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Project on Philanthropy, Policy, and Technology September 2013

Social Economy Policy Forecast 2013 Lucy Bernholz Rob Reich

September 2013

Project on Philanthropy, Policy, and Technology

About Stanford PACS The Stanford Center on Philanthropy and Civil Society (Stanford PACS) is a research center for students, scholars, and practitioners to explore and share ideas that create social change. Its primary participants are Stanford faculty, visiting scholars, postdoctoral scholars, graduate and undergraduate students, and nonprofit and foundation practitioners. As publisher of the Stanford Social Innovation Review, Stanford PACS informs policy and social innovation, philanthropic investment, and nonprofit practice.

About the Digital Civil Society Lab This series of reports is part of the ReCoding Good Project of the Digital Civil Society Lab at the Stanford Center on Philanthropy and Civil Society. The Lab studies the intersections and implications of digital technology and civil society, with emphasis on experimentation, research, and public policy. For more information, please see and @digcivsoc.

This work is licensed under the Creative Commons Attribution-ShareAlike 3.0 Unported License. Policy Forecast


September 2013

Project on Philanthropy, Policy, and Technology

About the Authors Lucy Bernholz is a Senior Fellow at the Stanford Center on Philanthropy and Civil Society where she leads the work of the Digital Civil Society Lab.

Rob Reich is Faculty Co-Director of the Stanford Center on Philanthropy and Civil Society. He is Associate Professor of Political Science and Ethics in Society and Associate Professor, by courtesy, of Philosophy and at the School of Education at Stanford University.


Policy Forecast

I. Introduction The social economy consists of the broad array of mechanisms or tools for the deployment of private resources for the public good. We identify policy issues related to the structure and operations of the social economy, with a particular eye to the issues facing charitable nonprofits and philanthropic foundations. The first section frames each of several policy domains:

• Governance and Accountability • Finance • Political Activity and Campaign Finance • Digital Infrastructure and Content, and Taxes Within each domain we identify active policy and note whether the discussions are occurring among legislators, regulators, within industry groups or in the courts. This section serves as a map to a wide-range of pending policy decisions. The next section gazes into the more distant future and is, therefore, more speculative. We aim here to survey the landscape for new policy ideas percolating among scholars, activists, and practitioners that are not currently on any administrative or legislative agenda, but that are worthy of discussion. The forecast draws from the work of the Philanthropy, Policy and Technology Project at Stanford University’s Center on Philanthropy and Civil Society (PACS). The forecast is part of an ongoing exploration of the rise of novel mechanisms for the private financing and production of social and public goods, including the emergence of a digital civil society and the regulatory, practice, and policy options these developments bring forward.

Policy Forecast


II. Active Policy Domains of the Social Economy Governance and Accountability This section covers issues related to how different forms of enterprise in the social economy are governed and the norms and requirements of public accountability and reporting for each form. At the root of many of these policy ideas is a growing recognition that one institutional form—the nonprofit organization—is no longer sufficient or applicable to many of the structures that make up today’s social economy. The nonprofit structure itself is the focus of some proposed changes. Other problems and potential solutions arise from the conflicting requirements for different enterprises involved in similar types of work.

Governance Different enterprises forms require varying degrees of oversight over management. Nonprofit organizations must have a board of directors that has both fiduciary and legal responsibility for the organization, including a set of principles regarding endowment investment management. Nonprofits do not have shareholders, though

Different enterprises are governed with varying degrees of public oversight.

many are membership organizations and all of them rely on some degree of public support. The size of their “publics” varies greatly from a few people to millions, and that support might be financial, volunteer time, or online awareness and expression. A member of the public can

express their interest in a nonprofit’s actions by volunteering, seeking a board position, giving or withholding financial support, through social media expression or drawing the attention of legal overseers if justified. Public companies must have a board of directors, though independence of the board from management is a matter of good governance principles not regulation. Public companies are operated to benefit shareholders, who can exercise their authority through proxy voting and shareholder petitions. Privately held businesses have the fewest outside obligations; they also 4

Policy Forecast

face strict limits on how they can raise outside capital. Even the registration requirements differ: individuals can self declare their status as a 501(c)(4) social welfare organization and begin operating without IRS approval. Other 501(c) organizations as well as businesses need to register within their state of operation and with the IRS. The new forms of social businesses— including benefit corporations and low profit, limited liability companies (L3Cs) offer variations on the governance models of private companies, particularly in terms of the fiduciary responsibilities of board members. Shareholders are increasingly demonstrating their authority over public companies through petitions and proxy voting, and several organizations exist to organize shareholders. There exist numerous proposals to change the definition of fiduciary responsibilities for nonprofit endowment managers—both the board members and the professionals that they hire. 1 The question of nonprofit stakeholders also deserves attention. Several organizations, such as Creative Commons, Digital Public Library of America, Guidestar, The Mozilla Foundation Open Knowledge Foundation, Ushahidi and The Wikimedia Foundation are examples of global, digital communities for whom the typical governance structures of 501(c)(3) nonprofits are problematic in fundamental ways. They are blazing new paths regarding community accountability and decision-making, cross-border (and -currency) financial management, and multiple layers of reporting. For these organizations, and many to come, the governance requirements of nonprofits—particularly in terms of how decisions are made, how they are reported, who has final say, and to whom results are reported—are more limiting than helpful. Similarly, the ability of individuals to band together to take action without formal organizational hubs (as seen in the experiences of TEDx, CrisisCommons, the Occupy movement, Arab Spring and other national protests, and the protests against the Susan G. Komen Foundation in 2012) raise the possibility of new governance needs for global, digital, networked civil action.2 Some proposals for addressing these needs are identified in the third section of this paper. Policy Forecast


