The Last Mile, a US non-profit company, has launched an impact security in the form of a non-principal protected note for which payment obligations are subject to a guarantee. Incapital was the settlement agent, a role that included obtaining the Cusip and setting up DTC eligibility and also helping with setting up the settlement with US Bank, the trustee. "This impact security is the first financial product where an investor can invest in a non-profit and potentially earn a financial return explicitly linked to impact," said Catarina Schwab (pictured), co-founder and co-chief executive officer at NPX.

The deal is predicated on increasing access to capital for nonprofits, and for them to be able to raise more money over a longer period of time and at a lower cost. NPX advised The Last Mile on the security and how much it needed over how much time. While it would been a lot easier with one donor and one investor, there is donor fatigue in philanthropy in the US, according to NPX. The pledge to donate catalyses investor capital through a financial product, for the first time, and opens a large pocket of capital to the non-profit sector.

The four-year security allows the nonprofit to issue performance-based debt to investors and make required payments on the debt over time with donations from the established donor fund. At issuance, the nonprofit raised $800,000 from 11 investors and $900,000 from 16 donors, with the former amount collected by the nonprofit to fund the first web development shop inside a US prison, San Quentin State Prison in the Bay Area. "They educate the men in coding and then hire them in a development shop on the inside, so that companies like Airbnb can outsource coding work to San Quentin prison," said Lindsay Beck, co-founder and co-chief executive officer at NPX.

Every hour worked is paid out at the market rate of $50 per hour, so the donors are donating per unit of impact, which is hours worked, with a maximum of 18,000 hours worked for the $900,000 to be fully released by the donor fund. "The inmates are paid the highest wage inside prison for their work, which is $16.49 per hour; the next best wage is 95 cents per hour," said Beck. "The wage is set by the California prison system, not by the nonprofit."

The investors (The Chockstone Fund, Kate Harbin Clammer, Bradley & Chris James, David Keller, Montcalm TCR on behalf of their clients, Anna & Mason Morfit, Mark Newhouse, Duncan Niederauer, Omidyar Network, Ted Williams and Joe Wolf) receive up to the full donor amount if the impact goal of inmate hours worked over the next four years is met. "If the nonprofit hits the cover off the ball and all impact is achieved in the first year, investors will receive $900,000 back in year one," said Beck.

If the number of hours falls short, investors may lose some or all of their investment and the donors in the fund will redeploy the remaining funds to other nonprofits of their choosing, according to NPX. There will be an audited impact report on predetermined metrics, which, as the organisation achieves impact, will trigger payment (or not) to the investors "We tried to make it as simple as possible: there is one impact metric, which is assessed once a year," said Beck. "There is a limited tolerance for complexity."

The donors include Devon & Pete Briger, Camilla & Matt Field, Lulie & Gordon Gund, Hall Capital Partners Charitable Fund, Mimi & Pete Hathaway, Krishnan Shah Family Foundation, Lobeck Taylor Family Foundation, Amy & Drew McKnight, Perkins Hunter Foundation, David Pottruck, Joanna Rees & John Hamm, The San Francisco Foundation, Virgin Unite, Alexandra & Spencer Wells, Yagan Family Foundation and one anonymous donor.

A lot of the donors are small because they are trying something new, while the security allows them to explicitly link their donation to performance and so share the risk: under the old model, they would have donated and hoped, according to NPX. The partners in the project are: Artisans Collaborative, Community Initiatives, Incapital and Mission Measurement/Impact Genome Project.

The security was issued by a non-profit, so falls within the 3(a)(4) Securities Act exemption, and was developed by Anna Pinedo, partner and co-leader, global capital markets at Mayer Brown and NPX. There is no broker-dealer getting a commission, so the US Financial Regulatory Authority (Finra) is not involved. "As the plans are to do more of these deals, there may be a registered broker-dealer for a bigger deal," said Pinedo.

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