A Novel Financial Product That Links Financial Returns With Social & Environmental Impact

THE IMPACT SECURITY

WRITTEN BY

Lindsay Beck, Co-Founder & Co-CEO, NPX

With assistance from: Anna Pinedo, Partner, Morrison & Foerster LLP

01

Table of ConTenTs

Background 02

Definition 03

Participants 04

Mechanics 05

Flow of Funds 07

ExampleTransaction 08

Structure 09

SecurityQualifications 10

RegistrationRequirements 11

Comparison 13

Risks 15

Benefits 16

Conclusion 18

Appendix 19

CONTENTS

ACKNOWLEDGMENTS

The authors are grateful to the many people and experiences that inspired and influencedthedevelopmentoftheImpactSecurity.

WethankthebroaderNPXandMorrison&Foersterteams,inparticularCatarinaSchwab,Co-Founder&Co-CEO,NPX.

WealsoappreciatethetimeandthoughtfulfeedbackprovidedbyRebeccaGrant,WonKim,ZachKnight,andKatherineRockwell.

02

baCkground

Despite tremendous interest among impact investors in achieving both market-ratefinancialreturnsandsocialorenvironmental impact, there has not been a financialproducttodatethatexplicitlylinksfinancialreturnswithimpact.

Moreover,nonprofitorganizationshavelargelybeenleftoutoftheimpactinvestingmovement.Despitetheirinherentmandateto achieve social impact, there are very few waystoinvestinnonprofitorganizationsandearnfinancialreturns,therebylimitingnonprofitaccesstothisgrowingpoolofinvestmentcapital.

Other than loans or loan funds, the vehicles that have been developed to invest in theworkofnonprofitorganizationsarebespokeandentailsignificantlimitations,includingtheinabilitytoreplicatequicklyandscale.

TheImpactSecurityrepresentsauniquesolutiontothesechallenges.TheImpactSecurityisaninnovative,proprietary

financialproductthatexplicitlylinksfinancialreturnswithimpact.TheImpactSecurityoffersdonorsanewwaytogivethatmaximizesimpact;providesimpactinvestorswithastreamlinedfinancialproductthatpaysfinancialreturnsbasedonimpact;andenablesnonprofitorganizationstoaccessnewsourcesofcapitalwithafocusonimpact.

A NEW WAY TO FUND IMPACT

Đ Donors – a new way to donate thatmaximizesimpact

Đ Impact Investors–astandardizedfinancialproductthatexplicitlylinksfinancialreturnswithimpact

Đ Nonprofit Organizations – a new fundraising tool that enables access to new sources of capital tiedtoimpactperformance

Impactinvestingisafast-growingassetclassthatrepresentsaradicalnewapproachtoinvestingincompanies,organizations,financialproducts,andfundsthatstrivetogeneratemeasurablesocialorenvironmentalimpactalongsidefinancialreturns.

BACKGROUND

03

definiTion

THE IMPACT SECURITYThe Impact Security must have the followingfivecharacteristics:

1. The proceeds of issuance, excluding transactionfees,aredeployedexclusivelytoadvanceanentity’scharitable mission

2. The terms of the instrument specify a predetermined set of impact outcome(s)

3. The terms of the instrument include thepublicreportingofanobjective,predetermined process for third-party measurementand/orevaluationofimpact outcome(s)

4. A predetermined outcome payor(s) undertakes responsibility either to guaranteetheissuer’sobligationtorepay investors, or to make payments of thecontingentreturnstotheinvestorson behalf of the issuer

5. Aninvestor’sfinancialreturnisvariablebased upon predetermined impact outcome(s)

Because the Impact Security is issued byanonprofitorganization,foundation,government,orsupranationalentity,theofferingisexemptfromSECregistrationrequirements.

The Impact Security combines the contingentreturnsconceptfoundinpay-for-successfinancingswithanestablished,scalable and tradable capital markets structure,adebtsecurity.

TheImpactSecurityisadebtsecurityissuedbyanonprofitorganization,foundation,government,orsupranationalentity,featuringvariablereturnsthatarecontingentontheachievementofpredeterminedimpactmetrics.

