Working in partnership with members of the Ontario Social Economy Roundtable and the Ontario Nonprofit Network, Centre for Social Innovation (CSI) is pleased to present our briefing to the Provincial Partnership Project. In this paper, we are inviting the province to clarify and assist in scaling up Community Bonds.
Most of you know that CSI is hard at work promoting our Community Bond offering -- 4% return for a five year -- held inside your RRSP -- but once you buy a CSI bond, wouldn't it be amazing to be able to have your whole portfolio holding local social enterprise investments? Equally tantalizing, wouldn't it be amazing if non-profits and social enterprise could leverage their greatest assets -- their communities -- to build community infrastructure?
CSI and its partners is inviting the province to consider streamlining, clarifying and enabling the widespread take-up of Community Bonds in Ontario.
If you are as geeky as I am, take a look at the attachment below to find out how we might do it. Or just read a little further where I keep making the case : )
-----
The Ontario Social Economy Roundtable (OSER) is a network of independent and connected organizations that have been working with and supporting the social economy sector in Ontario. The Canadian Community Economic Development Network (CCEDNET), Ontario Co-operative Association, (On Co-op) Centre for Social Innovation (CSI), Toronto Enterprise Fund (TEF) with the United Way Toronto, the Ontario Nonprofit Network (ONN) and Centre canadien pour le renouveau communautaireen (CCRC) are partnering around a series of briefing papers to the Partnership Project related to improving access to capital for nonprofit organizations and other social finance issues.
These partners are recommending that the Ontario government utilize existing infrastructure to create an enabling environment in which social enterprise can thrive. They are recommending:
Advertising
1. Clarifying and scaling-up the role out of Community Bonds -- RRSP/TFSA eligible debt instruments designed to enable nonprofit financing
2. Expanding Infrastructure Ontario's eligibility to enable nonprofits to access $3.8 billion in financing through an existing infrastructure
3. Creating a Social Enterprise / CED Tax Credit
This briefing will focus on the implementation of Community Bonds in Ontario.
Community Bond
In simple terms Community Bonds are securities issued by a nonprofit to an individual or an organization in return for an investment in the nonprofit. It is a binding promise by the nonprofit to pay the investor a specified rate of interest over the life of the bond and to return the investor's capital at the end of the term. It could be secured or unsecured depending on the purpose of issuing the bonds.
Put another way, Community bonds are loans that provide a fair return on investment and enable non-profits to leverage their greatest asset -- their clients, members, donors and constituents -- to create assets that will serve the community in perpetuity.
A community bond is:
o A debt instrument - it is essentially a loan (nonprofits and communities can't issue equity)
o RRSP/TFSA Eligible - Community Bonds can be RRSP/TFSA eligible and are held inside their RRSP/TFSA portfolio
o Accessible - minimum investments need to be affordable for citizens to be able to invest.
Community Bonds are about leveraging the one asset that nonprofits do have -- their relationships with their communities.
Just imagine how small towns could create the performing arts spaces, financed by their audience, how hockey rinks could be financed by the hockey mom's or how existing property owners could re-finance their assets with community bonds to do vital green retrofits.
Community bonds are open to all investors -- individuals, foundations, companies, business people or retiree's. They are a true ethical investment -- one which citizens could often walk in to and point and say that they ‘own' a piece of these. They democratize social finance making investment possible to everyone. Community Bonds are the ultimate "buy local" strategy.
Community bonds are also a vital tool for citizens to re-engage with their communities that have the potential to: shift a system; transform a marketplace; change behaviour; and create social value. At the same time, it rebuilds the relationship between the citizen and the commons, provides a kick-ass tool to the citizen and non-profit sector and enables communities to create their own solutions.
Community Bonds are a "bottom up" solution that will be driven by the nonprofits and civic entrepreneurs but require legislative clarity and oversight to give confidence to both the investors and investees.
Community Bonds would be very much like corporate bonds. Like corporate bonds the process of selling Community Bonds to the public needs to be regulated. Investors would be in a position to assess the level of risk that they are willing to assume, as with any investment. We recommend that this be done by an Offering Statement Process and that provisions similar to those in the Co-operative Corporations Act be included in Bill 65.
For more on community bonds watch the video below from a TedxToronto talk:
Non-profits issuing interest-bearing bonds is a contradiction in terms.
How can an organization be said to be operating on a non-profit basis, when its sources of funding (the bondholders) are making a profit from its operations? It can't. In fact, the profits the organization makes, instead of being put back into operations (as any normal non-profit would do), are extracted from the organization and handed out to bondholders as interest.
How is this any different than for-profit organizations transferring their profits out to shareholders through dividends?
This scheme amounts to privatization of the voluntary community service sector.
Is Rabble actually promoting this?
Any 'normal non-profit' already operates with a combination of contributed capital (i.e. donations and earnings made) and borrowed capital. Whether it be overdrafts, lines of credit, or mortgages, most not-for-profits--especially larger NFPs--have some form of debt arrangement in place already. Your suggestion is that the interest paid on these debts mean that the organization is operating on a for-profit basis. This is a pretty tenuous argument.
