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Is the United States Ready for Social Stock Exchanges?

Social stock exchanges are new platforms designed to connect “business[es] that deliver social and environmental value with investors seeking both a social and financial return.”01David Cameron, U.K. Prime Minister, Opening Speech at the G8 Social Impact Investment Forum on Social Investment as a Force for Social Change (Jun. 6, 2013), available at https://www.gov.uk/government/speeches/prime-ministers-speech-at-the-social-impact-investment-conference. Like conventional stock exchanges, social stock exchanges are self-regulating organizations04See generally, John Carson, Self-Regulation in Securities Markets, The World Bank, Policy Research Working Paper No. 5542 (2011), available at http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2011/01/24/000158349_20110124091038/Rendered/PDF/WPS5542.pdf. that have significant rule making power and discretion to establish, monitor and enforce rules and regulations applicable to the securities markets and its participants.

Currently, there are three prominent platforms that have made the first step towards the structure of social stock exchanges: the Social Stock Exchange in the United Kingdom, the Impact Exchange in Mauritius and the Social Venture Connection in Canada. The first two are currently information portals that provide details about the social impact of business that are listed on conventional stock exchanges,02The Impact Exchange also makes it possible for social parties to execute private place transactions through the Impact Partner Platform operated by the Asia IIX. Impact Exchange, About Us, available at http://impactexchange.asiaiix.com/about/. while the third is a private placement platform that connects investors with social businesses and enables transactions in the primary market only.03See generally, Sarah Dadush, Regulating Social Finance: Can Social Stock Exchanges Meet the Challenge?, 37 U. Pa. J. Int’l L. 139 (p. 192).

Specifically in the United States, there is the Mission Markets, a B Corporation specialized in providing information for and connecting accredited sustainability ventures and social enterprises to impact investors in a variety of transactions, such as equity purchase, structured debt and notes, and private placements.05See generally, Mission Markets, available at http://www.missionmarkets.com. It also provides review for due diligence and offering documents and closes the transactions through its broker dealer partner.06Ashoka, Stock Exchanges for Social Enterprises? Here’s Where You Can Find Them, FORBES, (Mar. 27, 2014), available at http://www.forbes.com/sites/ashoka/2014/03/27/stock-exchanges-for-social-enterprises-heres-where-you-can-find-them/#7b5e3f625d5c. The Mission Markets operates as a research and data platform without aiming to transform to a social stock exchange in the future and it is different from the other platforms because “it seeks primarily to support companies in incorporating social responsibility into their business models, rather than remedy entrenched social problems.”07Id.

Additionally, on June 12, 2015, the California Stock Exchange TM announced its intention to become the first social good impact stock exchange in the United States, but their parameters for operation are still unclear.08The California Stock Exchange TM, The California Stock Exchange TM Announces Progress and Long Term Plan, http://www.calstockexchange.com/the-california-stock-exchange-tm-announces-progress-and-long-term-plan-2/; see also The California Stock Exchange TM, About Us, http://www.calstockexchange.com/about-us/.

Social stock exchanges are distinct from conventional stock exchanges because in addition to prioritizing the interests of investors, they prioritize the interests of beneficiaries of investments (individuals or communities). The purpose of a social stock exchange is important for many reasons, but mainly to introduce socially responsible businesses to investors looking for a combination of financial return and positive social impact, and to provide a regulatory framework for such a market and, consequently, to protect its participants and beneficiaries.

Before entering into the discussion of specifics of social stock exchanges in the United States, it is important to define an impact investment, a social business, and an impact investor and the beneficiaries of these transactions.

Impact investments are “investments made into companies, organizations, and funds that intend to generate social and environmental impact alongside a financial return.”09The Global Impact Investing Network, Impact Investing, https://thegiin.org/impact-investing/. The impact investments are also referred to as social finance or the pursuit of double or triple bottom line returns on investments (financial, social and environmental).10See generally, Tim Hindle, Triple Bottom Line, The Economist (Nov. 17, 2009), http://www.economist.com/node/14301663. Businesses that aim to achieve double or triple bottom line of returns and, therefore, receive impact investments are referred to as social enterprises11“A social enterprise is an organization or initiative that marries the social mission of a non-profit or government program with the market-driven approach of a business.” Social Enterprise Alliance, Social Enterprise, available at https://socialenterprise.us/about/social-enterprise/. or social businesses.12See, The Grameen Creative Lab, The Social Business Concept, available at http://www.grameencreativelab.com/a-concept-to-eradicate-poverty/the-concept.html. Hence, the core business and main purpose of such entities is to create a positive social or environmental impact and not simply giving back to society.

