Why have principles for Community Bonds?
If your organization is considering offering Community Bonds, we ask that you carefully read and abide by these principles of use. Community Bonds are an incredible tool for nonprofits and charities to raise money by turning their community of supporters into investors. But in order for Community Bonds to remain an effective tool it is crucial that we establish best practice guidelines to increase their appeal to the broader public and to safeguard their legitimacy.
Principles of Community Bonds
- Organizations considering issuing Community Bonds must develop the case for investment in an honest and open way that is respectful of the organization’s culture and ensures there is a strong, compelling, case for the Bonds that is understood and supported by all key stakeholders in the organization. This case includes:
- A clear set of organizational operating principles. It is important that any project be considered in light of these principles and any conflicts identified and resolved.
- Organization wide commitment to all facets of the planning process: to manage (or on a more practical level pitch) the project, senior management must have a deep and fundamental understanding which can only come from active involvement in the planning process
- Honest assessment of new demands the project will place on organizational capacity – any deficiencies need to be addressed and rectified. For example organizations considering a social enterprise need access to industry knowledge.
- Space within the planning process to vigorously debate and vet the project so that when it comes time to move beyond debate to action, all voices have been heard and there is support to proceed.
- Board of Director input – Ultimately it is the nonprofit’s board that is responsible for the nonprofit and its activities including the decision on why and how to seek financing. Board member involvement in the planning process will provide additional insight and sober second thought, and is essential if the nonprofit is going to seek financing from the general public.
Any type of planning process involves assumptions. It is important that these assumptions are able to stand up to scrutiny. All of the project’s assumptions need to be documented and wherever possible be the result of independent or empirical evidence provided from:
- Third party experts – (i.e. appraisers, contractors, architects).
- Individuals with industry knowledge (for example, for social enterprises, indivudals may include managers and accountants who understand the market and business model).
- Organizational knowledge – the nonprofit may have first-hand knowledge, for example if it has been operating a building or social enterprise, that can be used as a basis for assumptions (these should be vetted to ensure consistency with industry norms).
The organization should be as open as possible with investors. Investors’ decision to invest in a nonprofit is not solely a financial decision. They may be forgoing a financial return for a social return. They are putting their trust and faith in the organization. Absolute honesty with investors through the bond issuing process is key to a long term, mutually satisfactory relationship. The organization should be clear about:
- Risks of project failure – There needs to be a full, clear and plain disclosure of potential risks that the project will not succeed. This would include an analysis of their likelihood, potential impact and possible mitigations of these risks.
- Shared risk – although investors are the primary financers the organization should have a financial stake in the project. It is not only good public relations, it reinforces the organization’s commitment to succeed.
- Financial projections that explore different scenarios (best, worse and most likely cases) so that outcomes can fully demonstrated.
- Organizational capacity strengths and how weaknesses are being addressed.
- Exit strategy for investors to recoup investment if the project fails.
4. Social Impact Goals of the project
Social impact goals need to be clear and unambiguous.
- Why is this project being undertaken? If successful what will it achieve for the organization and the community in 1 year, 5 years or 10 years? How is the project aligned with mission objectives?
- How will social impact be measured?
- What community assets will be created?
Community bonds are a tool that allows community members to invest in assets that provide benefit to and are retained in the community. It is important that these investments are accessible to all community members (regardless of means):
- Bonds should be affordable to a significant portion of the community
- Bonds should be RRSP or TFSA eligible when practical
Issuing community bonds will bring in a new stakeholder: the bondholder, who will require assurance that the investment remains sound and that social impact objectives are being met. The reporting requirements and investor rights need to be articulated in the bondholder agreement and should include the following:
- Regular communication with the bondholders.
- Third party verification of reporting should be sought wherever practical.
- Sufficient empirical data (i.e. financial results) so that the bondholder has a clear picture of progress to date.
- Measurement of the actual results against the original planned data with clear, frank explanations of any differences.
- Revised projections and related action plans.
- Project’s unintended impact or consequences to the organization.
- Opportunity for interaction with management, if bondholders feel it is warranted.
7. No third party soliciting of investment
(“third party” is defined as individuals who “sell” the community bond to the public for a flat fee or a percentage of the amount raised).
However, the use of credit unions and other community-based financial institutions charging small administration fees to facilitate the bond sale for Registered Retirement Savings Plan and other tax administration purposes can be quite beneficial and should be explored.
- A nonprofit selling community bonds should be willing to do this work itself. This ensures that the organization is committed to the plan, how it is financed and ultimately to the bond holder.
- The organization interacts directly with the investor. Trust and an investor’s commitment to the nonprofit’s mission can only be built through direct contact. This connection is vital to how community bonds create community based assets.
8. Use of trustee to facilitate the transaction
To provide additional assurance to investors, a trustee should be used to administer funds and act on the bondholders behalf. The trustee’s role will be set out in a trustee agreement and will include such tasks as:
- Collect and administer all bondholder funds during the solicitation stage.
- Register the mortgage charge or other security, and execute and maintain all related legal documentation.
- Hold the security on behalf of the individual bondholders.
- Convene bondholders’ meetings and act on their instructions.
- Exercise all bondholders’ rights under their security.
Thank you to Beth Coates of the Canadian Alternative Investment Cooperative for writing these principles for the Ontario Nonprofit Network who is spearheading the work to create a vibrant social finance space for nonprofits.