DEFINITION

A NEW FINANCIAL PRODUCT

Đ Issuedbyanonprofitorganization,foundation,government,orsupranationalentity

Đ Established, scalable, tradable debt security structure

Đ OfferingexemptfromSECregistrationrequirements

Đ Variablereturnstiedtoimpact

DONATE VS. INVEST

Thewords“donate”and“invest”areoftenusedinterchangeablyinthenonprofitsector.Forpurposesofthispaper,thetermswillbeusedasdefinedhere:

Donation–atax-deductiblefinancialcontributiontoanonprofitorganization.

Investment – the purchase of an assetwiththeexpectationoffuturefinancialreturns.

04

ParTiCiPanTs

DONORSDonorsmayincludefoundations,familyoffices,corporations,andindividualswhowanttomaketax-deductibledonationsand/orqualifyingdistributionsdirectlyorthroughvehicles, such as Donor Advised Funds (DAFs).Governmentsmayparticipateasdonors, or grant-makers, at the federal, state,county,andcitylevels.SupranationalentitiesthatincludetheUnitedStatesasamembermayparticipateasdonorsaswell.

INVESTORSInvestors may include anyone interested inimpactinvestingopportunitiesthathavethepotentialtoyieldbothsocialandfinancialreturns.BecausetheImpact Security is an “exempt security,” investments may be accepted from non-accredited and accredited investors, including, but not limited to, individuals, retailinvestors,institutionalinvestors,familyoffices,endowments,andfoundationsmakingprogramrelatedinvestments (PRIs) or mission related investments(MRIs).

NONPROFIT ORGANIZATIONSNonprofitorganizationsincludeIRSapproved501(c)(3)charities,privatefoundationsandprivateoperatingfoundations,aswellasentitiesestablishedororganizedandoperatedexclusivelyforcharitable purposes and not for pecuniary

profit,includingaspecialpurposeentityformedforthesolepurposeofinvestinginanonprofitorganization.

INTERMEDIARIESThe assistance of several intermediaries is requiredtostructureandofferanImpactSecurity.Thesemayincludestructuringadvisors,attorneys,fiscalagents,intermediaries, evaluators, placement agents,andimpactauditors.

The Impact Security brings together donors, impact investors, and nonprofitorganizations.

PARTICIPANTS

INVESTING IN A NONPROFIT ORGANIZATION

Anonprofitorganizationmustexist for a charitable purpose and cannotengageinfor-profitactivities.PursuanttoIRSregulations,nonprofitexecutivesand/orboardmemberscannotprofitfromatransaction,butdebtcanberepaidwithinterest.Thedebt repayment component of the Impact Security is similar to loans that nonprofitorganizationscommonlyreceivefromtraditionallenders.Inboth cases, the debt is repaid using donationsorearnedrevenue.

05

MeChaniCs

TheImpactSecurityenablesanonprofitorganization,foundation,governmententity,orsupranationalentitytoissuedebtwithconditionalpaymentsassociatedwiththeachievementofpredeterminedimpactmetricsbytheserviceprovider.

Thefollowingisasummaryofthefunctions,rolesandeligibleparticipantsinanImpactSecurity.

MECHANICS

FUNCTION ROLE ELIGIBLE PARTICIPANTS

Issuer AnissuingentityissuestheImpact Security

Đ 501(c)(3)or501(c)(4)entity,includingapubliccharity,privatefoundation,orprivateoperatingfoundation

Đ Poolednonprofitvehicle

Đ Anotherentityestablishedororganizedandoperatedexclusivelyfor charitable purposes and not for pecuniaryprofit

Đ Aspecialpurposeentityformedforthesolepurposeofinvestinginanonprofit

Đ Agovernmentalentity(federal,state,county, or city)

Đ Supranational(e.g.,WorldBank)thatincludestheUnitedStatesasamember

Investor An interested investor will purchaseanImpactSecurity;theinvestor buys the Impact Security as an investment and not as a donation.

The investor invests upfront riskcapitalandmayrealizefinancialreturnscontingentontheachievementofthespecifiedimpactmetrics.

Đ Accredited and non-accredited individual investors

Đ Institutionalinvestors

Đ Corporations

Đ FoundationsmakingPRIs/MRIs

06

MeChaniCs

FUNCTION ROLE ELIGIBLE PARTICIPANTS

Donor (or Outcome Payor)

The donor (or outcome payor) commits to make a tax-deductibleorqualifyingdonation,orgovernmentgrant,payablecontingentontheachievement of predetermined impactmetrics.

Đ Government(federal,state,county,or city)

Đ Foundation

Đ Corporation

Đ Individual

Đ Supranationalentity

Đ Donor Advised Fund

Service Provider Animplementingagencyutilizesthe proceeds to undertake activitiestoachievethepredeterminedimpactoutcomes.

Đ 501(c)(3)entity,includingapubliccharity,privatefoundation,orprivateoperatingfoundation

Đ Poolednonprofitvehicle

Đ Anotherentityestablishedororganizedandoperatedexclusivelyfor charitable purposes and not for pecuniaryprofit

Intermediaries Intermediaries assist with offering;sales,transfersand/orexchanges;andauditingofanImpactSecurity.

Đ Structuring Advisors

Đ Attorneys

Đ Fiscal agents (or trustees)

Đ Intermediaries

Đ Evaluators

Đ Placement agents

Đ Impact auditors

07

flow of funds

FLOW OF FUNDSThefollowingisapossibleofferingstructureinvolvingtheissuanceofanImpactSecurity.Foradditionalofferingstructurealternatives,pleaseseetheAppendix.

Diagram 1 – Standard Flow of Funds

INVESTOR(S)UpfrontInvestment

Capital

OUTCOME PAYOR(S)Performance Based

Donations

ISSUER

SERVICE PROVIDERImplement Services

& Report Impact

DonationPledge

Investment

Impact Security

Payment of donation,principal, returns, and/or bonus based on impact

1

2

3

4

08

exaMPle TransaCTion

EXAMPLE TRANSACTIONIMPACT GOALS

Đ Empower10,00peopletoliftthemselvesoutofpovertythroughemployment Đ Achieveorganizationalself-sustainability

DEAL TERMS

ISSUER NonprofitOrganization INVESTMENT AMOUNT $8millionUSD

TERM 5 years MAXIMUM INVESTOR REPAYMENT

$10millionUSD

IMPACT METRIC Audited worker earnings

FLOW OF FUNDS

IMPACT INVESTORS

Commit $8 million in upfront risk capital by purchasing the Impact Security.

IMPACT INVESTORS

Are paid up to $10 million, principal plus interest, over years 2-5 as impact is achieved.

NONPROFIT ORGANIZATION

Usesthe$8million to achieve the impact goals asverifiedbyanindependent third- party auditor.

PRIVATE DONORS

Fulfilltheirdonationpledgeof $8 million to thenonprofitorganizationover years 2-5 as impact is achieved.

PRIVATE DONORS

Pledge to donate $10 million to thenonprofitorganizationif the impact metric is achieved.

09

sTruCTure

1. ISSUERThe issuer should be: (i) a 501(c)(3), 501(c)(4)ora“poolednonprofitvehicle,”(ii)anotherentityestablishedororganizedand operated exclusively for charitable purposesandnotforpecuniaryprofit,(iii)aspecialpurposeentityformedforthesolepurposeofinvestinginanonprofit,or(iv)agovernmentalentity.

2. OUTCOME PAYORThe issuer or a third-party payor or guarantormayundertaketheobligation,onbehalf of the issuer, to make payments to the holders of the Impact Security to the extentthatthespecifiedcontingencies(i.e.,the achievement of impact performance targets)aremet.

3. USE OF PROCEEDSThe use of the proceeds raised through the issuance of the security must be clearly disclosedintheofferingmaterials,andtheproceeds,excludingtransactioncosts,mustbe deployed exclusively to further the social purposeoftheserviceprovider.