Reporting and accountability The enterprises in the social economy are organized under several different legal forms, from nonprofits to social welfare organizations to social businesses. Each enterprise form has different requirements about what it must report to the public and on what schedule. For example, charitable nonprofits with more than $25,000 in annual revenue are required to file annual financial reports with the IRS. Publicly owned social businesses file quarterly corporate statements. Privately owned social businesses, like privately owned commercial businesses file no public statements unless they are organized as benefit corporations, in which case there is an annual report of social/environmental activities filed with an independent audit agency at the state level. Social welfare organizations, or 501(c)(4)s, file annual reports with the IRS; 527s file monthly or

Each enterprise form has different requirements about what it must report to the public and on what schedule.

quarterly 8872 reports on their activities, as well as an annual report with the IRS. The most visible problems caused by these reporting differences have arisen from the growth in politically active social welfare nonprofits. Because 501(c)(4) social welfare organizations

can pre-register as tax exempt, file financial reports annually, and don’t need to disclose their donors they have become an attractive option for funding and conducting political activities with far less scrutiny than 527s or PACS. These differences have received significant media attention3 and are increasingly being scrutinized by transparency advocacy organizations such as The Sunlight Foundation and Some states have passed legislation to subject these organizations to higher levels of scrutiny and reporting, but efforts at the federal level have stalled. Charitable nonprofits also face different reporting requirements from social businesses, specifically those organized as benefit corporations. Benefit corporations must post an annual benefit report on the public portions of their websites and some states require these be filed with the 6

Policy Forecast

Secretary of State (though the Secretary has no power over the reports). Nonprofits must file annual tax forms, which include information on the organization’s finances, personnel and investments. The reports must refer to one of a dozen or so independent, third-party standards for reporting benefit. Somewhat ironically we have reached a point where organizations structured solely for social benefit (nonprofits) must report only on their financial activities whereas organizations structured for financial and social benefits (privately held social businesses) must report only on their social impact.

Disclosure requirements Donor disclosure is another important area of policy misalignment. Organizations structured under section 501(c) of the tax code do not need to disclose their donors publicly whereas donors to

Pressure to change the disclosure rules runs the risk of handicapping nonprofit organizations working in sensitive issues.

politically focused organizations (such as 527s or PACS) must be identified. Pressure to change the disclosure rules runs the risk of handicapping nonprofit organizations working in sensitive issues where donor disclosure is potentially dangerous or undermining valuable traditions of anonymous giving. Donor disclosure is made more difficult because of the different reporting authorities and timetables for (c)(4) organizations and 527s or PACS (the former report to the IRS, the latter to the FEC).

Policy Forecast


Table One: Governance and Accountability5 Issue

Conflict between practices of disclosure for political donors and nonprofit tradition of anonymous giving



Some states setting new requirements (NY); Others allowing their state elections commissions to investigate 501(c)(4) (MT and CA) Diversify and Change state As of 2013, benefit expand corporate corporate codes to corporations are structures include a variety of legal in 14 states benefit corporations, and L3Cs in 10 L3Cs, or H corporations. Expand pool of Expand mission Activists proposing capital available for investment options changes to the investment Uniform Prudent Investment Management Act to allow nonprofit endowment managers greater leeway in making mission and program-related investments Expand peer-to-peer President Obama Presidential budget businesses at local signed a budget order for FY 2014 level order for FY 2014 expanding the pool of nonprofits which must file electronically (eFile 990s) Seek faster and President Obama Presidential budget more efficient filing signed a budget order for FY 2014 of nonprofit reports order for FY 2014 expanding the pool of nonprofits which must file electronically (eFile 990s) Seek limits to Proposals to limit Legislation limiting nonprofit executive the pay of nonprofit pay has been pay executives and passed in several senior managers. states No similar proposals (FL, MA NJ, NY) for commercial or The Senate Finance benefit businesses Committee is investigating some cases (e.g. NYU)


Policy Forecast

Requirements to disclose all donors from broader array of 501(c) organizations, including 501(c)(4)


State attorneys general, state political practices commissions, FEC

IRS, state departments of corporation

State attorneys general



State attorneys general; Senate finance committee

Finance One of the key forces of change within the social economy is the blended mix of financing options for enterprises focused on social returns and/or financial returns. How these sources are accessed, regulated, and used as incentives for innovation shapes the social economy. The different forms of funding come with different type of regulatory oversight and at different costs. Grant dollars are expensive capital for nonprofits to access, because of the difficulty in finding funders, the time required to apply, the lack of consistent applications, and the idiosyncratic reporting requirements of each funder. Capital that focuses on financial returns may divert attention from social missions. Reporting mechanisms for social outcomes are not standardized or as developed as financial reporting mechanisms. The implications of financial innovations and proposed policy changes on one type of capital are rarely considered in light of their ripple effects on other forms of funding.

