Representatives of the Centre for Applied Legal Studies (WITS), Bowman’s and the UCT GSB Bertha Centre have been engaging in conversations about impact investing legal practice in recent months. The collective identified that that Deborah Burand (Grunin Center for Law and Social Entrepreneurship, New York University) would be Johannesburg in November and resolved to utilise the opportunity to establish a two-day convening on the subject. A group of lawyers, impact investors and regulators met to discuss South African legislation and how the legal profession can support the growth of impact investing.
Crowding in more capital & Regulation 28
- South Africa has more potential regulatory levers for driving impact investment than available in the US where regulation has had a ‘chilling effect’ on capital commitments.
- Draft explanatory guidance on the use of Regulation 28 in South Africa have been developed but not been formally issued. Indications are a lack of prioritisation for impact investments, as opposed to inherent complexity or a need for further policy development, is the key constraint.
- Instead of developing policy inputs the emphasis may need to shift toward establishing and showcasing opportunities to utilise the legislation (e.g. exploring CIS vehicles) and establishing better accountability mechanisms.
- Practitioners are finding ways to circumvent some of the restrictions of the Venture Capital Company (VCC) form – including workarounds for investing in real estate and the practice of spreading deals over multiple vehicles to circumvent ticket-size restrictions.
- There are no similar tax benefited fund structures in the USA but work has been done to create specialised forms for social enterprises. However, these forms are largely based on state as opposed to federal law and have not been well tested in the courts to date.
- There are concerns the VCC regime may not be extended past 2021 and collaboration with existing lobby groups such as SAVCA may be beneficial to assure its longevity and relevance for impact investments. The ILO also has an upcoming convening in Cape Town that will have corporate forms for social enterprise as one area of investigation
- Data protection is topical in the US as impact oriented initiatives such as impact bonds have been finding it difficult to navigate data protection laws when proving their impact. There is increasing recognition that programme beneficiaries may not find contractual information on use and ownership of their personal information accessible.
- South Africa has data protection laws in place but concerns about unauthorised transfers of personal information are still relevant. At times, it appears that inappropriate usage of data may be ignored as a minor concern relative to impact organisations’ wider social benefit mission.
- This matter needs to be flagged as an area of concern going forward but most social enterprises in South Africa are likely not yet at a point where navigating the data protection landscape for impact reporting purposes is the pressing concern.
- French solidarity funds, which enable up to 10% of a pension-fund beneficiary’s contributions to go towards an impact mandate, are an interesting example of liberalising access to impact investments.
- A domestic solidarity fund would be an interesting area to explore. However more work is required to gauge what the best institutional home of such an offering would be as trust in public sector bodies and major private financial institutions that host pension funds is low at present.
- Legislation, along with legal action, sectoral mobilisation, and education on fiduciary duty, can be a lever for driving greater accountability amongst trustees and asset consultants.
- It is also useful to research how effective self-regulation mechanisms can be established – possibly with a view towards formally incorporating them into law further down the line.
Transformation and impact investing (BBBEE)
- There is significant competition for social impact funding in South Africa and the principles of transformation, embedded in BBBEE legislation, can be utilised as a tool to more effectively channel funding towards socially impactful investment.
Training and research
- The tools available to lawyers for impact deals are the same as for commercial transactions, however their application in evaluating risk-return is starkly different to ensure protection of the social yield
Legal clinic and partnerships
- To be effective, clinic pedagogy must be immersive and requires substantial supervision of law students by a registered candidate attorney.
- It is imperative for South Africa to build a legal community of practice to crowd-in expertise and promote efficient and effective lawyering around specialisations, such as impact investing.
- Establishing new journals or seeding new ones can be a means of encouraging legal scholarship on impact investing.
- NYU’s recent research has also been in areas including corporate governance arrangements, practices used to embed impact objectives in legal agreements and processes for implementing amendments to existing impact investment agreements.
- Monitor upcoming changes to the legal environment and lobby regulators to accord greater urgency to issuing guidelines that facilitate the flow of institutional funds to impact investing
- Research options and proposed amendments for widening use of the VCC form in impact investing and support initiatives lobbying to extend it past 2021
- Research the enabling role of creating a dedicated social enterprise corporate form in South Africa.
- Research mechanisms for driving reporting and accountability against both existing legislation (e.g. NDP, and Regulation 28) and new approaches such as self-regulating mechanisms.
- Seek to maintain an awareness of the need to drive data protection in impact investing even as initiatives to support improved impact transparency evolve.
- Develop collateral such as questionnaires that enables commercial lawyers to introduce impact investing lens to clients interested in investing for impact.
- Develop mechanisms that can be used to enable social enterprises to access a greater share of enterprise development funding in the face of considerable competition from more traditional SME’s.
- Map the wider landscape of stakeholders that may be able to provide resources (e.g. host a secretariat) or funding towards legal training initiatives e.g. Business Leadership SA, SAIFAC (at the constitutional court), DAAD or other university faculties.
- Develop a roadmap for establishing a legal clinic involving engaged law faculties e.g. at the University of the Witwatersrand or the University of Pretoria and establishing collaborations between local and NYU legal clinics for cross border transactions.
- Develop an impact investing legal executive education course for lawyers in partnership with existing reputable legal training providers e.g. Thomson Reuters Foundation and NYU. To be developed alongside Professor Deborah Burand.
Please contact Barry.firstname.lastname@example.org for further information on this work stream.