The issuer should make certain representationsandwarrantiesrelatingtoitsintended use of proceeds and will covenant not to use the proceeds for any purpose otherthanthespecifieduses.

Thetermsofthesecurityshouldrequirethe issuer or independent third party to

provideanattestationorreportregardingdeploymentoffunds.

Disclosuresofrelevantauditedfinancialstatements should be made and the terms of the Impact Security should outline where and how such reports will be made available to investorsandinterestedmarketparticipants.

4. DEBT STRUCTUREThe Impact Security should be structured asacontingentpaymentdebtobligationoftheissuer.Thesecurityshouldincorporateacontingentrepaymentcomponentwhereby certain payments, which may be interest payments and/or principal amounts (orboth),aretiedto,orcontingentupon,theachievementofspecifiedimpactperformancetargets.

Inordertobecharacterizedasa“debtsecurity,” the Impact Security must evidence a promise to pay the certain (non-contingent)paymentsonthesecurityandthe holder of the debt security must have the recourse or remedies typically available toadebtholder.

Asisthecasewithdebtsecuritiesissuedby corporate obligors, the Impact Security may be issued pursuant to the terms of a “notepurchaseagreement,”a“fiscalagencyagreement,”oran“indenture.”

AlldisclosuresrelatingtotheImpactSecurityshouldidentifythesecurityasadebtsecurity.Thetermsshouldmakeclearthatthedebtsecurityistransferable.

Inordertopromoteandachievestandardization,transparencyanddisclosure, an Impact Security should meet the following criteria:

STRUCTURE

10

sTruCTure

5. FISCAL AGENT OR TRUSTEEThereshouldbeafiscalagent,issuingand paying agent or indenture trustee independentoftheissuer.Suchentityalsowill act as “registrar” (in the event that the securitiesarenotissuedandclearedthrougha central depository, like The Depository Trust Company, Euroclear, or Clearstream) for the securitiesandwillfacilitatesales,transfersorexchangesofthesecurities,aswellaspaymentsonthesecurities.

6. DEBT SECURITY IDENTIFIERTo the extent that the issuer of the Impact Securityorthefinancialintermediaryassistingtheissuer(whetheractingasaplacement agent or an underwriter) obtains asecurityidentifier(i.e.,aCUSIPnumber,an ISIN or similar), so that the security can be held in a brokerage account, it will obtaina“debt”identifier.

7. IMPACT EVALUATION & REPORTINGAt issuance, the terms of the Impact Security must declare the predetermined desired impact outcome(s) as well as theevaluativetools(s),process(es)and/orstatisticalmethod(s)bywhichimpactoutcome(s)willbemeasured.

An independent, third party impact auditor should be appointed to verify the impact outcomes.

Thesecurityshouldidentifyapredeterminedreportingscheduleoverthelifetimeofthesecurityappropriatetothe impact outcome(s) being measured and resultinginvestorpayments.Thesecurityshouldidentifywherethereportswillbemadepubliclyavailable.

8. INVESTOR REPAYMENT TERMSThedocumentationshouldclearlydiscloseall investor repayment terms, rates and schedules.

SECURITY QUALIFICATIONS

AnImpactSecurityqualifiesasa“security”asdefinedinSection2(a)(1)oftheSecuritiesAct,whichincludestraditionalinstrumentssuchasnotes,stock,bondsandsimilarinstruments.AlthoughtheImpactSecuritymaybeconsiderednovel,theinstrumentfitswithintheconceptofa“note”oran“investmentcontract.”

An“investmentcontract”isdefinedasanycontractortransactionwherebyaperson(i)investsmoney,(ii)withtheexpectationofprofits,that(iii)dependsontheeffortsofotherstorealizethebenefitofitsinvestment.TheImpactSecurityinvolvesamonetaryinvestment(notadonation)frominvestors.Investorswillbeawareofthepotentialforprofit.And,lastly,thereturnontheImpactSecuritydependsexclusivelyontheeffortsofthenonprofitserviceprovider,notthedonororinvestor.