Borrowing capital is the same as purchasing any other service. If a not-for-profit contracts with a building company to install a playground, there is no argument made that profits earned by the building company violate the not-for-profit status of the purchasing organization. Why should this be any different if the not-for-profit contracts to make use of someone else's capital for a period of time?
There are also some very specific differences between bonds and shares, and between bond interest payments and dividends.
First and foremost, shareholders have decision-making authority within the organization -- they control it. A bondholder has extremely limited influence -- in some cases there may be indirect influence due to demand options within the bond, but otherwise bondholder influence is limited to the threat of legal recourse should the organization default on interest or principal payments. Issuing a bond is in no way a 'privatization' of the organization, since management and authority still rest with the membership (which is not connected to bondholding).
Secondly, there are few limitations on the amount of an organization's earnings (or capital) that can be transferred to owners through dividends. Bond interest, on the other hand, is stipulated quite precisely and bears no relationship to the earnings or capitalization of the organization. Dividends are clearly intended to transfer profit, while bond interest is clearly a 'rental' fee for the use of the capital invested.
Community bonds are not for every organization. They do come with contractual obligations to repay at given rates and times, which can be difficult for some NFPs to manage. On the other hand, there are some unique advantages:
* they offer individuals a way to become directly 'invested' (financially and emotionally) in projects and organizations that they are passionate about. It also allows the participation of people who have financial resources they can afford to invest but not to give (i.e. retirement savings). This 'investment' further motivates them to volunteer and/or promote the project within the local community, which has a substantive positive impact on its success.
* they expand the pool of financial resources available to not-for-profits. This is particularly important for newer organizations that cannot access traditional lending because they have neither history nor security. It is also critical for projects that have high social impact but marginal economic return, as these projects would be considered too risky by corporate lenders but are considered of high value to the local community. Community Bonds have also been used to great effect in the UK for projects which have a high initial capital investment (i.e. renewable energy infrastructure) that makes it difficult for small local organizations to fund through traditional sources.
It's easy to get caught up in criticizing this kind of initiative because of the legal structure of bonds. I think it is helpful to consider that debt financing and community investment are already at the heart of the successful community shared agriculture movement -- although in that case the principal and interest on the investment are repaid in a more directly consumable form!
I, for one, am very excited to see Community Bonds being promoted in Ontario, and am pleased that Rabble would encourage people to take a careful look...
You can't call an enterprise "non-profit" when it is legally obligated to generate surplus funds in order to pay a return to its investors. I don't care whether those investors are shareholders or creditors, or whether they are silent partners or exercise control and influence over the operation of the enterprise; in all those case, the enterprise, as a vehicle for generating return on invested capital, is obliged to turn a profit. It does violence to the language to call it non-profit.
I happen to be the treasurer of a non-profit organization. All of our income is from donations and fundraising activities, and all of it goes into pursuing the organization's goals. We don't use borrowed funds, and we're not in the business of generating profits for anyone. Everyone who contributes money to our organization knows that all of it will go towards our goals, and none of it will end up as somebody else's return on investment. We are, in short, a non-profit organization.
If non-profits want greater access to borrowed funds, it makes more sense to lobby the government to provide interest-free loans. The Community Bonds promoters want to turn non-profit organizations into sources of profit for private investors. This is the same idea behind "public-private partnerships"; activities that are supposed to be for the public benefit are expected to provide a return on investment, thereby draining off funds that would otherwise be used for the public good.
Projects that have "high social impact but marginal economic return" are exactly not the kind of projects that we should be using to provide a guaranteed return on investment to bondholders!
Martin Settle, you have put together a solid explanation for how nonprofits in the proviince of Ontario function. In Bill 65, recently passed through 3rd reading, the government of Ontario recognizes 'commercial activities' as legitimate and confirms that non-profits have the ability to issue 'debt' (ie. bonds) as a way of assisting nonprofits to achieve their social outcomes. Being a nonprofit means that any surpluses must be reinvested in the social mission. This enables those of us able to do this, to be able to work independent of government support - enabling us to serve our community and our mission without having to beg for money from the government.
While I appreciate M.Spector's ideological concern with the idea that someone might be profiting from a nonprofit and I tend to agree in theory, the interest that we pay to individuals in considerably less than what we would need to pay the bank. and when we asked the government to give us a loan we didn't fit their criteria.
Nonprofits should really be called 'public benefit organizations' in my mind. We add value in the community. We pay a below market return for the use of funds to enable us to scale and we can come from a position of empowerment - leveraging our community (those that are most interested in our public benefit) instead of begging to government to make things happen.
Government has a role supporting the delivery of essential services. Social enterprise is not the right thing for all nonprofits, but I feel strongly that if we are going to build a robust and healthy civil society, we are going to need tools and innovations to enable us to take action without having to involve government at every turn. I believe that we need to enable citizens to solve some of their own problems and that real social innovation will come from the citizens of our find country. Community Bonds are just the beginning of this conversation... and just one solution.
...any surpluses, that is, left over after the profits have been extracted and paid to the financial investors!
Speaking of "ideological" concerns, only a capitalist, market-worshipping ideology values community improvement projects run by volunteers according to whether or not they can generate a profit for private investors.
My "ideological" concern is to see socially-useful projects funded collectively by society - not dependent on obtaining interest-bearing loans from holders of private capital. If it's worth doing, it's worth having government funding.