Now that my time in academic purgatory administration has come to a merciful end, I'm glad that Lloyd Mayer and all the the folks at Nonprofit Law Prof Blog were willing to have me back as a regular poster.  

For those readers who are academics, you know that it is that time of the summer to turn to those Fall syllabi, if you haven't done so yet. As I prepare to teach Nonprofits for the first time in a bit, I'm thinking a great deal about how to teach it and other drafting-heavy classes in a world with ChatGPT and other generative AI. I regularly use Nonprofits and my Estate Planning class (likely coming this spring) as a platform to teach the appropriate use of forms and samples.  I think that we can and should teach ChatGPT as just another type of form or sample - a starting point and not an ending point.   To know how to evaluate a form or sample, including text created by generative AI, one must know what good drafting looks like.  As a result, I'm thinking about how to mix original drafting with purposefully generated AI language.  It feels like things like bylaws and compensation policies are great places to do this kind of work.

• If you are an academic, are you thinking of doing this?  Do you have thoughts on exercises or assignments?  Thoughts on academic integrity issues?
• If you are a nonprofit professional, how are you using generative AI in your practice?  What skill sets do you want to see from graduates coming out of law school?

There were some great discussions at SEALS this year (a law prof conference for those of you who aren't academics)  on this topic, so I'd love to see some continuing work in this area.  I do think it is really important for practitioners to weigh in on this, however - when it comes to AI, I think that many law profs immediately start with either "It's cheating" or "How will they learn to write?"  Those are concerns that we need to address but we can't use those concerns simply to avoid AI -  I think we put our head in the sand if we don't acknowledge generative AI ... not as the future, but as the present.

What say you all!???

Originally, Elaine Waterhouse Wilson (aka eww)

(no part of this post was created using generative AI!)

 

 

 

 

 

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:

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One Last Charitable DAO Post

As I've discovered in the last week, charitable DAOs are a hard problem to crack. A big part of the problem is that they seem, to this point, to be a purely theoretical construct, so we don't know what they would look like in practice. But their decentralized management combined with their uncertain entity form produces a whole lot of uncertainty.

And a whole lot of interest! I got an email from the inimitable Professor Ellen Aprill with a couple thoughts on the question. (She wanted me to make clear that they were off the top of her head, not deeply considered, but they're unsurprisingly interesting and insightful.)

Before I get to her thoughts, on the entity question: like Professor Reyes, I suspect that for-profit DAOs are generally partnerships for state law purposes. (She argues that the joint and several liability that comes with partnerships is bad for DAOs and that they should, instead, look to the business trust form, an interesting idea that is beyond the scope of this blog post.)

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Charitable DAOs Revisited

This morning, I got an email Professor Harvey Dale with some important questions and comments on yesterday's post about charitable DAOs.

Professor Dale asked whether I was certain that members of a DAO wouldn't be able to take a charitable deduction. Not, of course, for their contribution to the DAO. But if the DAO were to pass that money through to a charitable organization, could donors take a deduction?

And, while my thoughts aren't yet fully fleshed out, my initial thought is that they probably can, though in large part it depends on how a DAO is classified for tax purposes. If it's merely a non-entity agent acting on behalf of the donors, then they would presumably get a deduction when it gave the money to charity. Similarly, if the DAO is treated as a partnership, partners should get a pass-through of the deduction. If it's treated as an association taxable as a corporation, on the other hand, donors would not get a deduction when the DAO made a distribution.

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Charity on the Blockchain

Over the last couple weeks, decentralized autonomous organizations (or "DAOs") have made it to the news, primarily because of ConstitutionDAO, a DAO created to bid on and acquire a copy of the U.S. Constitution. (It lost to Ken Griffin, the head of Citadel.)

So what is a DAO? Professor Carla L. Reyes has published a fairly comprehensive explanation but, for purposes of this blog post, I'm going to drastically simplify. Essentially, a DAO is an informal(-ish, at least) agglomeration of people who contribute cryptocurrency to an endeavor. With the contributed capital, the DAO funds whatever endeavor it is going to pursue.

In exchange for the cryptocurrency individuals donate, they get a token that gives them certain financial and governance rights in that endeavor. The idea broadly seems to be to flatten governance--instead of some kind of board of directors, the DAO is governed by the direct vote of all of its token-holders. And because all votes and decisions are available publicly on the blockchain, the DAO is (the theory goes, at least) completely transparent. Strangers can come together and do things because the blockchain has eliminated the need for trust; transparency means nobody can get cheated.

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Searchable 990s!

I had a substantive post I was going to write today about a recent PLR. It was going to be fascinating, and I was going to raise a question about why the IRS drafted the PLR the way it did.

And then I opened Twitter. And saw this:

New: Search the full text of nearly 3 million nonprofit IRS filings, including investments and grants given to other nonprofits.https://t.co/LyCBYe6evq

— ProPublica (@propublica) June 6, 2019

And there went my productivity for the day.

I love GuideStar. I love the access it gives to tax-exempt organizations' 990s, and all the information I can get from that. The one thing that has always kind of annoyed me, though, was that the 990s weren't searchable. And that wasn't Guidestar's fault--it merely posted the 990s it received, which, I assume, the organizations didn't provide in an OCR manner.

But now, ProPublica has provided a searchable database of 990s, going back as far as 2011. (Full-text search is here; advanced search is here.) I don't know the best way to use the database, but I did do a search for "Loyola University Chicago" to see whose 990s we show up in. Turns out about 304 990s mention us. (I say about because the search isn't perfect: I couldn't find Loyola mentioned in the DePaul Schedule I that came up in the search.) A lot of the mentions are from private foundations, or from matching grants. There's even a mention in the 2010 Form 990 for the Charles Koch Foundation, though there the university is giving back about $1,200 in unused funds from a 2009 grant.

Samuel D. Brunson

 

Accumulating Digital Assets for Non-Profits

A recent article from Non-Profit Quarterly speaks to the ability of not-for-profits to accumulate valuable assets, that is, social media capital. Although not appearing on the balance sheet, a solid social media presence can help non-profits reach their target audience both more efficiently and effectively.

While many non-profit managers may assume that spending valuable resources on a social media presence may be frivolous, in the end it may be a more economical way to solicit donations and spread the organizational mission to others. On the flip side, having immediate access and accessibility to these organizations changes the competitive landscape of non-profits.

The article brings to light an outline of how to both understand social media capital, and leverage it to your organization’s benefit. Although there are currently no accounting methods to account for social media assets, with the growing importance of social media coupled with the massive value associated with these presences, it is not impossible to envision a time in the coming years where these assets appear on the balance sheet, fundamentally changing how non-profits operate.

 In a digital age it is of the utmost importance of all those involved in the management of a non-profit to understand how their organizations can build a sustainable advantage, lowering their operating costs while maximizing their potential reach.

David A. Brennen

Cyber-Attacks and Risk Allocation

A compelling article from the ABA’s Business Law Today on the risk of loss to client bank accounts from cyber-theft highlights the dangers faced by all bank account holders across the United States, including non-profits. In a technology driven economy, while efficiency is promoted through instantaneous transfers, a door has opened for a new type of cyber-crime.

This article explores some of the inconsistent and unpredictable case law that has developed over who should bear the risk of loss from a cyber-attack, the bank or the customer. Loose standards of “commercial reasonableness” lead to a wide range of possible interpretations. For example, the same banking practice was “reasonable” for one bank, but “unreasonable” for another.

This issue is particularly important for non-profits, who would likely be forced to close their doors if they were to bear the consequences of a large cyber-attack, leaving them without the necessary funds to continue operation.  

The article concludes with some practical advice on how an organization should assess their banking needs and what type of protection is best for their own needs.

David Brennen

Pigs, Get Ready to Fly - The Multistate Registration Filing Portal Steps Closer to Becoming Reality

If you've ever been involved in helping  a charity comply with the various state solicitation registration requirements, then somewhere between swearing and tearing your hair out I'm sure you thought, "There has to be a better way!"  Shake your fist at the sky in despair no more!   It is with unbounded joy that I share part of a note I received from Bob Carlson of the Missouri Attorney's General Office, who has been actively involved for some time with NAAG and NASCO's efforts to develop a simplified filing process.   And lo...

The Multistate Registration Filing Portal, Inc. has released our Request for Information (RFI) regarding a Single Internet Registration Portal. ...   The RFI has been posted at http://mrfpinc.org/rfi/.  We welcome all comments and look forward to robust response to the RFI.  We also invite you to share it with anyone you believe may be interested. 

The MRFP will host a conference call on March 15, 2016 from 3:00 p.m. – 4:30 p.m. EST to provide additional background information and answer questions from the public about the registration process. Dial-in: (800) 232-9745; PIN: 3232959. Charities, their registration services providers, and any other interested parties are welcome to participate. ...

The RFI will remain open until April 1, 2016....   Our one-page project summary is still available at  http://mrfpinc.org/project-overview/

Seriously awesome work,  Bob and everyone involved with this process.   I am sure I speak for lots of folks when I say that we can't wait to see this become a reality!

EWW

Shameless Self-Promotion: Vote for the Nonprofit Law Prof Blog as a 2015 Best Tax Blog!

WalletHub is calling on the public to vote for the Best Tax Blogs of 2015 from among the 50 finalists chosen by its editors, including the Nonprofit Tax Prof Blog.  If you find this blog informative or otherwise helpful, we urge you to go to the voting website and vote for this blog (as well for other tax blogs you enjoy).

Lloyd Mayer

On the March to Efficiency: Millennials & Charity: Water

        A concept that I have introduced through scholarly writing and blogged about here is the need for a more efficient charitable market. In August, I commented upon a Vanguard Charitable study that found millennials are more likely to see their charitable giving as a form of investment and thus promote a culture of giving that demands more transparency and accountability, two hallmarks of a more efficient charitable market. A recent NPR broadcast that examined the work of Scott Harrison’s nonprofit, Charity: Water, confirmed just that.

        In the segment, Harrison spoke about his dual purpose in forming Charity: Water. First, he wanted to provide clean water to the almost 800 million people globally who lack access to it by building wells. Second, he sought to make an example of how a nonprofit could do its work in a way that would resonate with the next generation of givers. He recounted his own experience of being hesitant to give to charities prior to starting Charity: Water, which stemmed from the absence of information on how a charity would use the funds. Today the nonprofit world is concerned with how approximately 80 millennials make their decisions about giving, and not surprisingly, it is different from the prior generation(s). As stated in my prior post, it is widely accepted that millennials want to view their “donation” as “investment,” and at least one commentator recommends that nonprofits refer to the latter. Another salient point is how technology intersects with millennial giving. Millennials value their time, and as a result, any form of technology that makes it easier for them to invest is preferable. Moreover, the Ice Bucket Challenge that swept through social networks over the summer shows that the desire of millennials to share the details of their lives extends to their giving. In response, Charity: Water is utilizing a birthday campaign where donors can ask their network to donate one dollar for each year celebrated, i.e., $25 dollars to celebrate a 25th birthday. Charity: Water is also placing sensors on its wells, so donors may interact with the impact of their investment in a novel manner. Charity: Water’s innovative approaches are proving successful. They have helped over 4 million more people in twenty-two countries gain access to clean water. Millennials and nonprofits like Charity: Water may just help move giving into the next century and towards a more efficient charitable market.

 

Khrista Johnson

Online Political Activity Training for Nonprofits

The Learn Foundation has several "short courses" regarding nonprofits and political activity available online for free.  Not quite sure when these courses were first posted but I found them while perusing through the Chronicle of Philanthropy.  The courses, taught by an avatar named Mya along with downloadable written materials prepared by "legal staff," include (1) Advocacy and Lobbying Rules For Private Foundations, (2) Electioneering Rules for Private Foundations and Public Charities, (3) Expenditure Responsibility Rules for Private Foundations and (4) Anti-bribery/Anti-corruption Rules for Private Foundations.  I have not "taken" the courses yet but they seem designed for regular folk who might find themselves serving as board members.  Here is some history behing the courses:

In 2010, legal staff at the David and Lucile Packard Foundation, Bill & Melinda Gates Foundation, The William and Flora Hewlett Foundation and Gordon and Betty Moore Foundation (collectively the "Foundations") joined together to develop a comprehensive training program on legal issues in grantmaking. The goal of this collaboration is to create online, web-based trainings to supplement existing in-person training programs. The Foundations identified a shared need for this type of instructional resource, and a common desire to collaboratively develop a training system that speaks to a variety of learning styles and organizational training needs.

As a result, the Foundations developed Learn Foundation Law, a free first-of-its-kind resource for private foundations (and others who are interested), to host e-trainings and tools related to the basic legal rules for private foundations. Most e-learnings developed by the Foundations take less than one hour to complete and feature a program officer named Maya who leads participants through each course. Participants can return to any training at any time for a refresher and click on individual modules to refer back to specific topics. In addition, other e-learnings developed by any one of the Foundations may also be hosted on this site.

The Foundations hope you find value in this site, as it is intended to be an ongoing project to benefit the field and support the outcomes we seek in the charitable communities served.

dkj

Crowdfunding for Nonprofits: Solicitation or Matchmaking?