11

regisTraTion

NONPROFIT ISSUERIntheUnitedStates,anonprofitissuercanofferitssecuritiespubliclyinrelianceontheexemptionprovidedbySection3(a)(4)oftheSecuritiesActof1933,asamended.

Section3(a)(4)oftheSecuritiesActexemptsfromtheregistrationrequirement“anysecurityissuedbyapersonorganizedand operated exclusively for religious, educational,benevolent,fraternal,charitable, or reformatory purposes and not forpecuniaryprofit.”

An IRS tax ruling as to 501(c)(3) status doesnotguaranteethattheissuerqualifiesfortheSection3(a)(4)exemption.Iftheissuer, despite its tax-exempt status, serves asubstantialnon-charitablepurpose,orifany part of its net earnings “inures to the benefitofanyperson,privatestockholderor individual,” it will not be able to avail itselfoftheSection3(a)(4)exemption.

GOVERNMENT ISSUERIntheUnitedStates,aUSgovernmentissuercanoffersecuritiesinapublicofferinginrelianceontheexemptionprovidedbySection3(a)(2)oftheSecuritiesActof1933,asamended.

An Impact Security can also be issued by internationalgovernments,internationalorganizations,andsupranationalentities.

PRACTICAL IMPLICATIONSInpracticalterms,theexemptionfromtheregistrationrequirementsishelpfulinthatit means:

Đ The issuer does not have to prepare andfilearegistrationstatement,whichwouldrequiresubstantialtime,effortand expense

Đ Theissueranditsfinancialintermediarymayusegeneralsolicitationandofferthesecuritiespublicly,reachingapotentiallylargeraudienceofinterestedimpact investors

Đ Theofferingwouldnotberequiredtobe structured as a private placement (wherecommunicationsabouttheofferingwouldbelimitedorwheretheofferingwouldbeopenonlytocertaintypes of investors)

Đ CertainnoticeandotherfilingswillberequiredtobemadeinstatesthatdonothaveexemptionsfromBlueSkyregistrationrequirementsforthesecuritiesofnonprofits

Đ Thesecuritiescansettlethroughadepository, like DTC, and can be held through a brokerage account

Đ Thesecuritieswouldnotbesubjecttotransferrestrictions

TheImpactSecurityisexemptfromSECregistration.

REGISTRATION REQUIREMENTS

12

regisTraTion

STATE REGISTRATIONSWhereastheSecuritiesActregulatestheofferandsaleofsecuritiesatthefederallevel, each individual state has its own setofsecuritieslaws.Thesestatelawsareknownas“BlueSkylaws.”WhileBlueSky laws vary from state to state, these lawsgenerallyrequirethatsecuritiesberegisteredwithstatesecuritiescommissionerspriortotheirofferorsalewithinthestate.Assuch,asingleclassofsecuritiesmayneedtoberegisteredinseveralstates(inadditiontoanyfederalregistrationrequirement).AsisthecaseundertheSecuritiesAct,themajorityofBlueSkylawsincludeexemptionsfromregistration.Theseexemptionsvaryfromstatetostate.

Federal law also creates a category of securitiesthatareexemptfromallstateregistrationrequirements(“CoveredSecurities”).Unfortunately,securitiesissuedbynonprofitsarenotincludedinthelistofCoveredSecurities.

Insummary,beforeofferingorsellingsecuritiesinaparticularstate,andunlessthe Impact Security can otherwise be structured as a Covered Security, the state’sBlueSkylawsmustbeanalyzedtodeterminewhetherregistration,filingsorfeesarerequired.Moststatesprovideforexemptionsfor501(c)(3)entities.