Similarly, impact investors invest their capital in social businesses. More specifically, for the purpose of this article, they are investors that acquire stocks of social businesses. While the common goal is to generate social impact alongside financial returns, impact investors may have different expectations of social and financial returns. It is not always easy to discern the motives of impact investors, as some investors may prioritize social impact over financial gains while others the opposite, or they may have other reasons such as values, strategic institutional priorities, rules and regulations, or risk and return objectives.13Insight at Pacific Community Ventures Et Al., Impact Investing 2.0: The Way Forward (2013), available at http://www.pacificcommunityventures.org/ impinv2/wp-content/uploads/2013/11/2013FullReport_sngpg.v8.pdf. The motives of impact investors matter to social stock exchanges because this will further affect the way social businesses conduct their businesses and determine the potential risk of harm to beneficiaries.

Finally, beneficiaries are “those whose lives should be improved by social business and impact investments”14Sarah Dadush, Supra note 3 at 164. that can be from both rich and poor countries and are in a position of vulnerability. They can purchase goods or services from social businesses (e.g., water filtration devices, financial services, affordable housing and healthcare, joint cell phone ownership program, access to credit or education, among other things, to underserved populations), work for a social business, or receive social goods and services for free through initiatives that use the capital markets to finance it (e.g., issuance of bonds).

The social-financial characteristic of impact investments make them unique and the parties involved in the transactions cannot be compared to parties in a conventional investment in capital markets because of the double or triple bottom lines of return; nor can they be compared to parties in philanthropy or public assistance because of the expectation of financial returns by the investors.15See generally id. at 170.

Therefore, social stock exchanges are entitled to create a new set of regulations in order to distinguish social businesses and impact investors, establish procedures to standardize social finance and shape the relationship between social investors and businesses and beneficiaries, and so ensure the commercialization of social solutions will be safe and sustainable.

In distinguishing impact investments, the social stock exchanges must create additional requirements for listing that are specifically related to social and/or environmental impacts, such as delivery of social impact reports (i.e., Impact Reporting and Investment Standards16IRIS, What is IRIS?, https://iris.thegiin.org. ), the establishment of rules related to minimum investment duration, preference to patient capital,17See What Is Patient Capital?, Acumen Fund, available at http://acumen.org/ideas/patient-capital/ (explaining that patient capital is “a form of investment that has a high tolerance for risk, has long time horizons, is flexible to meet the needs of entrepreneurs, and is unwilling to sacrifice the needs of end customers for the sake of shareholders”). clear de-listing conditions, accessible grievance mechanisms, strong enforcement provisions, specific social ratings (i.e., Global Impact Investing Rating System18See generally, Beth Richardson, Sparking Impact Investing Through GIIRS, Stan. Soc. InnovationRev. (Oct. 24, 2012), available at http://ssir.org/articles/entry/sparking_impact_investing_through_giirs (explaining that company ratings include (1) an overall rating; (2) an impact area rating in the fields of “Governance,” “Workers,” “Community,” and “Environment”; (3) detailed judgments on the company’s “Social or Environmental Business Model”; (4) key industry specific performance indicators; and (5) benchmarking based on the company’s geography, size and mission). ), personal liabilities to board of directors and/or officers, election of a social director, and mandatory use of devices to avoid change in control, among others.