Sources of funding The full spectrum of capital and operational funding for nonprofits, social welfare organizations, social businesses, religious organizations and commercial enterprises includes:

• Grants from individuals, institutions and government agencies • Contracts for service • Fees for service or product sales (earned income) • Membership dues • In-kind donations • Shared services/shared cost arrangements • Revenue derived from intellectual property • Investment income • Equity investments • Debt financing (loans or loan guarantees) • Tax credits and exemptions

Policy Forecast


Old assumptions about financing streams for nonprofits and businesses basically separate along the lines of access to government grants, equity investments, and tax exemptions. These assumptions are breaking down. Impact investors are creating many ways to provide equity investments for social returns, although it is still not possible to take an equity ownership

Old assumptions about financing streams for nonprofits and businesses basically separate along the lines of access to government grants, equity investments, and tax exemptions. These divisions are breaking down.

stake in a nonprofit organization. Tax credits and exemptions are increasingly available beyond nonprofits. For example, Philadelphia provides tax credits specifically to B corporations through its Sustainable Business Tax Credit.6 Similarly, government makes grants to businesses in several sectors including energy, health, and transportation.7 Local governments often provide tens of millions of dollars worth of tax incentives to lure or keep local employers.8 Tax-privileges through “qualified private activity bonds,” also allow municipalities to provide low-cost commercial finance options for private sector

building projects.9 Traditional revenue sources such as membership dues are declining, forcing organizations to adapt and attempt new models. As the regulatory regimes blur, some of those alternative revenue sources (such as creating associates instead of members) may trigger a different set of regulations.10 What is true now, more than ever, is that “following the money” into the social economy is much more complicated than simply tracking philanthropic dollars to nonprofits. The multiple sources of private finance do more than simply expand the available dollars—they come with a range of different financial expectations and multiple new overseers.


Policy Forecast

Table Two: Finance Issue


Concerns about Limit the fees that nonprofit fundraising the fundraising firms practices can charge, which is often calculated as a percentage of the total funds raised Expand available capital to social enterprises Expand capital available to impact investing

Use of crowdfunding, JOBS Act Development of industry groups and voluntary tracking mechanism

Lack of common standards for tracking and reporting on outputs and outcomes

Creation of the Sustainability Accounting Standards Board (SASB) Development of Global Impact Investing Rating System (GIIRS) and Impact Reporting and Investment Standards (IRIS)



Various states have placed caps on fundraising percentages, require reporting of these relationships and their fees Partly awaiting rulemaking by SEC

State attorneys general

The Global Impact Investing Network (GIIN) operates and has spawned partners such as Toniic, focused on smaller investors. Impact investors were successful in bringing their proposals to attention of 2012 G8 Summit.

GIIN partners include: the UK’s Department for International Development; Rockefeller Foundation; the USAID; Omidyar Network; and major industry players, such as JP Morgan. Note: these are not regulating authorities, they are industry leaders GIIN led the development of IRIS the leading industry standard for impact investors.

Securities Exchange Commission (SEC)

All three of these proposals are being implemented within the industry. None have yet led to policy changes about requirements. SASB is developing standards within different industry sectors. The health sector industry standards have been released for public comment and are in the final stages; others are scheduled to begin shortly. None have been implemented yet.

Policy Forecast


Currently, policy activity here is focused on expanding tax credits beyond nonprofits specifically at the local level (see section below on taxes) and building a base of impact investors to advocate on relevant issues. The nonprofit organization behind B corporations, B Lab, has successfully changed corporate code in several states to recognize benefit corporations. Innovations in impact investing, where efforts focus on using investments in enterprises that can achieve social and financial return, are likely to both require and catalyze regulatory changes. The 2012 JOBS Act, which greatly expanded access to crowdfunded equity investments, is one example (though implementation is on hold). More than a decade has been spent trying to launch secondary markets for social enterprises. These exchanges will require new types of listing and services, and may well change how existing exchanges operate. These efforts have already birthed new types of standardized reporting—these might one day become mandatory. An industry-led effort, the Sustainability Accounting Standards Board (SASB), is geared toward changing practice (and, potentially, policy).

Political Activity and Campaign Finance This domain includes rules about tax-exempt organizations involved in lobbying, advocacy, electioneering and direct political activities. Key issues include defining both the scope of such activity and what must be disclosed about participants in it. Since 2010, when the United States Supreme Court decided the Citizens United v the FEC case, organizations established as nonprofits under 501 (c) (4) and 501 (c)(6) of the Internal Revenue Code have become more active in raising and spending funds on political campaigns. Responses have ranged from efforts (on one hand) to extend such activity to all nonprofits and (on the other hand) to define free speech as a right of natural persons and remove all enterprises from funding political activity. Much of the actual policy discussion and proposals have been more tactical, focusing on the implementation and definitions used by regulators of these organizations.


Policy Forecast

Defining the boundaries of political activity Laws setting up public charities and social welfare organization do not permit them to devote themselves to political activities, though complicated rules permit some lobbying, advocacy, and electioneering. There are interesting questions about whether it is justifiable to limit the political activity of nonprofit organizations; these questions revolve around attempts to define the appropriate boundary between political and associational life; to preserve the public sphere from being colonized by private and particularistic interests; and to protect equality of opportunity for political influence against unregulated and secret flows of private money into politics. In the wake of the Citizens United decision, there are important legal questions about the political activity of nonprofit organizations, especially that of 501(c)(4) social welfare groups. At issue currently

In the wake of the Citizens United decision, there are important legal questions about the political activity of nonprofit organizations.

is whether the legally allowed political activity of 501(c)(4) organizations, coupled with their ability to maintain donor anonymity, is fundamentally changing how both the campaign finance rules and charitable nonprofit regulations work in practice. The legal paradigm for campaign finance is transparency of donor identity; the legal paradigm of nonprofit finance is permissible anonymity. When nonprofits become significant players in campaign finance, the two paradigms clash. The different points of view on the current situation range from a small group that seeks to allow all nonprofit organizations, 501(c)(3) public charities as well as 501(c)(4) social welfare organizations, to engage in some political activities and maintain donor anonymity; those who would limit all political activity by all nonprofit organizations; and those who would permit political activity but require disclosure of donor identity. Serious consideration is being focused on defining the meaning of certain terms within the current regulations, specifically the phrases

Policy Forecast


“insubstantial” and “political activity.” Information on these efforts can be found in the Bright Lines Project of Public Citizen.11 Efforts are underway at the state and federal level to push legislation changing the donor disclosure rules for 501(c)(4)s exclusively. Several states have increased donor reporting requirements related to political activities.

