The non-distribution constraint and social enterprise: Can share capital fund non-profit organisations?

What the paper says

Not-for-profit (NFP) organisations are characterised by the 'non-distribution constraint' that binds them in their governing documents to apply their income and assets for their purposes and not share that income or those assets with private persons (during operation and on winding up). This has meant that access to capital through the equity markets has been largely closed due to an inability of equity owners to receive a market return on their investment. Social enterprise and the social impact investing movement have challenged this by creating hybrid organisations that combine both 'purpose' and 'profit' for the common good. For example, they have developed social impact bond debt instruments, a form of quasi-equity, to allow the creation of an instrument with some of the economic characteristics of equity. This article argues that the raising of funds by issuing shares with fixed or capped dividend rights and the right of a return of capital to the shareholder limited to the price paid for the shares (on redemption, buyback or winding-up) seems to have been overlooked to date in NFP legal structuring. Such shares are given the name 'non-distribution constrained shares'. A framework is proposed where capital could be raised by NFPs and charities (including social enterprises) by issuing non-distribution constrained capital (shares or debt) without breaching the spirit of the non-distribution constraint, and so being able to retain charity registration (if applicable) and tax concessions.