What is a donor-advised fund?
A Donor Advised Fund (DAF) is a fund or account established at a Section 501(c)(3) public charity sponsoring organization to help people efficiently coordinate donations to charitable causes. As soon as an individual transfers money to a DAF, they surrender legal ownership over the funds and are eligible to receive the tax benefits of a charitable donation. The donor is then able to advise on how the contributions are deployed for charitable use.
DAFs have exploded in popularity in the US over the past decade as they provide individuals with a convenient and efficient way to donate to charities while simultaneously de-linking the task of deciding how much you want to donate from the task of deciding to whom the funds should be granted.
The unintended consequence of delinking these steps, however, is that individuals are often slow to allocate funds to a final recipient. In fact, over $125B currently sits unallocated in DAFs in the US.
But I thought DAFs could only grant to 501(C)(3) organizations?
If you thought money sitting in your donor-advised fund (DAF) could only be used to grant to 501(c)(3) organizations, you are not alone. This myth exists because on the largest DAF platforms it’s true. Perhaps surprisingly, this restriction is not due to IRS regulations but instead imposed by the DAFs themselves as the easiest way to prove their activities support a charitable purpose. Per applicable regulations, funds contributed to DAFs are required to be used for charitable purposes, but they are not limited to supporting only nonprofit organizations.
Innovators in the field recognize that often the most effective path to significant charitable impact involves working with both nonprofit & for-profit organizations. These innovators are structuring their DAF platforms and processes to enable funds to be invested in for-profit organizations so long as that investment is furthering the DAF’s charitable goals.
How does this impact Daintree’s strategy and funding?
Daintree has partnered with innovators and legal experts in the DAF field to design an investment mechanism that follows applicable regulations while simultaneously enabling the flow of investment capital to for-profit companies run by under-represented founders. One of these partners, Inspire Capital, has established a DAF with the explicit mission of ensuring historically under-represented founders have equal access to investment capital. To achieve this goal, the Inspire Capital DAF has partnered with Daintree Capital to provide working capital loans to historically under-represented founders.
These investments are deemed to have a charitable purpose since—by investing in founders who currently receive a disproportionately small fraction of investment capital—they are helping to address the historic gender and racial imbalance that exists in access to investment capital.
Inspire Capital conducts due diligence on all fund recipients—including Daintree—to ensure they are appropriate vehicles for carrying out its charitable purpose, in addition to ensuring its activities are compliant with the rules governing it as a DAF platform.
How can I help?
If you are interested in learning more about how you can use tax-advantaged funds to invest in under-represented founders, please reach out to us below: