In Trusts and Estates, unfortunately not available on line, David T. Leibell & Daniel L. Daniels, partners in the Stamford, Conn., office of Wiggin and Dana LLP, report that several states are on the verge of inaugurating a new type of low-profit entity, the Low Profit Limited Liability Company, or L3C, that could make it possible for many foundations, who may currently be leery of program related investments, to prudently practice social venture philanthropy. In essence the new corporate form is designed to make it possible for foundations to invest in a mission aligned for-profit venture in such a way that,
- The foundation would provide a goodly portion of the seed money for a start-up.
- The L3C would be organized so the foundation buys down the investment risk for others investors. That is, the foundation bears the greatest risk of loss and receives a lower than market return.
- The arrangement allows the remaining interests in the L3C to be marketed to purely economic investors.
Leibell et. al. conclude that at least one state, either VT or NC, will authorize the L3C this year. This could be a "game-changer" for mission aligned social venture investing. Imagine, for example, that a pharmaceutical company owns a patent on a drug that cures river blindness. However, those suffering from the disease in Africa cannot pay much for it. So, the medicine has never been brought to market. Now imagine that an L3C is formed to purchase the patent and make the drug. A foundation makes the initial investment, and takes a low return. (The investment may be considered a grant, under the program related investment rules to which the L3C is accommodated.) Other investors now see that they can invest and get a competitive return. So the remaining dollars flow into the L3C which goes on to sell affordable medicine that saves the vision of hundreds of thousands of people. (Some additional background on L3Cs from a foundation perspective is here.)