Should Nonprofits Issue Shares?

April 10, 2012; Source: CNN Money

Yale economist Robert Shiller is exceptionally well known for his housing analysis, including his co-development of the S&P Case-Shiller Home Price Index, but his new book addresses philanthropy and the nonprofit sector and proposes a concept of nonprofit stock. He described his proposal in an interview with CNN Money:

“One problem with philanthropy is that it’s unrewarding: You give away the money, and that’s it. So as an example of ways to humanize finance, I have a notion of a different form of philanthropy that would have shareholders. You’re still basically giving away the money, but the shares you bought through your donation would pay dividends. And at your discretion you can reinvest them in that company or in another nonprofit.”

In his blog for the Huffington Post, Shiller called his proposal for nonprofits that issue shares “participation nonprofits,” which he defines as a nonprofit “that raise[s] money by selling shares to the public…[and] pays dividends from its profits into a special account in the name of a shareholder.” He added, “The shareholders get a charitable tax deduction for making the investment, but can use the dividends in the account only for further charitable contributions, including purchasing shares in participation nonprofits or can spend them on themselves in some predefined emergency situations such as a medical crisis. With participation nonprofits, charitable giving will be more fun for the donors, for they could watch their money grow and feel their influence grow with it, if they invest wisely, fulfilling a natural human need for stimulation and appreciation.”

This brings to mind the NPQ Newswire’s coverage of the tug-of-war over the Cato Institute (see here and here) in which pro-Koch and anti-Koch forces are fighting over the nonprofit’s limited amount of shares. In the Koch case, the defense of the concept of a share-issuing nonprofit is that there was really no appreciation of value to the Cato shares over time; they were simply the equivalent of memberships. But Shiller’s idea is that there is an appreciation of value in the form of dividends to the shareholder’s account, so to speak, but the appreciation of value is purely in charitable purchasing power. What do NPQ Newswire readers think of this concept? Will it help nonprofits raise lots more money? Does it violate our general “public benefit” intentions as a sector? Do you think the idea might work legally?—Rick Cohen

  • Elaine Leichter

    I do not question that Professor Shiller is a leader in the realm of economics, but I have to wonder how much he understands about exempt organizations law from a tax perspective. The type of organization he describes would have difficulty qualifying for exemption under Section 501(c)(3) …. even with the requirement that all “dividends” remain irrevocably dedicated to charitable uses.

    For one thing, the issuing charity cannot abdicate responsibility for the disbursement of dividends.

    In order to qualify for exempt status, the issuing charity must function as a “donor advised fund,” does it not? If the shareholder can tell the issuing charity where to disburse the dividends …. that is a donor advised fund.

    The issuing charity has to be concerned about the administration of the fund; the appropriate use of the dividends disbursed to other charities; and the potential for inurement to the “shareholder” as a result of the dividend disbursement.

    The definition of a gift is property transferred for less than full and adequate consideration motivated by disinterested generosity. If you want something for your gift, it starts to look like it is not a gift.

    Instead of providing for the less fortunate in our society and/or funding education and social services with charitable dollars … how about if the economists come up with a way to reverse the direction that our economy is going … where virtually all of the wealth is held by a few families … and get normal working families a living wage, so that they can participate in the economy in a meaningful way, which will create an upward spiral. Supply-side economics has been a failure. Let’s fix that.

  • Robbie

    “…pays dividends from its profits into a special account in the name of a shareholder.” What profits?? If there were profits, the entity should incorporate as a C- or B-Corp and invite investors to share dividends if they are successful. I don’t get it.

  • Martin Dinstuhl

    “One problem with philanthropy is that it’s unrewarding: You give away the money, and that’s it.”

    I don’t think you quite understand the word ‘philanthropy’.

  • rick cohen

    Dear Martin: That was a quote from Professor Shiller, not an opinion held by me as the author of the newswire. It’s in quotation marks as a quote from Shiller’s interview with CNN Money. Thanks.

  • rick cohen

    Dear Robbie: I’m not sure I get it either, though Shiller’s full text for the HuffPo article is enthusiatic about B corporations and other hybrids. I suspect that this is a sentiment reflecting not only his broader interpretation of the nonprofit sector to include perhaps hybrids, but his enthusiasm for the current trend of “impact investing” or impact grantmaking. If other readers have a sense of what Professor Shiller means by profits in this sense, we’d love to hear.


  • rick cohen

    Dear Elaine: You’ve raised really solid questions that make a lot of sense to me. I hope more NPQ Newswire readers weigh in pro or con. Thanks for your contribution.

    Rick Cohen

  • Tom Scott

    I have to echo Robbie’s sentiment. What profit? Even the largest nonprofits include contributions in their revenue line. If those contributions now have to be counted as capital, then what profit they may have had is gone. I guess the approach could be: “We really need this money, but if we find out we don’t need all of it, we will give some of it back rather than use it for our future sustainability or expansion.”

  • Linda Duhon

    “participation nonprofits,” which he defines as a nonprofit “that raise\[s] money by selling shares to the public…\[and] pays dividends from its profits into a special account in the name of a shareholder.”?????

    Sounds like a Ponzi scheme to me.

  • Caroline Oliver

    Taking my cue from John Carver’s thinking, I believe that it is valuable to think of nonprofits as potentially having “moral owners”. (Nonprofit’s [U]legal[/U] owners, i.e. those who have a vote at the AGM, often being confined to board members alone or a wider group of signed up “members”.

    However I think it is important to distinguish moral owners as those who care about the long-term best interests of the non-profit as a vehicle for producing benefit to persons beyond themselves. Their “return on investment” is thus measured in terms of the benefit they want to see produced for others.

    According to this definition some long-term funders would qualify as moral “owners” but some might more accurately be seen as sponsors or contractors for service.

  • Caroline Oliver

    Please delete the smiley face from my contribution just submitted – it was inserrtd in error!

  • Nathan Slovin

    Hornets nest or slippery slope? Maybe a little of each. As soon as there is a benefit beyond feel good or I want to save the whales or cure cancer we inject questions of financial value which can easily cause an organization to take value boosting action that may not have anything to do with the organizations charter or mission.

    While share value would be a clear measure it may not be measuring what we need nonprofits to measure. Ultimately, that I the key whether we allow nonprofits to sell shares or not we must find the most meaningful + effective measurements.

    I vote for more accountability and better measurement not selling shares.

  • Amy Kerwin

    Knowing the nonprofit organization is doing good work in this tough world (and then receiving a hand-written message along with a tax-deduction letter is reward enough for me:))

  • sschwar10

    I think this idea is INGENIOUS. Foreshadowing challenges with legality and ethics aside one has to recognize the huge impact this could have, possibly making it irrelevant if it is a tax exempt charity.

    Philanthropic entrepreneurship is nothing to dismiss, our country would become much less dependent on government as a whole if non-profits were able to have more revenue and increase capacity.

    Theres a ted talk about this that provides a good perspective for anyone interested

  • Elijah

    In my personal opinion I believe this is a good idea on the surface, but may cause and pose legal issues. I am also convinced that it will help NPO’s raise more money because most people want to be recognized as a part of the NPO they donate to. It is also a brilliant concept to be able to use the money in a medical crisis. I think it is also a good idea if the share holders of the NPO could use the shares in a predefined emergency economical crisis. This is a non-profit company. I am not convinced that it will work legally.