Social impacting investing has become the latest trend topermeate the financial markets. With massive anticipated funding gapsfor sustainable development goals, and a millennial-driven thirst fordoing good while doing well, this trend is likely to continue in thecoming decades. This burgeoning industry is poised to experience yetan additional boost, since it provides an alternative mechanism forprivate actors to “profit from our pain,” particularly in the wake ofthe COVID-19 pandemic and the Black Lives Matter movement.
As to be expected, the law has not sufficiently adapted to this newwave of innovation. Scholars have thus focused on how social impactinvesting should be measured and disclosed. However, they have paidlimited attention to whether federal securities laws’ antiquateddistinctions between public and private indicators—or rather itspublic-private divide—contributes to the harms that poorly overseensocial impact investments can cause. This Article seeks to fill thisscholarly gap by exploring how this public-private divide gives rise tothe possibility that social impact investing will lead to exploitation.This divide permits regulatory loopholes where social impact investorscan obscure information about potential negative externalities flowingfrom their investments. It further allows elite investors to exclusivelyprofit from community pain.
These loopholes are troubling because social impact investinghas the highest potential for impact along the continuum of sociallyconscious strategies. However, due to the need for regulatoryflexibilities, such as the power to invest in illiquid assets, most socialimpact investors operate as exempt entities. Retail investors, whoencompass all members of the general public, are restricted fromaccessing these privately held investment vehicles due to investorprotection concerns. Restricting investors in this manner is a primaryindicator of privateness under federal securities laws. Affectedcommunity members, who are the targeted beneficiaries of theseschemes, are thus excluded as investors. This exclusion also limitstransparency, yet an additional indicator of privateness, which wouldenable the general public as well as policy makers to makeassessments about the extent to which these schemes are maximizingnet social welfare. This is particularly problematic given the potentialfor social impact investments to generate unaccounted for negativeexternalities, such as when seemingly clean energy technologiesinadvertently destroy surrounding environments or habitats. Solelyrelying on privately ordered solutions can leave costly loopholes giventhat they are completely voluntary and lack standardization.
Innovative regulatory solutions that reconceptualize this publicprivate divide may best address potential harms of social impactinvestments. This Article proposes to combine existing indicators of“publicness” and “privateness” while perhaps creating newmeasures. Codified in an entirely new series of exemptions entitled the“Social Impact Exemptions” that would appear under the SecuritiesAct of 1933 and the Investment Company Act of 1940, theseexemptions would effectively recalibrate existing rules related to retailinvestor access and disclosure, while possibly creating newframeworks for accountability and management structure.