Thursday
September 1
2011

Pankaj Jain

SOCAP11 Preview: Legal Catch-Up With Social Innovation

Editor’s note: The following is one of several previews posts leading up to September’s SOCAP 11 Conference on Sept. 6-9 in San Francisco.

Law is typically condemned to play catch-up with social innovation.

Ask Jenny Kassan, who, among other things, is the managing director of Katovich Law Group and CEO of Cutting Edge Capital. As an attorney and community development consultant, Kassan specializes in environment-friendly and socially responsible ventures. Her legal practice areas include consulting for start-ups, small and growing businesses and non-profit organizations. Kassan has also co-founded the Sustainable Economies Law Center (SELC), a non-profit organization that conducts education and advocacy on legal issues related to community asset ownership, cooperative enterprise, urban agriculture and sustainable food enterprise, alternative methods of exchange, and affordable and supportive housing. Her legal specialties include social enterprise law as well as what she calls “sustainable economies,” an approach that helps social entrepreneurs and mission-oriented community groups wade through laws that were not originally designed with them in mind.

“One of the reasons we started SELC is that laws in the US are not designed for the innovations that many people are trying to do to create a more sustainable economy,” Kassan says. “The laws were created for an entirely different set of economic relationships – ones in which there are extreme disparities between the players involved – for example, employer-employee, producer-consumer, landlord-tenant, securities offeror-investor. These laws were not created for situations in which the relationships are more egalitarian like in a worker-cooperative where the employer and the employees are the same people. Or in a food sharing club in which the producers and the consumers are the same people. Those kinds of arrangements result in legal grey areas and it is easy for people who are trying to create these new kinds of relationships to get into legal trouble. Of course, many of these innovations are exactly what we would like to encourage, but the legal system can make them risky and expensive to do”.

Government policy and regulations are a means to an end and not an end in themselves. “Laws governing non-profits and social business enterprises are frustrating – the distinction between non-profits and for-profits is outdated and no longer necessarily relevant. Many for-profits are driven by a social mission in the same way that nonprofits are.”

In response to a question on the ideal choice of legal structure for social business enterprises in the U.S., Kassan notes “it is not an easy choice – the answer depends on the business model as well as the state in the U.S. that you are doing business.” As an example, she shared an interesting story with me about Equal Exchange, that is a worker-owned cooperative business based in Massachusetts and has created an amazing model for fulfilling its mission while simultaneously making money for its investors. Read more about this innovation here in detail.

New legal initiatives such as the L3C and the B Corporation are trying to address some of the problems confronted by social business enterprises. Kassan adds, “These are still very new so it is quite hard to forecast whether they will be able to solve the problems that they were designed to address.” Interestingly enough, Katovich Law Group and Cutting Edge Capital are themselves certified B Corporations, which integrate socially responsible and environmentally friendly practices throughout their operations.

As a lawyer who works with many clients who have a “hybrid structure,” i.e. a separate for-profit organization and non-profit organization co-existing together, which have synergistic relationships with each other), Kassan says the term is very broad and many purposes vary.

“A lot of problems come up when an entrepreneur that wants a hybrid structure is motivated by the potential for channeling grant funds to a for-profit business. Nonprofit organizations are so constrained in what they can do that it is not worth using one unless the primary motivation is a charitable or educational mission”.

Are the legal regulations and tax laws keeping pace with social reality? According to Kassan, an instance when laws and policy in the U.S. are strangling innovation in the new economy is in relation to regulating the flow of funding to small businesses in the U.S.

“The legal framework in relation to the flow of capital to small businesses is in an unhealthy state. Half of the US economy is made up of businesses that 98 percent of us cannot invest in. This includes small independent businesses within our communities that we might interact with regularly – enough to make an informed decision about whether they would be candidates for investment,” she said. “Instead, those of us who are not wealthy investors are required to invest our money in a casino called Wall Street – and misallocation of investment capital is a huge problem. Small businesses are the primary drivers of innovation and job creation and yet they have a severe lack of access to capital. This is a huge issue, which if not addressed properly, will be catastrophic for the economy”.

For a deeper perspective on why 98 percent U.S. citizens are currently blocked from impact investments, the movement to break down those institutional barriers, and innovative moves to democratize access to capital, meet Kassan and join her in San Francisco at SOCAP 11 for a panel titled “The Democratization of Impact Investing: Breaking Down Barriers to People Powered Capital,” at 11:45 a.m. Wednesday, Sept. 7.

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