Several states have increased donor reporting requirements relating to political activities.

The IRS is also considering defining “primary” political activity to allow for better monitoring of 501(c)(4) activities. Many grassroots efforts exist too; some aim for a Constitutional amendment to restrict free speech rights to “natural persons,” rather than associational or corporate entities; others aim to make fundamental changes to

campaign finance such that the deployment of private assets is either unnecessary or only a marginal source of political funding. Finally, we see a rise of transparency organizations devoted to providing information about campaign finance and shining a light on the growing influence of wealthy individuals, dark money, and nonprofit organizations (e.g., Sunlight Foundation, Maplight, United Republic, Rootstrikers).


Policy Forecast

Table Three: Political Activity and Campaign Finance Issue


Improve the review Congressional of social welfare investigations of IRS organizations’ process applications for taxexempt status

Define bounds of political activity by nonprofits

IRS proposal to define “primary” social welfare definitions

Disclose the names of donors (individuals and institutions) to politically active nonprofits

DISCLOSE ACT. Campaign Finance Reform. Efforts to overturn Citizens United. Public campaign funding proposals



Fast tracking proposals still on hold after 120-day review process. Report on nonprofit journalism organizations emphasizes outdated nature of IRS review procedures. The IRS says it will define “primary” social welfare activities. Some states are setting their own limits and additional disclosure requirements Some states are increasing disclosure rules (NY).

Congress, IRS. The House Oversight and Government Reform Committee is currently holding hearings to investigate the IRS’s targeting practices.

Media coverage of think tanks’ use of nonprofit status, political fundraising, and political gifts.

FEC, IRS, Supreme Court ruling in Citizens United v. the FEC.

State legislatures, US Congress, Supreme Court ruling in Citizens United v. the FEC.

Grassroots and civil society efforts to change campaign finance, amend constitution (e.g. Rootstrikers, Brennan Center, Democracy 21, FreeSpeechForPeople, MoveToAmend)

Policy Forecast


Digital Infrastructure and Content The proliferation of online data, often available to the public for free (though there are costs to providing the data) is challenging established business models for many enterprises, including nonprofits. The result so far has been experimentation with new forms of revenue, new ways to cover the costs of managing the data, and the creation of new enterprises to use the data. These efforts are shifting the landscape of organizations and how they operate. At the moment, most of the energy is still focused on enterprise-level innovation and not yet on oversight or regulation of the organizations themselves or the digital data driving these changes. More and more of our lives involve work done with digital tools. This is true of our professional lives, our personal lives, and our public lives as citizens and members of civil society groups. We focus here on the policy proposals for digital infrastructure and

More and more of our lives involve work done with digital tools.

content concerning our public lives as citizens. The digital environment represents both new horizons for, and new limits on our freedom of association. We are using digital tools to express ourselves as individuals, communities

and citizens. Examples range from the distribution of online petitions, fundraising via text message, using open government satellite imagery to develop source maps for disaster relief or health care delivery, to the crowdfunding of art, research, and social services such as parks, education, and libraries In this context, the regulatory frames that govern how those tools (infrastructural, content-specific, and the associational relationships supported by the tools) are used become increasingly important.


Policy Forecast

This sphere includes at least three levels of regulatory oversight:

• the digital infrastructure itself • rules about data created, distributed, used, and stored on the infrastructure

• rules governing the permission to speak online and to create and

maintain relationships or associations built online.

Policy Forecast


Table Four: Digital Infrastructure and Content Issue




Manage the sharing and reuse of digital content. Tensions between copyright control and broader access Manage conflicting incentives of users and corporate service providers regarding data use and ownership

Civil society organizations, philanthropists, and online networks encouraging use of alternative licenses Some industry specific efforts to make corporate terms of service more clear through icons

Several large foundations using or considering defaulting to Creative Commons licensing Each company determines the terms of service for use of its products. Some companies have different terms for different products

Relevant statutes: Digital Millennium Copyright Act (DMCA) Computer Fraud and Abuse Act (CFAA At the federal level the Federal Communication Commission oversees corporate practice, but companies still declare their own terms of service

Corporate outreach to users Third party analysis of corporate practice

Concerns over government access to data stored on corporate servers


Policy Forecast

Companies subject to government oversight, subpoena, and data requests. Not required to make users aware of these, though increasingly the largest Internet companies are doing so

Electronic Frontier Foundation publishes annual “Who has your Back?” report comparing corporate policies Proposals include Three lawsuits filed banning warrantless in 2013 against searches, making the NSA (ACLU, process more EPIC, and EFF are transparent, plaintiffs) requiring corporate disclosure of Congressional cooperation hearings on Patriot Act, Federal Intelligence Surveillance Act, NSA operations

National security agencies operate through private intelligence court to access networks States have some authority over law enforcement’s practices for subpoenas and warrants for data searching

Congress, FISA, Patriot Act Corporate disclosure practices



Adapting to new requirements and practices for publishing data and requiring online data submission

Federal requirement for eFiling 990 to go into effect in FY 2014

Managing expectations and adoption of new data standards

Emerging practices for open access research publishing require new business models

Ensuring fair, equal and universal access to digital content Providing universal broadband access


Interoperability of public data sets affect 990s and/or nonprofit reporting

Municipalities publishing data according to certain standards


State and municipal mandates Globally, the IATI standards include national and foundation data

