Too often, social entrepreneurs fear that the law will set a trap for them and prevent them from maintaining their fidelity to their social goals. In reality, law is better understood as an ally to social enterprise. In their new book, Social Enterprise Law: Trust, Public Benefit, and Capital Markets (Oxford 2017), Professors Dana Brakman Reiser and Steven A. Dean explore how legal tools can help social entrepreneurs to grow and scale their ventures and their impact.
Around the globe, many social entrepreneurs, impact investors, and the attorneys who advise them are already familiar with legislative initiatives that have developed new legal forms for social enterprises. They may also have encountered certification efforts, designed to identify and brand mission-committed social enterprises. Brakman Reiser and Dean explore the value of these interventions, but also explore a broader canvass of legal tools, highlighting how individual lawyers designing contracts and structuring transactions can serve social enterprises and their investors.
The authors focus primarily on the problem of access to capital. Raising capital is always a challenge, but the dual mission of a social enterprise makes it even harder. Social entrepreneurs have to trust their investors won’t push them away from their social missions, and investors seeking social impact need to trust that the entrepreneurs running their investee ventures are not making empty promises about social good in order to raise capital at a discount. They each need assurances the other won’t defect from their shared vision, or they will never get together. Brakman Reiser and Dean argue that legal tools – including but also going beyond new organizational forms and certification – can be very effective means by which to provide these assurances.
One chapter proposes that social entrepreneurs and sophisticated investors can design contingent convertible bonds to reassure each other of their social mission commitments. Investors can agree to long-terms, low-yields, or other terms to signal their commitment to an enterprise’s social mission. A feature that converts these debt instruments to equity if the entrepreneur sells her shares can both signal the entrepreneur’s commitment to social mission and dampen her incentives to abandon it.
Another chapter considers the options for tapping the retail investment market, including newly available crowdfunding channels. In it, we propose a revenue-neutral opt-in tax regime that would provide a limited tax benefit to adopting entities paired with a heightened tax burden on sales of their equity. Such a carrot-and-stick would be attractive to mission-committed social enterprises and investors, but anathema to those for whom profit is paramount. The choice to opt in can also help signal and sort a noisy crowd.
These are just two of the many innovative proposals Social Enterprise Law develops to demonstrate that legal tools can help social entrepreneurs and investors find and trust each other to unlock capital for social ventures. The book will be a valuable resource for social entrepreneurs, impact investors, their attorneys and other advisors, and anyone interested in discovering new paths to accessing capital for social enterprises. It is available in print and electronic forms here, and from online booksellers worldwide.
Written by Dana Brakman Reiser