Under the new law a dividend is permitted if paid out of retained earnings OR if immediately after the distribution, the value of the corporation’s assets would equal or exceed the sum of its total liabilities.

The committee’s letter states, “As currently drafted, the Bill includes among the permitted special purposes those charitable and public purpose activities that may be carried out by a nonprofit public benefit corporation. It does not include reference to religious purpose activities that may be carried out by religious corporations. Although the California Corporations Code has separated nonprofit public benefit and religious corporations into parallel statutory schemes, the purposes of religious corporations are traditional charitable purposes just as much as those public and charitable purposes of public benefit corporations. Religious purposes encompass activities which may even be identical to those conducted under charitable purposes. There are a significant number of social welfare type of organizations that are incorporated as religious organizations. By leaving out the reference to purposes of religious corporations, the Bill excludes the activities of a large segment of the social welfare and charitable community and unnecessarily restricts the special purposes which could be included for this type of organization.”

In contrast, the California Association of Nonprofits, along with California Church Impact, California Society of Association Executives, and the Blood Centers of California, have written a letter opposing the bill.  They express the following concerns (quoted from their letter):

• What are the consequences for the quality of social, environmental, cultural, and educational services used and needed by California residents if for-profits are provided with enhanced capacity to compete with nonprofits for government grants and contracts, financial and human capital and the definition of the form and scope of practices for delivering social benefits?

• Some SB 201 proponents maintain that the capital pool for existing nonprofits and Flexible Benefit Corporations are mutually exclusive. What is the evidence to substantiate that claim? How can we be sure that investments in FPCs are not being made in lieu of charitable contributions?

• Although the single largest source of revenue for nonprofits is earned income, nonprofits are likely to find themselves at a competitive disadvantage with FPCs with access to capital simply unavailable to governmental and charitable entities. What are the likely outcomes of that situation?

• By all accounts, public benefit is difficult to evaluate and measure. How will nonprofits and investors be protected from misrepresentations by management and directors accountable only to their shareholders and not to standards established in many areas of nonprofit practice by existing nonprofit professional associations?

• There may be lessons to be learned from the UK, where there is a highly developed system for assessing public benefit outcomes of Community Interest Companies, a hybrid similar to that proposed in SB 201 and in existence since 2005. In the legislation, this core principle is achieved through the “community interest test.” A company satisfies the community interest test if a reasonable person might consider that its activities (or proposed activities) are carried on for the benefit of the community. Many community interest companies use independent social auditors, whose audits provide the basis for evaluations by social audit panels.  Through this audit system, the UK approach requires accountability not only to the shareholders but also to the stakeholders, such as recipients of social services, who are the purported beneficiaries of the companies’ activities.

• To the limited extent that they are regulated, what’s to prevent a Flexible Purpose Corporation from enjoying the same “light touch” from regulators received by their UK counterpart, the Community Interest Company, as reported in a recent article “Wrong Way Corrigan and Recent Developments in the Nonprofit Landscape: A Need for New Legal Approaches,” by James J. Fishman Pace, University School of Law?

• Given that they are engaging in “charitable and public purpose activities that could be carried out by a nonprofit public benefit corporation,” should FPCs be subject to some specific form or degree of oversight or accountability similar to the requirements for nonprofits from the California Attorney General, Internal Revenue Service, Franchise Tax Board, Board of Equalization, and Secretary of State?

• What assurances do we have that FPCs will continue to provide needed services when the economy is faltering when there are decisions to be made about shareholder returns? Nonprofits must maintain their vision and mission regardless and face scrutiny by taxing authorities and the California Attorney General.

• What is likely to be the impact of FPCs and similar measures on service and volunteerism, which up to now have been key component of our way of life in both California and the nation? Will the mixing of for-profit with charitable motives send a message that undermines the efforts of religion, nonprofits and government to encourage individuals, families and communities to unselfishly “take action that changes the world,” in the words of the mission statement of the Points of Light Foundation.

• In addition the proposals already pending in the Legislature, there are other available methods, some that have been in place for decades, to blend public and private purposes in single or related corporations. What are the relative merits of each type from the perspectives of potential abuse, impact on nonprofits, and impact on existing businesses? Will they erode or enhance the capacity of existing nonprofit entities under current law and in which both the public and private sectors have invested immense amounts of time and dollars?

First, it rewards companies that affirmatively serve the public interest in the state. The proposed legislation effectively creates and strengthens a brand for good corporate behavior.  The B-Corporation label recognizes companies that are committed to undertaking their business with high labor, environmental, and community standards, even if this commitment reduces its profitability.  HB-1009 effectively rewards a company embracing these goals by helping consumers also motivated by these values to find and selectively purchase their goods and services.  It similarly rewards socially responsible businesses by attracting like-minded investors.