Foundations and nonprofits considering how to mesh their data with these standards to provide more comprehensive analysis of revenue flows Public agency data A first ever Data Federal agencies, publishing from Transparency Policy State legislatures NIH, other federal Conference will and state level. be held in DC in Opportunity to align September 2013 policies so as not to look at multiple to create conflicting requirements, burdens on NPOs conflicting standards, and promising practices Presidential Executive Order FY2014 Requirements for NIH mandates publicly funded open publishing of research to be data and research; shared other agencies considering similar requirements. Implications for hospitals, universities and other nonprofit research organizations. Public interest Market changes proposals for “net in cable television neutrality� industry changing advocacy dynamics. Mobile carriers big influence on issue Affordable universal New players access (Google) entering market. Municipal Wi-Fi very uncommon

Individual funding agencies

Federal Communications Commission, Federal Trade Commission Federal Communications Commission, Federal Trade Commission

Policy Forecast


Digital infrastructure Currently, digital infrastructure policy relevant to the social sector centers on maintenance of and access to broadband technologies. This breaks down further into two issues: (1) access to the physical infrastructure, which may be limited by geographic proximity or cost, and then (2) assurance that all content that is distributed over the network is treated fairly and without bias to content providers. Regulatory authority over issues such as getting cables or fiber network to rural and low-income areas and ensuring pricing structures that meet a broad range of needs falls to the Federal Communications Commission and Federal Trade Commission. State and municipal governments also play a role, especially if they opt to provide their own local networks. Telecommunications firms (AT&T, Verizon) or cable television companies (Comcast, Time Warner) own most of the broadband infrastructure in the United States. Wireless spectrum is similarly

As more and more of our communications take place over broadband or wirelessly, the rules that guided telephone connectivity are being left behind.

controlled, though it is leased from the federal government. There are so few providers of these services that Google recently entered into the market to provide high-speed fiber in a few select localities, mostly to demonstrate the economic potential of such infrastructure. In previous eras the infrastructure for telephone connectivity was managed by private companies but regulated nationally to provide universal

access, rural reach, and emergency connectivity. These rules do not apply to the cable and fiber broadband infrastructure. As more and more of our communications take place over broadband or wirelessly, the rules that guided telephone connectivity are being left behind. Policy issues at this level include making the principles of universal access and emergency connectivity a part of the wireless and cable infrastructure, 20

Policy Forecast

increasing municipal oversight of this infrastructure to ensure public input and access, and encouraging greater competition among providers so as to ensure lower cost access. In addition to the management and oversight of the physical structure, policy issues exist around how content (data, photos, text, movies) is “moved” across the Internet or the wireless spectrum. The issue of content distribution is known colloquially as “net neutrality,” and the question is whether or not all content will be treated equally (as are all phone calls) or if companies can provide a “higher speed, more expensive” option to select providers. Doing so would also allow companies to slow or block other content.

Data privacy, ownership, and access Anything that is transmitted over the Internet or through wireless systems gets translated into digital bits of data – ones and zeros. These bits travel over networks that are owned by private companies and are stored on their equipment. This means that

Most users never read the fine print that explains how Flickr or Instagram can use their photos, what YouTube might do with their videos, or how long Google plans to store their email.

everyone who transmits ideas, photos, video, text or numbers over the Internet is effectively sharing a copy with at least one party (the service-providing company) beyond their intended audience. The companies write the rules that govern data use, ownership and storage on the Internet or on mobile phone systems. These rules, known as “Terms of Service,” lay out what the companies can do with a user’s information, under what terms the users of the service can delete or remove their data, and how long the companies are planning to store the information. Most users never read the fine print that explains how Flickr or Instagram can use their photos, what YouTube might do with their video, how long Google plans to store their email, or to whom Facebook might provide data access. As more people use cloud storage services, Policy Forecast


ever more material is being saved on servers where the user is not in charge of how the material is used, the company is. The companies are subject to government oversight and may be required to provide customer data to various state or national government agencies. State legislatures and Congress have authority to write legislation guiding these government requests for the information. Recent revelations about the extent of government data surveillance efforts, and the working relationships between government agencies and companies such as Google, Facebook, Microsoft, Skype, Twitter, and others, have raised public awareness of these issues. As people share information electronically and publicly, more of us than ever are becoming aware of how our ideas or photos or art are used by others. This reality of digital media – the ease with which information can be used and changed, has made intellectual property law and licensing issues relevant to many more people than was the case in the age of print. Licensing of material for use by others draws copyright law into the mix of the social economy, and many individuals and organizations are using alternative licensing schemes (such as Creative Commons) as tactical parts of their broader change strategies. This has implications for how institutions share information to build community and advance their ideas. It has also been a source of great policy tension between companies that move information over the Internet, the companies that produce and manage that information (particularly music, movies, and books) and the individual creators (artists and authors) who generate the information. These two levels of digital life—how the infrastructure is managed and who owns or has access to the material transmitted or stored on that infrastructure—make digital interaction fundamentally different than inperson or analog communications. Previous technologies for sharing and storing information—written letters sent via post or phone calls that might be perhaps stored on an answering machine—were owned and controlled 22

Policy Forecast

by the parties involved, not by the postal service or the phone company. The parties involved controlled what was saved, who saw it, and were fully informed if warrants were issued for its release. These assumptions don’t hold in the digital sphere. Media and policy attention to these issues is on the rise. The tradeoffs are typically framed between individual liberties (of the users of digital services) and security of the state. There are also business tradeoffs, as commercial enterprises can provide free access to their tools in return for profits generated from the aggregate data. The policy debates about data privacy, ownership, and access have generally involved large corporations and policy makers, though more recently the broad public has engaged in efforts to stop certain activities (e.g. the SOPA/PIPA campaigns). Civil society organizations focused on

There are also business tradeoffs, as commercial enterprises can provide free access to their tools in return for profits generated from the aggregate data.