These requirements are of the utmost importance in order to avoid mission drift,19Mission drift can take various forms: “In pursuit of more profit, a business may be inclined to target relatively better-off customers, raise prices to take advantage of the lack of competition often encountered in underserved markets, or take cash out of the business rather than reinvest in innovation to enable even broader customer reach.” Nick O’Donahue, et al., J.P. MORGAN & ROCKEFELLER FOUND., Impact Investments: an Emerging Asset Class, 67 (2010), available at https://thegiin.org/assets/documents/Impact%20Investments%20an%20Emerging%20Asset%20Class2.pdf. whereby an entity strays from its social mission and prioritizes “profits to the detriment of the social good”20Julie Battilana et al., In Search of the Hybrid Ideal, Stan. Soc. Innovation Rev. 52, §5 (2012), available at http://ssir.org/articles/entry/in_search_of_the_hybrid_ideal?utm_content=bufferbf4c7&utm_medium=social&utm source=twitter.com&utm_campaign=buffer. and in the end may harm the beneficiaries. In a broader understanding, social stock exchanges are more than trading platforms; they must ensure the protection of the beneficiaries and take measures to avert an increasing the vulnerability or exploitation of the beneficiaries by social businesses.

It is the responsibility of social stock exchanges to maintain a healthy and trustworthy securities market for impact investments. In order to be successful in this endeavor, social stock exchanges need to determine metrics and same standards for social reporting, so investors can make the most informed decision in relation to their investments. This will prevent investments based on misrepresented social and impact performance (which is subjective and difficult to measure), investment decisions based on incomplete information, and “cherry picking” by issuers of easiest requirements to comply with in order to have a social business listed.21Sarah Dadush, Supra note 3 at 223.

Furthermore, by providing a social investment environment to introduce social businesses and investors, the social stock exchanges structure the relationships between them and indirectly with the beneficiaries. From a regulatory perspective, a consequence of this structure is to make it possible for a social stock exchange to “create important lines of accountability between the key social finance stakeholders.”22Id. at 186.

Based on the above, it is clear that social stock exchanges bear a great responsibility; however, the market needs to be ready for this big step that is social finance. The alignment of these factors is the key of success for the transformation of social finance in investment opportunities for the public in general.

Since 2008, the United States started to move in the direction of social businesses by having some states recognize new structures of corporations such as the low-profit, limited liability company (L3C), the Flexible Purpose Corporation (later renamed to Social Purpose Corporation) in California, and the Beneficial Corporation.23See Susan Cormac, New Corporate Forms: Flexible Purpose Corporations, Benefit Corporations, and L3Cs, available at https://www.law.berkeley.edu/files/bclbe/Berkeley_Handout_1182011_-_1.pdf (briefly explaining the differences between the tree types of corporate forms).

Although there are a few corporate structures with social goals in the United States, the benefit corporation is the form that better addresses the pursuit of double or triple bottom line returns on investments, because of its higher standards of accountability, corporate purpose, and transparency.24See generally, Yusi Wang Turell, B-Corps Provide Purpose and Profit, BUS. NH MAG. (Apr. 7, 2014), available at http://millyardcommunications.com/index.php?src=news&refno=4404&category=News. Therefore, as per the current legislation, the corporate form of benefit corporations gives the choice to directors and officers to consider non-financial interests (environmental and social) over the financial interests of the shareholders and, consequentially, legal protection regarding their fiduciary duties to the company.25Benefit Corporation, Benefit Corporations are Necessary, available at http://benefitcorp.net/attorneys/benefit-corporations-are-necessary.

The first state to adopt a Benefit Corporation Statute was Maryland, in 2010, and thirty-one states26Benefit Corporations, State by State Status of Legislation, available at http://benefitcorp.net/policymakers/state-by-state-status. have followed this path, including Delaware. Considering that benefit corporations are a relatively new form of corporation, regulators have a lot to learn in terms of enforcement and compliance with specific regulations of benefit corporations if compared to similar initiatives in other countries, such as the Community Interest Corporations (corporate form equivalent to benefit corporations) set forth by the regulators in the United Kingdom in 2004.27See generally, Matthew F. Doeringer, Fostering Social Enterprise: A Historical and International Analysis, 20 Duke J. Comp. & Internat’l L. 291, 312-15 (2010) (describing that CIC rules are more detailed & advanced – including in relation to tax treatments – and better enforced as compared to benefit corporation rules).

