Week 6 Flashcards
Which of these can be considered a social enterprise?
I. a for-profit
II. a nonprofit
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are correct. The social venture philosophy says that the choice of form is secondary to getting results sustainably.
All of these are defining characteristics of a social enterprise as discussed by Peter Frumkin, EXCEPT
A) It is designed from inception to be sustainable.
B) It is designed to be able to scale up rapidly, if successful.
C) It is designed to nurture and sustain discernment at all levels of the organization.
D) It is designed to produce social change through innovative solutions.
C) It is designed to nurture and sustain discernment at all levels of the organization.
The correct answer is C. Social enterprises are discussed in the language of markets and business. The humanistic or religious language of discernment and virtue is secondary. The “commanding heights” on this viewpoint are held not by faith, government, or private virtues, but by markets, enterprises, and entrepreneurs.
The IRS definition of the term “program-related investment” includes which of the following statements?
I. The primary purpose is the production of income or appreciation.
II. Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose.
A) I only
B) II only
C) Neither I nor II
D) Both I and II
B) II only
The correct answer is B. The IRS definition states,
“1. The primary purpose is to accomplish one or more of the foundation’s exempt purposes,
“2. Production of income or appreciation of property is not a significant purpose, and
“3. Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose.”
Which of the statements below is true regarding program-related investments made by a foundation?
A) Program-related investments are made in programs conducted by the foundation.
B) Program-related investments are made by the foundation in the infrastructure needed by the foundation to accomplish its exempt purpose.
C) An investment advisor to a foundation should avoid program-related investments because their expected return is low and their risk is often high.
D) A program-related investment counts towards the required 5% foundation payout.
D) A program-related investment counts towards the required 5% foundation payout.
The correct answer is D. A foundation can use program-related investments in calculating the 5% payout. Program-related investments which may be “bad investments” (low return and high risk) from one perspective have to be considered also in the context of a grant that would have been a 100% loss.
A charity has no emergency reserves; its funding is cyclical, with most revenue received late in the year. The charity needs an emergency line of credit. A bank is willing to provide this at 9%. The charity approaches a foundation that has supported the charity’s work in the past. The foundation sets up a line of credit at 1%. What does this example represent?
I. a program-related investment
II. a breach of fiduciary responsibility by the foundation’s investment manager
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. This is a program-related investment. It is a kind of recoverable grant, counting towards the 5% payout that foundations are required to make. When recovered, the money coming back in will have to be granted back out again, not necessarily to the same grantee.
A foundation focuses on health in Malaysia. The foundation invests heavily in a rapidly growing company whose Malaysian factories are significant polluters. A recent study shows a correlation between the factories and cancer in the surrounding population. This example highlights the need for what?
A) Managing foundation assets with modern portfolio theory
B) Managing foundation assets with an eye to mission-related investments
C) Maintaining a barrier between the investment managers and the grant makers in a foundation
D) Need for a competent public relations counsel
B) Managing foundation assets with an eye to mission-related investments
The correct answer is B. This example is based on a scandal that erupted over investments made by the Bill and Melinda Gates Foundation. The story was a major driver in the mission-related investment field.
Typically, foundations do good in the world by making grants. Other than by making a grant, in which way(s) can a foundation do good with its corpus?
I. program-related investments
II. mission-related investments
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both statements are correct.
Which statement(s) below is (are) true of L3Cs?
I. They are mandated by federal law for those foundations engaging in program-related investments.
II. They are created under state law to meet the IRS definition of a program-related investment.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. L3Cs are created under state law to position a business as a program-related investment for foundations wishing to invest in PRIs. The IRS lays down the definition but does not require that the foundation invest only in organizations specifically formed for that purpose and blessed by state law. The L3C format reassures the foundation that the investee organization meets the requirements.
You are creating a corporation devoted to social good as well as to making a profit. Some of your potential investors are skeptical that your social intentions are more than just public relation stunts. To where might you turn, to have your company reviewed and certified as a socially good company?