free speech, civil liberties, and freedom of the press are very active on these issues, and are creative users of the mass organizing power of the Internet and wireless phones to involve the public.12

Associational activities Finally, we need to consider the associational activities that the Internet and wireless spectrum facilitate. Americans enjoy a right to associate in civil society in the analog world, where we can peaceably gather to pursue any shared interest. Digital technologies greatly expand our ability to do this— making it possible to create online interest groups, find others for face-toface meetings, and connect local gatherings to global networks. The rules regarding associational activities on the Internet or on mobile phones are essentially a sub-category of the rules that guide data storage and ownership. Individual users’ keystrokes, contact information, Policy Forecast


call records, web activity, GPS locations, or other digital traces about whom they know and associate with are stored as data on the systems maintained by the service providers. This information—who was called, emailed or messaged—is managed in the form of metadata (data about the data). The metadata on who you call, where you go, and who else is present are passively produced byproducts of GPS systems and cell tower triangulation systems in phones, cars, and other electronic devices. Revelations about the scope of United States government data collection on citizens and others, through the National Security Agency’s PRISM program and the Foreign Intelligence Surveillance Court, have been met with calls for both legal and regulatory redress.

The metadata on who you call, where you go, and who else is present are passively produced byproducts of GPS systems and cell tower triangulation systems.

Several civil society organizations, including the American Civil Liberties Union, Electronic Privacy Information Clearinghouse and Electronic Frontier Foundation have filed law suits against the National Security Agency, in some cases petitioning directly to the U.S. Supreme Court for violations of the First (freedom of speech and association) and Fourth Amendments (protection from unreasonable search and seizure and the

issuance of warrants without probable cause). Legislative responses to the news include tighter restrictions on private contractors by government agencies (Edward Snowden, who leaked the information about PRISM, was employed by a private consulting firm working for the NSA). In addition, US Senators have proposed the “FISA Accountability and Privacy Protection Act of 2013” to tighten civil liberties protections under the legislation that oversees foreign intelligence surveillance (FISA and the US Patriot Act). European countries also have responded to the revelations about PRISM, as Internet surveillance is inherently global.


Policy Forecast

Taxes Tax law, for individuals and corporations is important in shaping the revenue streams and structuring activities in the social economy. The two broadest tax policy questions are the provision of exempt-status to certain social purpose enterprises and whether or not tax deductions are allowed for individual donations.

Tax exemptions The practice of using tax-incentives in the form of tax-exempt status for nonprofits or charitable deductions for donors opens up important questions about whether such incentives are efficient, and even if efficient, if they are justifiable. Should those who benefit from these incentives be subject to particular types of requirements and constraints? How should the incentive mechanism work, for which individuals and for what organizations? The newest twist to the policy discussions about tax exemption comes from the rise of tax paying service providers. Both peer-to-peer services, such as car

Should those who benefit from these incentives be subject to particular types of requirements and constraints?

sharing companies, and commercials vendors that provide summer camps, afterschool programs, childcare services, higher educational programming are challenging the fairness of tax exemptions on the grounds of unfair business competition. Such challenges have been considered on very small scales, for example with regard to nonprofit car sharing organizations given priority for street parking. The rise of alternatives to tax-exempt organizations bears watching as a potential source of political opposition. These different tax structures also affect employment and insurance rules. Nonprofits can use unpaid volunteers and other enterprises cannot. Insurance regulations and nondiscrimination laws are also out-of-sync with the rise of peer-to-peer businesses. As regulators look more closely at Policy Forecast


these organizations, with their distinct hiring and membership structures, nonprofits should be alert to how proposed changes will carry over.

Tax deductions In the tax domain, most of the policy activity right now is centered on discussion of comprehensive federal tax reform. Contained within this discussion are proposals that would lower the limits on charitable deductions or differentiate the charitable sector so that donations to some types of nonprofits would qualify for higher deduction limits. Other proposals would change the mechanism altogether, away for example from a tax deduction to a tax credit. At the state level, tax credits for certain nonprofit activity and donations are ending. Some cities are now offering tax credits for B corporations. States and municipalities are also seeking tax revenue through what are known as Payments in Lieu of Taxes (PILOTS).13 A 2012 study from The Lincoln Institute on Land Policy identified more than 115 cities using PILOTS.14 Active policy proposals regarding 501(c)(3) nonprofits include local efforts to change how nonprofit tax exemption is granted. Current actions, including lawsuits and local legislative proposals can be seen in Princeton, NJ, Pittsburgh, PA and Corpus Christi, TX.15


Policy Forecast

Table Five: Taxes Issue



Tax deductions for charitable donations benefit nonprofit organizations and wealthier individuals

Proposed limits on individuals’ deduction rates as a means of minimizing tax preferences for the wealthy

In February, the House Ways and Means Committee heard testimony about the effects of capping charitable deductions.

Not all activities conducted by tax-exempt organizations are viewed as equally worthy of tax privilege

Create variable tax incentives for different types of nonprofits – make some donations eligible for greater deductibility

Tax-exempt organizations use municipal services but don’t contribute to the local tax base

States and municipalities levying fees for services (safety, emergency, transportation) on tax-exempt landholders

Expand and diversify potential service providers in certain localities

Extend tax credits to Benefit corporations to develop sustainable businesses

In June, the Senate released an updated set of tax reform options, including proposals to implement caps on charitable deductions The Senate’s updated report on possible reforms includes blanket exemptions for certain types of charities, but some proposals apply differently to private foundations, organizations with endowments, and organizations engaged in political activities. These fees, known as Payments in Lieu of Taxes (PILOTs), exist in numerous cities around the country. Traditional pressure for them has come from revenue-strapped municipalities; new pressure is coming from tax-paying competitors Philadelphia makes sustainable business tax credit available to Benefit corporations to encourage expansion of the sector


Senate Finance Committee, House Ways and Means Committee, Joint Committee on Taxation, IRS

Senate Finance Committee, House Ways and Means Committee, Joint Committee on Taxation IRS

A report by the Lincoln Institute of Land Policy reports that since 2000, 117 municipalities in 18 states have used PILOTs

Municipal governments

Policy Forecast


III. Potential Areas of Policy and Practice Change The following ideas have not yet risen to the status of formal proposals, nor do we know of proponents for these ideas beyond their earliest generators. Each of these ideas draws from analogs in other industries in which similar trends to those shaping the social economy are visible.