In addition, any company in the world can choose to become a B Corporation, which means a certification by the U.S. non-profit, B Lab, that is granted to corporations with the highest standards of verified social and environmental performance, public transparency, and legal accountability.28B Corps., About B Lab, https://www.bcorporation.net/what-are-b-corps/about-b-lab. In order to become a B Corporation, companies must comply with pre-determined performance requirements, which are re-assessed every two years.29B Corps, Performance Requirements, https://www.bcorporation.net/become-a-b-corp/how-to-become-a-b-corp/performance-requirements. Benefit corporations and B Corporations are often confused, because they have many characteristics in common; however, they are complimentary and the main difference is that performance requirements of the B Corporations that are more stringent.30Benefit Corporation, Benefit Corporations & B Corps, http://benefitcorp.net/businesses/benefit-corporations-and-certified-b-corps.

The emergence and consolidation of corporate forms in the United States focused on social and environmental purposes, such as community interest corporations, benefit corporations, and B Corporations, is significant for the growth of social finance and, more specifically, for the creation and development of new trading platforms such as social stock exchanges.

There is no doubt that the regulatory framework of the United States allows the creation of a social stock exchange under the Securities Exchange Act of 193431See generally, the Securities Exchange Act of 1934, 15 U.S.C 78f. and it is moving towards the regulation and development of social businesses and impact investments in the country. However, are the shareholders in the U.S. public markets ready for benefit corporations, B Corporations, and social stock exchanges?

Big players in the capital markets have converted to B Corporations, including Lazard, Oppenheimer, Comgest and GIC.32B Corporations, Find a B Corp, https://www.bcorporation.net/community/find-a-b-corp. The first B Corporation to go public was Rally Software in 2013 with its Initial Public Offering (IPO) priced in $83 million on Nasdaq.33Nasdaq, Rally Software Development Corp., http://www.nasdaq.com/markets/ipos/company/rally-software-development-corp-660534-71967. Two years later, Etsy executed the second and a much larger IPO of a B Corporation in the amount of $266 million on Nasdaq.34Nasdaq, Etsy Inc., http://www.nasdaq.com/markets/ipos/company/etsy-inc-716408-77778. Now, Laureate Education, the largest for-profit college network in the world, has filed for an IPO that may be the first IPO of a benefit corporation in the amount of $100 million – which may be raised to $1 billion35Ranaissance Capital, For-profit education for sale: Laureate Education files for an IPO that could raise $1 billion, Nasdaq (Oct. 2, 2015), http://www.nasdaq.com/article/for-profit-education-for-sale-laureate-education-files-for-an-ipo-that-could-raise-1-billion-cm526784. .

The Laureate IPO is a very important step for impact investments. If it is a successful transaction, it will represent a good precedent for new benefit corporations and B Corporations and “will provide a strong counterpoint to skeptics that believe that businesses cannot access institutional capital unless they focus exclusively on maximizing value for shareholders.”36Luke Stephan, Can private equity help make business good?, available at https://www.linkedin.com/pulse/can-private-equity-help-make-business-good-luke-stephan?trk=hp-feed-article-title-like.

The scenario is positive; however, it is too early to draw any conclusions in relation to the acceptance by the market of benefit corporations and B Corporations as an asset class. Although there was no pushback in the IPOs mentioned above and they were considered and remain a success, it is important to observe how the investors behave in relation to such companies, especially in case of any social or environmental decision made by the management to the detriment of the financial interest of the shareholders.

While there is no social stock exchange in the U.S. market, the conventional stock exchanges have a relevant regulatory role in relation to benefit corporations and B Corporations that will be the foundation of social stock exchanges regulations. One example is the specific language included in Etsy’s Prospectus related to its status as a B Corporation.

In this case, Nasdaq had to analyze Etsy’s Prospectus with a different and new perspective establishing the minimum disclosure requirements that it understood was necessary for B Corporations and, more than that, establishing a precedent to further public offerings of B Corporations. To illustrate, in Etsy’s Prospectus37Etsy, S-1 Form, Risk Factors, available at https://www.sec.gov/Archives/edgar/data/1370637/000119312515077045/d806992ds1.htm. there are a number of risk factors about B Corporations and the impacts that the certification may bring to the company and its shareholders that were used as a basis for the risk factors raised by Laureate in its Preliminary Prospectus.38Laureate, S-1 Form, Risk Factors, available at https://www.sec.gov/Archives/edgar/data/912766/000104746915007679/a2209311zs-1.htm.

