07 October 2008

Non profit Initial Public Offering

The 11th Sept 08 edition of the Economist (subscription required) has a piece on a charitable organisation 'Do Something' raising public funds in a manner similar to a corporate public offering. The organisation Do Something is raising US $8 million by way of an IPO (the public raising has no expenses which will be paid from the proceeds). The stated purpose of the IPO is to provide significant Social Return on Income (SROI). Here is an excerpt from the paper which explains the philosophy behind the capital raising:

"The IPO prospectus, put together by Do Something’s board of chief executives and technology entrepreneurs, contains the usual market data, a description of the 15-year-old organisation’s activities, an overview of the competitive landscape and bold claims about its qualities (“Do Something is also one of the most efficient organisations in the United States”), all designed to convince investors that it can achieve its ambitious goals. The only thing that stops it from being a typical IPO prospectus is the absence of any pledge to make a profit. On the contrary, the opening boilerplate explains that “units offered in conjunction with this prospectus represent a perpetual interest in Do Something; this interest is strictly philanthropic, with no provision for cash returns at any time.”

The natural question is why do an IPO when the fundamental principles of profit motive and capital appreciation are taken away from the capital raising process. Here are some of the key reasons:
a) A charitable organisation typically spends substantial time and effort to raise funds which often get exhausted in a few months at most and then the cycle of raising funds restarts - distracting management from its core task at hand and instead making them spend valuable time trying to raise money for short term needs. The IPO allows raising of long term capital, allowing such focus.

b) The organisation will be more transparent with quarterly performance and financials being exposed to the 'shareholders'. There will also be closer and more transparent meeting of the shareholders with the management.

c) If the charter provides, the shareholders can remove management for non performance or other such reasons.

d) The IPO process improves M&A activity in charitable bodies - take the example of cancer research. If a person's spouse has died of the dreaded disease, it is likely that the person would create a small charitable foundation for cancer research. With a few thousand dollars, the money isn't going to go too far in terms of output of research - but if several dozen or hundreds of such bodies were to merge, the scale would allow serious funding/research to take place. An IPO would enable such bodies to merge using the currency of securities. I believe the process in the US is not very complex for achieving this.

While Do Something is not a pioneer in the field of an IPOs for a charitable organisation, it is perhaps for the first time that it has opened itself to change in management by shareholders and thus injected a new level of governance structure in the opaquely run charitable world.

CEO of Do Something, Nancy Lublin is a friend and fellow YGL.

1 comment:

ilexpert said...

"Opaquely run Charitable World" thats true! there is a distinct illiquidity in the market for Corporate Control in so far as the Charitable space is concerned; I agree about the holy Grail of "Perpetual Capital" that IPO allows; but its true Share holders are not going to incur monitoring costs unless they have something to gain; So, if the Prospectus reads, " No Provision for cash returns", then Am not too sure that the transparency and Corporate disclosures are to any end at all.Because the Disclosures are a function of expectancy of returns that investors want.