Peer review registration and exemption maintenance The current system of filing for tax-exempt status results in long waits although eventually almost all applications are approved. Once exempt status is received, only the most flagrant legal violations result in it being revoked, resulting in a landscape littered with effectively defunct enterprises. The IRS is extremely challenged in making the proper rulings quickly. Faced with a similar set of challenges, the US Patent and Trade Organization implemented a trial “peer-to-patent� system for reviewing applications and determining whether they met the standards. This trial ran from 2010 to 2011 and provided a forum for members of the interested public to identify

The opportunity also exists to consider automating elements of the approval process.

and flag applications where there were contested claims to originality. Proposals, none of them further along then the idea stage, exist to try similar means of involving interested publics in both new applications for tax-exempt status, and for implementing a more

rigorous process for maintaining this status. The rise of technologies that allow for ready input from many sources, identify conflicts of interest, and might also gather some sense of a community’s needs and desires could be tried. The question of maintaining tax-exempt status over time is particularly relevant in light of the changing dynamics between subsidized services (philanthropic and nonprofit) and market sustainable alternatives. The opportunity also exists to consider automating elements of the approval process.


Policy Forecast

Peer review of foundations Similar to the idea of reviewing nonprofits on some regular basis, and drawing from the practice of peer review in academia, proposals exist to develop a process for peer review of foundation activity. Less powerful than accreditation procedures but more purposeful than simple informationsharing, the idea would be to use peer networks to review operational practices and results from different foundations as a means of improving practice and increasing transparency.

Data trusts As early as 1999 technology experts and constitutional lawyers were considering the idea of developing “conservancies� for digital assets. The most well-known manifestation of these ideas is Creative Commons, a global system of alternative licensing schemes designed specifically for digital data that are now being used as a springboard for other digital conservancies. As individuals become increasingly concerned about the use, ownership, and storage of their personal

Data trusts, which might serve a function similar to land trusts, are one proposed means of addressing these tensions.

data by corporations and governments, the idea is being revisited. The tension to balance is the potential public good that aggregate data sets might yield (medical breakthroughs, innovative interventions, better urban planning) with the privacy rights of the individuals from which the data come. Also at stake is widespread access to creative works in ways that allow for fair use while protecting the rights of creators. Data trusts, which might serve a function similar to land trusts, are one proposed means of addressing these tensions. As with real estate, various mixes of ownership, public access, and perpetuity are possible and are worthy of consideration. These trusts could then offer an alternative form for the use, storage, and ownership of private data for public purposes over time.

Policy Forecast


Data distribution clauses for nonprofits Nonprofit organizations are distinguished from commercial enterprises in the corporate code by the non-distribution clauses that dictate how excess revenue must be used. These rules require the organization to dedicate all such revenue excess (profit) to the public purpose of the enterprise and forbid individuals to benefit from it. As a result,

How can these enterprises articulate their intention to dedicate private data to their public purpose, over time?

nonprofits are generally seen to put purpose before profit. Similar clauses about the use of data should be considered. How can these enterprises articulate their intention to dedicate private data to their public purpose, over time? Doing so may require

foregoing potential sale or marketing partnerships built on the data and so comes with clear costs. However, doing so would also distinguish the short and long term intent of the organization vis-Ă -vis data and its mission, clearly differentiating it from its commercial or public competitors.

Social good mission insurance As social enterprises seek to juggle social returns with financial returns, and their financing options for growth shift over time, proposals are emerging for insurance products that would pay out if an enterprise reaches the point where it is clearly choosing financial return over social benefit. The beneficiaries of such a product would, apparently, be those who would no longer be served by the enterprise. The secondary market for buying and selling such insurance products could be structured as a means of increasing capital available to start-up enterprises. Early investors who prioritized social returns over financial returns would be able to use the insurance product as a bridge investment as the enterprise transitioned. The idea is to decouple the pursuit of mission from the enterprise form. Insurance policies might also allow an individual enterprise to bundle 30

Policy Forecast

together a broader range of financial capital, proffering each investor their desired range of return.

Global nonprofit governance structures The 501(c)(3) nonprofit organization is an American institution. Similar types of organizations exist in some countries but not all, inhibiting global giving by donors who seek some form of comparable due diligence structure. At the same time, the type of governance models that best fit global, digital communities of peers are hampered by the hierarchical management and reporting requirements of the typical nonprofit organization. Early signs of governance innovation can be seen in the rebirth of co-operative structures within the sharing economy, the need for frequent rule

A transnational enterprise model that was designed to function across borders, currencies, languages, and reporting requirements, is worth considering.

exemptions from organizations like Wikimedia Foundation or Creative Commons, and efforts to maintain a “structureless structure� as is being tried by CrisisCommons. The multiple finance options in the social economy place additional pressure on traditional nonprofit governance. The opportunity exists to learn from these first-born global digital networks, identify structural alternatives for governance and accountability, and consider modifications to the nonprofit code. Alternatively, a transnational enterprise model that was designed to function across borders, currencies, languages, and reporting requirements is worth considering.

