A New L3C Creates a Fund for Detroit Social Entrepreneurs

September 30, 2012; Source: Crain’s Detroit Business

The son of the late Max Fisher, Philip Fisher is the vice chairman of the Max M. & Marjorie S. Fisher Family Foundation. A successful investor in his own right, Fisher has played an active role in the Fisher Foundation, an increasingly important philanthropic actor trying to deal with Detroit’s economic crisis—and he has his own low-profit limited liability corporation (L3C). Michigan is one of the first of a quickly growing number of states to authorize L3Cs. Given Michigan’s economic freefall, the state was clearly interested in any innovative approach that might help lift it out of its economic doldrums. It figured the so-called hybrid entity of an L3C, a for-profit company with a social mission, might work.

When the L3C statute was enacted in 2009, the purpose was pretty clear: “L3Cs are designed to qualify as a recipient of [foundation] Program Related Investments or PRIs.” The idea of the L3C is that these for-profit companies would be able to attract PRIs (which count toward foundations’ mandatory payout requirements) because of their social mission in which profit is not a significant goal. It’s not clear, however, how many (or whether any) PRIs with L3Cs have actually been completed (at a recent NASCO conference described here in today’s Cohen Report, one speaker suggested that the L3C experience with PRIs was almost none). Critics have been pretty tough on the claims of L3C proponents about PRIs (see this piece from Taxation of Exempts).

Sitting close to the helm of his family’s foundation, Fisher’s L3C would seem to have had something of a head start, at least in terms of knowing what foundations do and don’t think about PRIs awarded to for-profit entities. Fisher’s organization, Mission Throttle L3C, “hopes to attract a new class of investors, from individuals to corporations and government, to support Michigan-based social-impact efforts and social entrepreneurs through investments in a new social-impact fund that he hopes will attract $10 million to $50 million,” as put by Crain’s Detroit Business.

Fisher acknowledges that his interest in the model of the L3C and his desire to support social entrepreneurs reflects his “life’s course to mate my capitalistic principles with my philanthropic soul.” An example of the kind of social entrepreneur that Mission Throttle L3C could support, according to Crain’s, is Veronika Scott, who founded the Element “S” Sleeping Bag Coat for homeless people.

Fisher explains, “It’s about trying to figure out, how do we create more money for philanthropy in Michigan?...How do we ... hook people who wouldn’t be donors, customarily, with the opportunity to invest?” The article reports that Fisher is in conversations with philanthropists around the state, including Tony Berkley, director of mission-driven investing at the Battle Creek-based W.K. Kellogg Foundation, and Fisher hopes to launch the social investment fund by the first quarter of 2013.

For the moment, leave aside the notion of program related investments and think about mission related investments (MRIs). From a foundation’s corpus, the latter are still subject to the prudent investor rules and don’t count toward foundation payout requirements. While L3Cs might be perplexed about their inability to make it through foundation portals for PRIs, there is nothing stopping them (or other socially minded corporations without the L3C branding) on MRIs. We would be interested in seeing whether Fisher’s three-year-old L3C attracts MRIs without having to deal with the restrictions involving PRIs. And as a public-private partnership, we would be interested in seeing how Fisher’s proposed investment fund interacts with the investment initiatives foundations have created through the New Economy Initiative, which itself has a strong component of supporting entrepreneurial activity in economically downtrodden Detroit. –Rick Cohen

About

Rick Cohen

Rick joined NPQ in 2006, after almost eight years as the executive director of the National Committee for Responsive Philanthropy (NCRP). Before that he played various roles as a community worker and advisor to others doing community work. He has also worked in government. Cohen pursues investigative and analytical articles, advocates for increased philanthropic giving and access for disenfranchised constituencies, and promotes increased philanthropic and nonprofit accountability.

  • Kelly Kleiman

    The decision of the ABA’s Taxation section to condemn L3Cs as a solution without a problem may make the entire question academic. As long as the IRS treats these as ordinary for-profit corporations, the utility of the L3C model is minimal at best, and it opens the way for for-profit companies to bend the tax laws in their favor and skim off the very limited amount of venture capital available to nonprofit organizations.

  • rick cohen

    Dear Kelly: Wonderful observations as always. Shouldn’t you write a full-fledged piece on your conclusion? It’s about time that we begin having this kind of dialogue about L3Cs. But if the ABA TAxation section reached that decision, then you have to explain to me how some of the nation’s top nonprofit lawyers have become cheerleaders for L3Cs as solving that nonexistent problem. Want to write an article for us?