It is necessary to have more benefit corporations and B Corporations listed on the conventional stock exchanges and more data to assess if the U.S. market is open to impact investments. Hence, only after the consolidation of benefit corporations and B Corporations as viable investments in the United States will the segregation of the marketplace and creation of social stock exchanges in the United States be effective.

That being said, the United States needs more substantial social business and more engagement of impact investors to be ready for its first social stock exchange. At this point, the focus should be on the improvement of the current channels of information and creation of new platforms of social finance in the United States to educate potential impact investors and social businesses and on expanding the impact investments in the country.

Nonetheless, the initiatives taken by the government and the social businesses in the United States are extremely important for the development of social finance in the country and should be further explored and developed. They not only create a new investment path and provide U.S. investors with new tools to reach underserved populations and/or address environmental problems, but also place social finance one step closer to the capital markets.

References   [ + ]

01. David Cameron, U.K. Prime Minister, Opening Speech at the G8 Social Impact Investment Forum on Social Investment as a Force for Social Change (Jun. 6, 2013), available at https://www.gov.uk/government/speeches/prime-ministers-speech-at-the-social-impact-investment-conference.
02. The Impact Exchange also makes it possible for social parties to execute private place transactions through the Impact Partner Platform operated by the Asia IIX. Impact Exchange, About Us, available at http://impactexchange.asiaiix.com/about/.
03. See generally, Sarah Dadush, Regulating Social Finance: Can Social Stock Exchanges Meet the Challenge?, 37 U. Pa. J. Int’l L. 139 (p. 192).
04. See generally, John Carson, Self-Regulation in Securities Markets, The World Bank, Policy Research Working Paper No. 5542 (2011), available at http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2011/01/24/000158349_20110124091038/Rendered/PDF/WPS5542.pdf.
05. See generally, Mission Markets, available at http://www.missionmarkets.com.
06. Ashoka, Stock Exchanges for Social Enterprises? Here’s Where You Can Find Them, FORBES, (Mar. 27, 2014), available at http://www.forbes.com/sites/ashoka/2014/03/27/stock-exchanges-for-social-enterprises-heres-where-you-can-find-them/#7b5e3f625d5c.
07. Id.
08. The California Stock Exchange TM, The California Stock Exchange TM Announces Progress and Long Term Plan, http://www.calstockexchange.com/the-california-stock-exchange-tm-announces-progress-and-long-term-plan-2/; see also The California Stock Exchange TM, About Us, http://www.calstockexchange.com/about-us/.
09. The Global Impact Investing Network, Impact Investing, https://thegiin.org/impact-investing/.
10. See generally, Tim Hindle, Triple Bottom Line, The Economist (Nov. 17, 2009), http://www.economist.com/node/14301663.
11. “A social enterprise is an organization or initiative that marries the social mission of a non-profit or government program with the market-driven approach of a business.” Social Enterprise Alliance, Social Enterprise, available at https://socialenterprise.us/about/social-enterprise/.
12. See, The Grameen Creative Lab, The Social Business Concept, available at http://www.grameencreativelab.com/a-concept-to-eradicate-poverty/the-concept.html.
13. Insight at Pacific Community Ventures Et Al., Impact Investing 2.0: The Way Forward (2013), available at http://www.pacificcommunityventures.org/ impinv2/wp-content/uploads/2013/11/2013FullReport_sngpg.v8.pdf.
14. Sarah Dadush, Supra note 3 at 164.
15. See generally id. at 170.
16. IRIS, What is IRIS?, https://iris.thegiin.org.
17. See What Is Patient Capital?, Acumen Fund, available at http://acumen.org/ideas/patient-capital/ (explaining that patient capital is “a form of investment that has a high tolerance for risk, has long time horizons, is flexible to meet the needs of entrepreneurs, and is unwilling to sacrifice the needs of end customers for the sake of shareholders”).