Limit nonprofit political activity by changing campaign finance If participation in political campaigns could be separated from the money needed to run those campaigns, the difficult questions about nonprofit institutional involvement would be made easier. Proposals to use individual

Policy Forecast


vouchers to fund political campaigns, and other proposals that would shift campaign funding away from a small number of large funders, could accomplish this. Such proposals are available from Larry Lessig’s group, Rootstrikers, as well as The Brennan Center for Justice and Democracy 21, and Public Campaign. An effort at campaign finance reform in New York, led by Governor Cuomo, failed in 2013.

Media changes Changes in the newspaper business have resulted in the creation of numerous nonprofit news outlets in the last decade. A study in 2013 by the Pew Research Center found 172 nonprofit news sites created since 1987.16 Many of these organization face long delays in receiving IRS approval of their tax-exempt applications, a reality that led the Nonprofit Media Working Group to release a report calling for changes to the IRS review process.17 Of interest beyond the world of nonprofit news are the questions raised by the report’s identification of changing business models wrought by digital technology and the definition of charitable purposes or public goods. You can find the complete report and its recommendations at the Council on Foundations website.

The ethics of data: industry standards and potential regulations Nonprofits collect many forms of data from their constituents and stakeholders. Some of this information is freely given, such as donors’ names and contact information. Some of this information is actively collected as part of research projects and is governed by the rules guiding that research. Other data, such as participation in events, the signing of petitions, or the registering of votes affirmatively or against the nonprofit’s actions, have long been collected. These data have been stored in analog forms, or off networks, and have thus been of little concern. Now that much of this information is stored on networks or offsite with corporate


Policy Forecast

cloud service providers, individuals may warrant assurance about how, when and by whom the information can be accessed. There are numerous efforts at developing and using common standards for data collection and tracking, shared taxonomies, and unique organizational identifiers are all geared toward addressing the practical issues that nonprofits face in collecting, sharing, and reporting on these types of data. It is important that these efforts seek the opinions of, and respect the privacy of, the individual members of the public whose data the nonprofits hold. Experimentation in the field of medical research with new forms of consent from individuals donating their data offer potential lessons for other fields. Data collected about research subjects, beneficiaries of the organization’s work and other actions need to be considered with regard to the privacy of those individuals. Here again nonprofit organizations

Some sectors, such as humanitarian aid, are already beginning to think about sector-wide practices and codes of conduct.

have a public purpose, and trusted relationships, to uphold. Considering organizational practices in light of that purpose and trust is of paramount importance. Some sectors, such as humanitarian aid, are already beginning to think about sector-wide practices and codes of conduct. Nonprofits should consider this as a key element of their own code of conduct, and, potentially, regulatory distinction.

Policy Forecast


IV. Conclusion The social economy is considerably more complex than dualistic relationships between nonprofits and philanthropic funders. It follows that the policy domains that matter are numerous, poorly aligned, and, perhaps, somewhat unexpected. Tracking current and potential policy proposals as well as relevant regulatory bodies and overseers will require us to first expand our understanding of the economy. This first-ever forecast is simply that, a first effort. As the dynamics between charitable and political giving and investment spending continue to develop we will grow more confident in observations of critical policy domains. At the same time, we also anticipate that there will be hybridization in form and overlap in regulatory responsibility.


Policy Forecast

September 2013

Project on Philanthropy, Policy, and Technology

1 See, for example, the Network for Sustainable Financial Markets (http://www. and legal efforts to change the Uniform Prudent Investor Act. 2 See research on leaderless movements, What Is Occupy? Inside the Global Movement, ( and Lance Bennett, “The Logic of Connective Action,” Information, Communication and Society, May 2012. 3 See ProPublica’s ongoing work Mother Jones reporting http://www. 4 and


Sources for all tables: ACLU, AEI, Alliance for Charitable Reform, ALEC Council on Foundations, Brennan Center for Justice, Brookings Institute, CATO Institute, Center for Democracy and Technology, Center for Political Accountability, Columbia Law School National State Attorneys General Program, EFF, EPIC, Free Press, Heritage Foundation, Independent Sector, National Council of Nonprofits, NTEN, OpenStates. org, Philanthropy Roundtable, Public Knowledge, The Sunlight Foundation, Urban Institute. 6

aspx?stage=start&type=all%20business%20types%A7ion=financing%20%26%20 incentives&bspcontentlistitem=tax%20credits,%20grants%20%26%20other%20 incentives 7

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Policy Forecast


September 2013

Project on Philanthropy, Policy, and Technology

8 A 2012 investigation by The New York Times found that cities, counties and states provide more than $80 billion in such incentives. us/how-local-taxpayers-bankroll-corporations.html?ref=louisestory&_r=0 9 10



See, for example, ACLU, Demand Progress, Electronic Frontier Foundation, Free Press, Public Knowledge, and others. 13


Adam H. Langley, Daphne A. Kenyon, and Patricia C. Bailin “Payments in Lieu of Taxes by Nonprofits: Which Nonprofits Make PILOTs and Which Localities Receive Them,” campaign=AdMat%20Oct09&utm_medium=email&utm_source=newsletter&utm_ content=report 15 and Kelly Gifford, “The Tax Man Cometh: Residents Go After Princeton’s Nonprofit Status,” The New York Observer, July 2, 2013. 16


“The IRS and Nonprofit Media,” cfm?ItemNumber=18708


Policy Forecast

Social Economy Policy Forecast 2013  

A publication by Lucy Bernholz and Rob Reich as part of the Digital Civil Society Project at the Stanford Center on Philanthropy and Civil S...

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