Good (Legal) News for Social Entrepreneurs

Good ideas are hard to come by; so, too, are funds for start-ups and investor-friendly regulations, especially in a struggling economy.

Luckily for budding entrepreneurs, two recent legislative developments might make it easier for you to get your innovative project off the ground.

Last month, the House passed the Entrepreneur Access to Capital Act, enabling entrepreneurs to crowd source online up to $1 million per year (or $2 million with the provision of audited financial statements).  The bill, which is backed by the White House, would cap shareholder investments at $10,000 or 10% of annual income, whichever is less.

So how exactly would a new law, if enacted, shake things up for social entrepreneurs?

Scott Edward Walker offers several enlightening FAQs on the VentureBeat blog, pointing out some key opportunities and potential risks involved with crowd-funding.

While the finer details are yet to be resolved, one thing is certain: the Act would lift current federal securities laws that prohibit solicitation for investments through crowd-funding websites or social networks like Facebook and Twitter (note that in some cases, e.g. Kickstarter and IndieGoGo, donations are allowed).

This is exciting news for projects that might benefit from local investing, or “locavesting” as coined by Amy Cortese in her popular book of the same name. In a recent interview, Cortese described her frustration with regulations that favor wealthy investors and hinder investments in local companies. The new legislation would effectively replace current SEC laws (which, believe it or not, have been in place since the 1930s), and may be the key to unlocking new funding possibilities for social innovators across the U.S. It will offer an alternative to venture capital and other sophisticated investment models, and may appeal particularly to those interested in empowering communities and building local businesses from the ground up.

Let’s hope that the companion legislation, now awaiting mark-up on the Senate floor, is promptly passed.

In a second interesting development, multiple bills have been introduced (and in some states, enacted) to authorize new legal structures that span across the spectrum from 501c3s to for-profit organizations. In a Wall Street Journal guest column, Kyle Westaway describes these models, including:

  • The low-profit limited liability company (L3C), which operates primarily to achieve a charitable purpose and secondarily for profit,
  • The benefit corporation, which creates a general benefit for society as well as its shareholders, and must report on its social and environmental performance, and
  • The flexible-purpose corporation, which strives to achieve a specifically-designated purpose in addition to profit.

For those mission-driven organizations that are also interested in creating sustainable value (as, we know, all in the MIT IDEAS community are!), these innovative legal structures could offer some great options.

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