A) Candid
B) Philanthropedia
C) Mightycause
D) B Lab
D) B Lab
The correct answer is D. B Lab certifies corporations as B corporations, meeting criteria for doing social good.
Candid - like consumer reports for charities
MightyCause - a venture funded social enterprise committed to transforming peoples live through meaningful giving.
Philanthropedia - no such thing
In establishing a socially positive organization, a social entrepreneur should be greatly concerned about all of these, EXCEPT
A) Creating an organization that is sustainable in doing good
B) Creating an organization that provides innovative solutions
C) Creating an organization that qualifies as a nonprofit
D) Creating an organization that is scalable
C) Creating an organization that qualifies as a nonprofit
The correct answer is C. The choice of form is considered secondary to creating results through innovative solutions.
I - Innovative
S - Sustainable
S - Scalable
“I want results from the grants I make from my foundation. I rely on GIIRS to discover which organizations are getting high impact.” To what is this funder referring?
A) Global Impact Investing Rating System
B) General Impact Investing Rating Scenarios
C) General Impact Investing Resource Systems
D) Global Impact Intelligence Resource System
A) Global Impact Investing Rating System
The correct answer is A. Global Impact Investment Rating System (GIIRS) is the emerging international standard for rating social impact organizations.
An organization is formed to bring donors and nonprofits together online. Donors can research nonprofits, learn from one another, and make donations. The charities can make their case and provide ongoing updates on programs and results. The organization is set up as a for-profit, making its money by taking a percentage of the donations. Seed money comes from venture capitalists. The organization is highly profitable and is growing rapidly.
Considering this information, which statement(s) below is (are) correct?
I. The organization would be a mission-aligned investment for a foundation wishing to promote giving.
II. The organization would be a program-related investment opportunity for a foundation wishing to promote giving.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
A) I only
The correct answer is A. I is correct. Yes, a foundation might find this a good investment considering both mission alignment and risk/return. However, it would not qualify as a program-related investment (PRI). The IRS definition of a PRI says, “Production of income or appreciation of property is not a significant purpose.”
As Lucy Bernholz uses the terms, which approach(es) below would be an example(s) of using private resources for public purposes?
I. giving $1 million to a 501(c)4 to provide attack ads in a presidential election
II. investing $1 million in a solar panel company which, over time, provides a 25% a year compound annual return to the investor
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are ways to use private resources to affect the world. Whether “dark money” in elections is good or bad, it is nonetheless an investment that certain people and companies make to promote their vision of a better world through electoral politics and policy change. Likewise, an investor could make a fortune in a for-profit company that addresses an urgent social need. This would not be philanthropy, as the term is traditionally defined, but it is a social investment. In Lucy’s terminology, philanthropy is a private use of funds for a public purpose. Where is it written, she might ask, that money has to be given to a nonprofit, in order for it to do good in the world?
With respect to Roca, what statement(s) below is (are) true?
I. It is funded, in part, through pay-for-performance contracts in which individual investors can profit, if Roca keeps youth from going to prison.
II. Roca is a nonprofit.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
C) Both I and II
The correct answer is C. Both are true. Yes, Roca is a nonprofit, and it does get about 31.2% of its revenue from pay-for-success contracts with investors. As Roca hits performance thresholds, the government saves money and provides some of that money back to investors. The better Roca does at keeping youth from prison, the more the government saves and the more investors (and Roca itself) receive.
Which of these is a good example of “community capital,” as that phrase is used in this course?
I. a public company situated in a local community
II. a farm funded via bonds sold to the customers who buy its produce
A) I only
B) II only
C) Both I and II
D) Neither I nor II
B) II only
The correct answer is B. Only II is correct. Community capital, as exemplified by the projects done by Cutting Edge Capital, can be described as small-scale, local investments offered by a local company, most often to local investors. You might think of this as grassroots investing by stakeholders in local, small organizations.