“Crowdfunding” appears to be all the rage.  Investopedia defines crowdfunding on the most basic level as the “use of small amounts of capital from a large number of individuals to finance a new business venture.”    In the earliest days, crowdfunding was basically a plea for money – see the artistic ventures funded primarily through Kickstarter.    The problem with that model, of course, is that one could not get equity in return for your contribution – after all, that starts to look an awful lot like a securities offering, and the SEC has issues with that.    The Jumpstart Our Business Startups (or, pithily, JOBS) Act of 2012 was designed in part to loosen the securities regulations on small business, so that there will be greater flexibility in the ability to offer equity in return for contributions through crowdfunding (or at least there will be when the SEC gets around to issuing regulations on the matter.)  

So what about nonprofits?  A recent article in TechCrunch, cited by the Chronicle of Philanthropy, notes the website Crowdrise recently received $24.0 million in financing.

Crowdrise.com (note: it’s a for-profit site) allows you to “create a fundraiser” for your event.  It appears that it isn’t limited to charities, although the site links to Guidestar.org in order to filter the bona fide Section 501(c)(3)s from the merely well-intentioned.   There seems to be a lot of fundraising teams for fun runs and the like, as well as fundraisers for sick individuals and medical expenses.  Some of these might qualify for a Section 170 deduction if given directly to the organization; other, such as the fundraisers for medical expenses, wouldn’t qualify for a deduction, no matter how well intentioned.    Crowdrise does state:

Your donation to a US-Based 501(c)3 charitable organization through CrowdRise is 100% tax deductible to the extent allowed by law. We will email you a receipt that meets all IRS requirements for a record of your donation.  If you are asked to provide a paper receipt for IRS purposes, please print out a copy of your email receipt. If you lose your receipt, email [email protected] and we'll send you a duplicate. Be sure to include your first and last name and the email address you used to make the donation. Donations to indviduals [sic] are not tax-deductible.

Crowdrise receives a transaction fee for each contribution made, which varies depending on the manner in which the transaction is consummated.

From a regulatory stand point, should we worry about this?  In the for-profit world, we have the SEC and its state law counterparts.  The IRS won’t (and shouldn’t) get involved, it seems to me, unless we are worried about charitable deduction issues.   That being said, is this high tech direct mail, and should it be regulated as such?  Take, for example, the Illinois Solicitation for Charity Act, which defines a professional fund raiser as one who receives “compensation or other consideration… on behalf of a charitable organization residing within this State for the purposes of soliciting, receiving or collecting contributions…”

Or is Crowdrise just an intermediary – it makes no legal representations that what is does is charitable or tax-deductible, necessarily.  I’d be curious to know how state regulators are approaching sites like Crowdrise from a solicitation regulation stand point, and how the Charleston principles would apply to such a website?

EWW

 

Accelerating Nonprofit Start-Ups

From Monday's The Wall Street Journal comes this story on the acceptance of a nonprofit start-up into the accelerator program of Y Combinator out of California.

Wait, this is a nonprofit blog!  Accelerator programs??

Accelerator and incubator programs are all the rage in the entreprenurial business world.   In general, they are places where an entreprenur with a good idea - but not much more - can find support and advice in growing a new business.   In the case of incubators, that typically means a hub for shared space, networking, and professional resources.  An accelerator program, essentially, is an incubator on steroids.  An accelerator often provides a structured program that is designed to help in a concrete way the limited number of businesses that are accepted into the program.  The goal is for those participants to be market-ready on an expedited basis (think three to six months).  The program often concludes with an event that brings together the participant startups and local equity investors ("Demo Day" in the article).  In return for this assistance, the accelerator typically takes a small equity stake in the business.  The growth of the business obviously rewards the startup's founders and the outside investors that come to the table, but also it also funds the operations and future investments of the accelerator itself through its equity stake.  Y Combinator is one of the most innovative accelerator programs out there, the former home of success stories Scribd, Reddit, and DropBox.

Wait, this a nonprofit blog!  What is this equity investing of which you speak??

That's what makes the notion of Y Combinator accepting a nonprofit so interesting!  As we know from Prof. Hansmann and others, one of the hallmarks of a nonprofit is the "nondistribution contstraint."  Under both state law and federal tax law, a nonprofit can't have equity investors.  The net earnings of the organization don't get distributed as income; rather, they are retained by the nonprofit to be devoted to its mission.   At the end of the day, neither the local investors nor the accelerator program itself can take a cut of the accelerated nonprofit's earnings - by definition!

