Shakespeare’s Juliet may not have ascribed great significance to a name but for securities lawyers and market participants alike there is significance to nomenclature. Social impact bonds, or investments that are intended to provide funding to achieve a particular environmental or social impact, have not, to date, been structured as debt securities or “bonds”. Also, many so-called social impact bonds may not be structured in such a way as to link financial returns and the achievement of observable impact milestones or results. We advise NPX, LLC which has developed the proprietary Impact Security, a debt security that incorporates pay-for-performance elements to expressly condition payments on the attainment of specified metrics. Impact Securities differ from green bonds, which are “use of proceeds” bonds wherein the issuer of the bond commits to deploy the proceeds of the bond issuance to fund certain environmental projects. Instead, payments to holders of Impact Securities vary based on the issuer’s success in furthering its goals.
Securities law considerations -
From a securities law perspective, assuming the Impact Security is issued by a non-profit entity, the security will be exempt from the registration requirements of section 5 of the US Securities Act of 1933. Section 3(a)(4) of the Act provides an exemption from registration for securities issued by an entity organised and operated exclusively for charitable purposes and not for pecuniary profit. As with other exemptions from registration, the entity availing itself of, or claiming, the exemption is required to show that it is available. A single substantial forprofit purpose will render the exemption unavailable. The entity claiming the exemption must ensure that no part of the entity’s net earnings will inure to the benefit of a stockholder, member or individual.
Originally published in International Financial Law Review on September 12, 2016.
Please see full publication below for more information.