18. See generally, Beth Richardson, Sparking Impact Investing Through GIIRS, Stan. Soc. InnovationRev. (Oct. 24, 2012), available at http://ssir.org/articles/entry/sparking_impact_investing_through_giirs (explaining that company ratings include (1) an overall rating; (2) an impact area rating in the fields of “Governance,” “Workers,” “Community,” and “Environment”; (3) detailed judgments on the company’s “Social or Environmental Business Model”; (4) key industry specific performance indicators; and (5) benchmarking based on the company’s geography, size and mission).
19. Mission drift can take various forms: “In pursuit of more profit, a business may be inclined to target relatively better-off customers, raise prices to take advantage of the lack of competition often encountered in underserved markets, or take cash out of the business rather than reinvest in innovation to enable even broader customer reach.” Nick O’Donahue, et al., J.P. MORGAN & ROCKEFELLER FOUND., Impact Investments: an Emerging Asset Class, 67 (2010), available at https://thegiin.org/assets/documents/Impact%20Investments%20an%20Emerging%20Asset%20Class2.pdf.
20. Julie Battilana et al., In Search of the Hybrid Ideal, Stan. Soc. Innovation Rev. 52, §5 (2012), available at http://ssir.org/articles/entry/in_search_of_the_hybrid_ideal?utm_content=bufferbf4c7&utm_medium=social&utm source=twitter.com&utm_campaign=buffer.
21. Sarah Dadush, Supra note 3 at 223.
22. Id. at 186.
23. See Susan Cormac, New Corporate Forms: Flexible Purpose Corporations, Benefit Corporations, and L3Cs, available at https://www.law.berkeley.edu/files/bclbe/Berkeley_Handout_1182011_-_1.pdf (briefly explaining the differences between the tree types of corporate forms).
24. See generally, Yusi Wang Turell, B-Corps Provide Purpose and Profit, BUS. NH MAG. (Apr. 7, 2014), available at http://millyardcommunications.com/index.php?src=news&refno=4404&category=News.
25. Benefit Corporation, Benefit Corporations are Necessary, available at http://benefitcorp.net/attorneys/benefit-corporations-are-necessary.
26. Benefit Corporations, State by State Status of Legislation, available at http://benefitcorp.net/policymakers/state-by-state-status.
27. See generally, Matthew F. Doeringer, Fostering Social Enterprise: A Historical and International Analysis, 20 Duke J. Comp. & Internat’l L. 291, 312-15 (2010) (describing that CIC rules are more detailed & advanced – including in relation to tax treatments – and better enforced as compared to benefit corporation rules).
28. B Corps., About B Lab, https://www.bcorporation.net/what-are-b-corps/about-b-lab.
29. B Corps, Performance Requirements, https://www.bcorporation.net/become-a-b-corp/how-to-become-a-b-corp/performance-requirements.
30. Benefit Corporation, Benefit Corporations & B Corps, http://benefitcorp.net/businesses/benefit-corporations-and-certified-b-corps.
31. See generally, the Securities Exchange Act of 1934, 15 U.S.C 78f.
32. B Corporations, Find a B Corp, https://www.bcorporation.net/community/find-a-b-corp.
33. Nasdaq, Rally Software Development Corp., http://www.nasdaq.com/markets/ipos/company/rally-software-development-corp-660534-71967.
34. Nasdaq, Etsy Inc., http://www.nasdaq.com/markets/ipos/company/etsy-inc-716408-77778.
35. Ranaissance Capital, For-profit education for sale: Laureate Education files for an IPO that could raise $1 billion, Nasdaq (Oct. 2, 2015), http://www.nasdaq.com/article/for-profit-education-for-sale-laureate-education-files-for-an-ipo-that-could-raise-1-billion-cm526784.
36. Luke Stephan, Can private equity help make business good?, available at https://www.linkedin.com/pulse/can-private-equity-help-make-business-good-luke-stephan?trk=hp-feed-article-title-like.
37. Etsy, S-1 Form, Risk Factors, available at https://www.sec.gov/Archives/edgar/data/1370637/000119312515077045/d806992ds1.htm.
38. Laureate, S-1 Form, Risk Factors, available at https://www.sec.gov/Archives/edgar/data/912766/000104746915007679/a2209311zs-1.htm.

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