I curious about how the admission of nonprofits to an accelerator impacts the accelerator's business model.  Undoubtedly, even with only for-profits involved, the accelerator assumes that for every Reddit, there are a handful of organizations that don't provide any meaningful return on the accelerator's investment.    As the accelerator can't take an equity interest in a nonprofit participant, does it just assume that the nonprofit is one of the losers (with an internal rate of return of, well, zero) and hope the others will balance out accordingly?  (That is what I gather from the article, by the way.)  Or could it mitigate this risk by essentially charging an alternative fee schedule - for example, providing mentoring and facilities at cost, which means nothing out-of-pocket for the accelerator other than the opportunity cost of admitting an additional for-profit startup.

I'm also curious about this as yet another manifestation of the social entreprenuership movement.  In the article, Paul Graham, the founder of Y Combinator, says:

I was talking to a friend who wanted to do a nonprofit project and I realized that i was giving exactly the same advice I'd be giving to a startup.

To some degree, that has to be undoubtly true and right.  Every new venture, for-profit or not, has similar concerns: where do I get my money?  what space am I going to use (if any)?  how many employees will I have.   And yet, there are fundamental differences in goals and methods of the organization - as much as nonprofits can (and to some degree should) adopt business ideas for the purpose of serving the organization's mission more efficiently, a nonprofit is, at its core, a very different animal with a very different mission.  Can a nonprofit successfully co-exist in a private equity environment driven by return?

We shall see - certainly, something to follow!

EWW

 

 

 

Nonprofit Converts to "B Corporation" Status to Take Investment Funds

Forbes reports that nonprofit CouchSurfing.org has become a "B" or "Benefit" Corporation in order to receive $7.6 million in funding from Benchmark Capital and the Omidyar Network.  The now former nonprofit connects global travelers with locals throughout the world and has a user base of three million people in 81,000 cities.  The B Corporation is an invention of the nonprofit B Lab, which certifies for-profit corporations as B corporations if they meet social, environmental performance, and legal accountability standards and "build business constituency for good business" according to the Certified B Corporation website.  B Lab is also working to enact B Corporation legislation in at least three states (California, Michigan, and New York). 

Hat Tip: Tactical Philanthropy

LHM

Seattle Foundation Connects Nonprofits and Donors with Information

The Seattle Times reports (a related piece is in The New York Times) on The Seattle Foundation's new program, launched on Wednesday, that provides financial data and other information on approximately 700 local nonprofits groups to potential donors.  Previously, the information was only available to clients who maintained accounts, or donor-advised funds, with the Foundation.  The Foundation seeks to more fully engage both present and potential donors with information that will aid them in making their charitable giving decisions.  As discussed in the New York Times article, such programs can offer more alternatives to donors who would otherwise default to a larger, national charity, instead of a lesser known local charity.  Although other databases exist that provide information on charities in an effort to connect them with donors, what makes the Seattle Foundation's program unique is that it offers "snapshot evaluations" based on the Foundation's own research.  As the Seattle Times article concludes, the Foundation's efforts reflect "the importance of connecting donors and recipients, and allowing philanthropy to be more personalized, transparent and direct."

NAM

Multilateral Development Banks (MDBs) Collaborate to Fight Corruption

Last week, the leading Multilateral Development Banks (MDBs) signed an Agreement for Mutual Enforcement of Debarment Decisions designed to fight fraud and corruption.  The MDBs signing the new agreement include the African Development Bank Group, the Asian Development Bank, the European Bank for Reconstruction and Development, the Inter-American Development Bank Group and the World Bank Group. 

The agreement has a direct impact on cooperation between the sanctioning mechanisms of MDBs.  Typically, MDBs sanction entities via reprimand, conditions on future contracting, or debarment.  Debarment is a declaration that an entity is no longer eligible to bid on projects funded by financing flowing from an MDB for a period of time.  The new agreement only applies to instances of debarment for a period of more than one year and only where they are made public by the sanctioning MDB.

Under the new agreement, when any one of the signatories publically debars an entity for more than one year, all  the other signatories will do the same.  For instance, if a contractor fraudulently diverts money from a World Bank project resulting in debarment, all of the other signatories will blacklist that contractor from bidding on future projects funded by them for a period of time.  In addition to abiding by the agreement, all of the signatories will continue to manage their own independent strategies to prevent fraud and corruption.

This agreement is a validation of the MDBs’ commitment to a 2006 agreement as part of the International Financial Institutions Anti-Corruption Task Force.  The parties to the 2006 agreement promised to harmonize their definitions of practices that are subject to sanctions and to share information to combat fraud and corruption.

The World Bank reported this cross-debarment agreement in a Press Release and a News Article.

SS