NFP Transforms to ‘Social Benefit Company’
27 January 2016 at 10:10 pm
Crowdfunding platform Chuffed.org has announced its transition from a Not for Profit to a “social benefit company”, which the organisation has called a new structure for social enterprise in Australia.
Chuffed was launched in October 2013 as a registered non-DGR (deductible gift recipient) charity, and has since raised $5.1 million for more than 1,300 projects worldwide.
CEO Prashan Paramanathan said that while the charity model initially kickstarted the organisation, with the help of a $460,000 grant from the Telstra Foundation, its ability to scale up was limited.
“[Chuffed] took off in a way that was at the upper-end of our ideal outcome, and it took us a little bit by surprise,” Paramanathan said.
“And so a year, year and a half into our life as Chuffed we sat back and reflected on what we’d produced and what struck us is that the numbers were great and fantastic and we were putting through million of dollars into the sector, but when you looked at that, even in the Australian context, there was a huge amount still left to do.”
He said that, in order to scale its operations and help more NFPs, the organisation needed to source capital.
“Of the NFPs in Australia, maybe a couple of percentage points, if that, have ever tried crowdfunding,” he said.
“And so we thought, look we want to scale this up. We can see there’s a demand for it coming through, what’s the best way of doing that? And it became very clear at that point that we needed capital to scale.”
However, Paramanathan said relying on philanthropy as a charity would not provide the level of capital, in the order of millions, that he hoped to generate for Chuffed.
“We just didn’t believe that would come out of philanthropy, it’s just never happened before,” he said.
“Philanthropy is great, but it can tend to bolster fun, shiny, new stuff – trying to mount an argument of ‘we’re big, let’s become gigantic’ just isn’t likely to fly.”
Once it was clear that Chuffed would have to convert from a charity into a social enterprise, Paramanathan said he investigated different models.
He said that social enterprises in Australia were typically faced with the conundrum of “what do I actually incorporate as?” without the guidance of existing legal structures.
“We thought there’s got to be another way of doing this, there’s got to be a way of preserving what we originally set out to do, while still being able to raise equity,” he said.
Paramanathan looked internationally and focussed his research on the “two main influencers” – community interest companies (CICs) in the UK and public benefit corporations in the US.
“We steered pretty strongly toward the US model… when I visited the UK in June last year, what became clear was that CICs weren’t particularly helpful in raising equity and, if anything, they had stymied the equity impact investment market,” he said.
“In the UK, while CICs are popular because they really tackle that identity issue for social enterprises, there’s actually not a huge amount of equity investment into CICs.
“The US model, I thought, was much closer to what we should strive for because… if we’re not creating a structure that can get equity then we’re not really moving forward.”
Currently 20 states in the US have adopted public benefit corporation legislation. However, the laws vary between states, so Paramanathan focussed on Delaware and California, home to the two most common models.
“We tried to figure out how to do it in the Australian context and there’s been some great work done already from Clayton Utz and Small Giants, and also by Social Impact Hub, looking at this issue… because there’s not a lot of case law around it,” he said
“We had to try and figure out how you do it within the current Corporations Act, because obviously legislative changes are going to take longer than we have time for.”
While the Corporations Act didn’t prevent Chuffed’s new business model, there was a lack of case law to back-up the interpretation of the act.
“That has been the stickler for other people doing it, and I think, realistically, to get to the stage of having a legislative structure in place we’ll have to have a bunch of people who just do it anyway within the current Corporations Act,” Paramanathan said.
“Then I think that will help shape whatever legislation does get in place in the future.”
Using the existing research, Paramanathan created guidelines for an Australian version that he has called a public benefit company.
He said the original charity would still continue to own a percentage of Chuffed, and the organisation would now look to raise equity from external investors who are aligned with its vision.
He also said one of the unexpected positives from transitioning to a public benefit company was the support of Chuffed’s initial backer, the Telstra Foundation.
“This was a highly unusual thing to do… we were concerned that if we did this transformation, we’re essentially taking their grant and converting it into this new entity, and we had no idea how they were going to react to that,” he said.
“We brought it up with the Telstra Foundation board and the management. They were universally, amazingly supportive of the idea.
“It probably created what should be the model of corporates supporting social enterprises, which is de-risk them initially with philanthropic grants, but with the view of getting them to the stage where external commercial investors would want to invest in them.
“That would be an unbelievable role for corporate philanthropy to play in the space.”
With a new structure in place, Paramanathan said the long-term vision for Chuffed is to move the nature of giving from being an act of benevolence to a real value exchange.
“Over the last year, what we started seeing happen on Chuffed is that people were putting up these amazing gifts and experiences in particular,” he said.
“For $250 you could have a gardening workshop with Costa from Gardening Australia and all that money went to supporting a community garden in Kings Cross.
“And that money wasn’t the money that was tagged to go to some other charity, that was money that was going to be a Bunnings gift voucher or was going to go to some other commercial company.
“When you take this idea of moving giving from an act of benevolence out to be a real value exchange, all of a sudden you can transform the entire economy into a social good economy.”