Hunton Law

Legal Counsel for Nonprofit & Tax-Exempt Organizations

Legal Counsel for Nonprofits, Foundations & Social Enterprises

Program-Related Investments

Earlier this year, the Internal Revenue Service released proposed regulations that provide guidance to private foundations on program-related investments (PRIs).  The proposed regulations include nine new examples of permissible program-related investments.  While the proposed regulations have yet to be adopted, the new set of examples demonstrates the expanded potential of PRIs to drive capital towards nonprofit and for-profit enterprises in the US and foreign countries. 

Private foundations, otherwise limited in the types of investments they can make, have been allowed to make PRIs since 1969.  Properly structured, a PRI can fulfill a private foundation’s legal obligation to make qualifying distributions for charitable purposes.  An investment will qualify as program-related so long as its primary purpose is to further charitable and other exempt purposes.  Neither the production of income nor the appreciation of property can be a significant purpose of a PRI, and a PRI cannot be used to fund legislative activities (lobbying) or political campaigning.  Since 1969, PRIs have typically been used for programs involving economically disadvantaged individuals and deteriorating urban areas. 

The new examples illustrate that PRIs can be much more flexible philanthropic tools than PRIs of the past.  Notably, the range of eligible PRI recipients is broader, and includes 501(c)(3) organizations, 501(c)(4) social welfare organizations, domestic and foreign business entities, and domestic and foreign individuals.  The range of investment types is wide, encompassing equity interests, straight debt, convertible debt, credit enhancement, and other forms of financing.  A significant purpose of a PRI cannot be income production or property appreciation; however, the possibility of a high rate of return does not automatically disqualify an investment as program-related.     

What does a PRI look like under the new examples?  A private foundation can provide seed capital (debt, equity, or some combination) to a for-profit venture that is seeking to generate social and financial returns.  This type of social enterprise would be one that few traditional investors would view attractive, yet holds promise for significant positive social impact.  The PRI can help establish and strengthen the venture’s creditworthiness, eliminating a significant amount of perceived risk and attracting further commercial investment.  The PRI can also spark a self-sustaining revenue model, whose benefits would continue to further the foundation’s charitable purposes.

The proposed regulations demonstrate the use of PRIs  in new contexts and with new forms of financing.  By providing more detailed guidance on what will qualify for a PRI, the new examples are generating discussion and interest among those seeking to give away capital as well as those seeking to access capital.