Second, it increases market efficiency. Some argue that whenever companies sacrifice profits for other goals like high labor or environmental standards, efficiency is lost.  This, however, springs from an incorrect definition of efficiency, since it focuses exclusively on whether or not consumers are being offered the cheapest goods and services.  A better definition of efficiency focuses on whether consumers are getting the best value for goods and services. Value includes quality of the product and quality of the company, and decisions about value depend entirely on consumer choice.  It is an axiom of a market economy that it functions more efficiently when consumers have the best information possible to make their market choices.  The B-Corporation label does this, effectively matching consumers and investors committed to improving the state’s public interest with companies that share these values.

Third, it boosts the state economy. In addition to the benefits that flow from greater market efficiency, the legislation will tend to drive more Maryland residents to buy goods and services from local companies and drive more investors to place money in local companies.  Local purchasing and local investing boosts local jobs.

Fourth, it supports the broad objectives of economic development. There is a growing body of evidence that locally owned companies, compared to absentee owned businesses, generate for every dollar spent in them higher economic multipliers.  That means more income, wealth, jobs, tax receipts, and charitable contributions for the state.  Additionally, the evidence also suggests that these businesses are particularly good a promoting smart growth, tourism, entrepreneurship, and low-carbon footprints—all goals officially embraced by the state of Maryland.

Finally, it accomplishes all these worthy objectives at virtually no cost. All that is required by the bill is voluntary action by companies who wish to apply and comply, and minor administrative declarations and paperwork by the state.  It would be difficult to identify another proposed measure that would deliver as much “economic stimulus” at as small a cost.

The only reservation I have about this bill—a minor one—is that I would like to see it go further.  I would like the bill explicitly to embrace the carefully nuanced criteria for social performance designed by B-Lab (the architects of the B-Corporation label).  And I would like to see explicit preferences in state procurement and in disbursement of economic-development incentives for B-Corporations.

The 2009 forum is being held on November 19 in Washington DC.  It will be available as a webcast.

At the 2008 forum, SEC Chairman Christopher Cox acknowledged the following in his opening remarks:

• For at least the past two decades, small businesses, which are 99% of all businesses, have bailed us out of every recession
• Small businesses have generated between two-thirds and three-quarters of all net new jobs, year-end and year-out
• Firms with fewer than 20 employees spend 45% more per employee on complying with federal regulations.

The following are some of the recommendations that came out of the 2008 forum:

• Adopt a new private offering exemption from the registration requirements of the Securities Act that does not prohibit general solicitation and advertising for transactions with purchasers who do not need all the protections of the Securities Act’s registration requirements.
• Currently, under Section 12(g) of the Securities Exchange Act of 1934, a company with 500 or more shareholders of record must register as a public company which triggers extensive reporting and other obligations – Exclude accredited investors from the 500 shareholders of record calculation.
• Establish a new system of scaled or proportional securities regulation for smaller public companies (recommendation from the Advisory Committee on Smaller Public Companies).
• Simplify the registration requirements for broker-dealers selling investments in small private companies (recommendation from the ABA Task Force on Private Placement Broker Dealers).

• One easy reform would be for the SEC to exempt from its usual expensive disclosure requirements any low-risk public ownership of locally owned microbusinesses. By low-risk, I mean that no person can hold more than $100 worth of any one stock—which means that we’re freeing up people to engage in the risk equivalent of a nice dinner for two. By local ownership, I mean that only residents within a state can buy, hold, and sell stock shares. And by microbusinesses, I mean any business with a total stock valuation on issuance of less than $250,000.  A related reform would be for the SEC to set simple rules for the setting up of internet platforms for trading the exempt securities above.
• Let’s allow small investors to pool their money in backyard investment funds (again, up to $100 per person) that in turn invest in diverse portfolios of local stocks. (Only the super rich can invest in such funds now.)
• Let’s allow any pension fund that places as much as 5 percent in local securities, either directly or through microbusiness investment funds, to meet legal standards of “fiduciary responsibility.” (Current regulations define the term in a way that directs virtually all such investments must go to global companies.)

• unaccredited investors would have to be residents of the state in which the offering was made; and
• at least 10% of the total funds would have to come from institutional investors whose minimum net worth is $100,000,000 each and/or from approved Small Business Investment Companies (SBICs).

The rationale is that the involvement of institutional investors would ensure oversight of the Community Fund by a sophisticated watchdog that would protect the interests of the rest of the investors.

The proposed legislation also authorizes the trading of shares issued by a Community Fund on an exchange or over-the-counter listing service.

• specifically allow cooperatives to receive Small Business Administration loans
• raise caps on SBA loans
• create the Small Business Early Stage Investment (SBESI) program, which would provide matching grant funding for venture capital investments in early-stage small businesses in targeted industries including agricultural technology, energy technology, environmental technology, life science, information technology, digital media, and clean technology
• make several other changes to SBA programs intended to improve them and make them more accessible.

The bill has been referred to the Senate Committee on Small Business and Entrepreneurship.