In November of 2016, Bryan Cave organized a half-day symposium examining the opportunities and legal considerations related to responsible and impact investing strategies. I participated on a panel to discuss how private foundations may engage in impact investing through the use of a program related investment (PRI).
We continue to see increasing interest by our foundation clients regarding the use of PRIs to engage in impact and social investing. So why do PRIs continue to be a part of the conversation for private foundations that desire to engage in impact and social investing?
First, PRIs have been expressly included in the Internal Revenue Code and Treasury Regulations for more than 40 years, and thus are a very well-established and accepted tool.
Second, PRIs provide a variety of additional benefits to a private foundation beyond the social benefit derived from the investment itself. For example, PRIs are not subject to the jeopardizing investment rules. PRIs are treated as qualifying distributions and are excluded from the fair market value of the foundation’s assets for purposes of calculation of the annual minimum distribution obligation. Similarly, PRIs are generally not subject to prudent investor standards.
An investment qualifies as a PRI under Code Section 4944(c) if (1) the investment’s primary purpose is to accomplish one or more of the purposes described in Code Section 170(c)(2)(B) (including religious, charitable, educational, and literary purposes); (2) no significant purpose of the investment is the production of income or the appreciation of property; and (3) no purpose of the investment is to accomplish lobbying or political campaign purposes described in Code Section 170(c)(2)(D).
PRIs often take the form of a below market or zero interest loans to a for-profit business, charity or social investment incubator or accelerator. PRIs may also take the form of a guarantee of a loan or equity investment in a for-profit business. Treasury Regulation Section 53.4944-3(b) provide several helpful examples of PRIs. See the following link.
https://www.gpo.gov/fdsys/pkg/CFR-2014-title26-vol17/pdf/CFR-2014-title26-vol17-sec53-4944-3.pdf
[View source.]
