The Nonprofit FAQ

Can a non-profit invest in for profit ventures?

G Walker wrote to NONPROFIT (see http://www.rain.org/mailman/listinfo/nonprofit) on March 30, 2006: Can a non-profit invest in for profit ventures? buy stocks, etc?..assuming that monies earned will be kept in its account to serve its mission. Putnam Barber answered: The simple answer is "yes." But, as is often the case, the practical answer is that it's complicated. There are rules and expected practices ("expected" by sophisticated donors, nonprofit observers, the press, etc.) aimed at assuring that the nonprofit will do a good job of balancing risk against opportunity in managing its investments and will avoid allowing its surplus funds to be controlled in ways that confer benefits on insiders (such as providing capital at low-cost to ventures undertaken by board members). One set of rules can be found in the Uniform Management of Institutional Funds Act (UMIFA); "Foundation News and Commentary" has a good briefing on UMIFA as it applies to foundations that can be found at: http://www.foundationnews.org/CME/article.cfm?id=2411&issueID=2378 There are a discouraging number of court decisions in cases where deep disagreements about the management of investments led to quarrelling. If nothing else, getting involved in such a case is expensive and a distraction. Many smaller organizations, faced with these complications, elect to place surplus funds in a money-market account that pays a competitive rate of interest. Unless a large amount is available for investment, the management "costs" -- both out of pocket and of leadership time and anxiety -- are often identified as too large to justify the potential return. Putnam Barber is Editor of The Nonprofit FAQ: A service of Action Without Borders/Idealist.org Posted 3/31/06