ANTI-FRAUD PROVISIONSRegardless of whether a security is exempt fromcertainrequirementsundertheSecuritiesAct,theExchangeActorstatesecuritieslaws,theanti-fraudprovisionsofthesecuritieslawswillcontinuetoapply.Whilethespecificanti-fraudprovisionsmaydiffer,theyallgenerallyprohibittheuse of any scheme to obtain money by means of an untrue statement or omission ofamaterialfact,orbyanymanipulativeordeceptivedevice,inconnectionwiththepurchaseorsaleofsecurities.Aviolationoftheseanti-fraudprovisionscanresultincivilliability.Asaresult,disclosuresandofferingmaterialsusedinconnectionwiththeofferandsaleofanyImpactSecuritiesshouldbevettedcarefully.

13

CoMParison

USE OF PROCEEDS BONDSTheImpactSecurityhasadifferentreturnprofilethantraditionalUseofProceedsBonds that seek to have a social impact, such as Social Bonds, Health Bonds, orGreenBonds.TheImpactSecurityfeaturesavariableorcontingentreturntiedtoimpactachievementwhereasUseofProceedsBondshaveafixedreturnindependentofimpactoutcomes.InaUseofProceedsBond,impactreportingisvoluntary,althoughencouraged.LiketheImpactSecurity,UseofProceedsBondsarealsostructuredasdebtsecurities.

PRACTICAL IMPLICATIONS

ReturnsonaUseofProceedsBondarepaid regardless of whether impact is achieved.Conversely,paymentsontheImpactSecurityarecontingentupontheimpactachievedbytheserviceprovider.ImpactreportingisrequiredunderanImpact Security, meaning that impact results are transparent to investors, donors, andthegeneralpublic.Learningsfromwhich approaches are successful in having impact, and which are not, will be more readily available to drive future investment andserviceproviderdecisions.

IMPACT BONDSTheprimarydifferencebetweenImpactBonds – such as Social Impact Bonds, Development Impact Bonds, and Healthcare Impact Bonds – and the

ImpactSecurityisstructure.Todate,Impact Bonds, despite their name, have not been structured as bonds – the termisamisnomer.Instead,theyhavehistorically been structured through investments in limited liability companies orinpartnerships,whicharenotfinancialproducts.Alimitedliabilitycompanyorpartnership is established for purposes offundingaparticularmission-basedinitiative.Generally,LLCinterestsorpartnershipinterestsareofferedandsoldinprivateplacementtransactions,madepursuanttoSecuritiesActexemptions,suchasSection4(a)(2)and/orRegulationD(Rule 506) solely to accredited investors or qualifiedpurchasers.

PRACTICAL IMPLICATIONS

Structuring an Impact Bond investment through an investment in a limited liability companyorapartnershipmeansthatoffersmaynotbemadeusinggeneralsolicitation(unlesstheparticipantswanttoundertakespecialeffortstoverifyinvestorstatus)andoffersarelimitedtohighnetworthorinstitutionalinvestorsonly.Theinterestssoldinthesetransactionsareconsidered“restrictedsecurities,”andarenotreadilytransferable.Aninvestorthatseekstotransfer the LLC or partnership interest would be bound by the terms of the LLC operatingagreementorthepartnershipagreement,asthecasemaybe.Moreover,therestrictedsecuritiescannotbeheldinabrokerageaccount.Conversely,theImpactSecuritycanbeofferedusingageneral

TheImpactSecurityisdistinctfromexistingimpactinvestingvehicles.

COMPARISON

14

CoMParison

solicitationorthroughaprivateoffering.ImpactSecuritiesarereadilytransferableandcanbeheldinabrokerageaccount.

PRIVATE EQUITY IMPACT INVESTING“Doublebottomline”privateequityfundsthatconcurrentlyseekmarket-ratefinancialreturns and social impact have historically measuredthesefinancialandsocialreturnsindependently.Privateequityinvestmentislimitedtoinstitutionalaccreditedinvestors,qualifiedpurchasersorqualifiedinstitutionalbuyers.

PRACTICAL IMPLICATIONS

PrivateEquityImpactInvestingexplicitlyfocusesonfinancialreturnsandsocialimpact,butfinancialreturnsarenotreliantuponimpact.Aninvestmentcouldforeseeablygeneratefinancialreturns,while not delivering on the social impact metricssetforth.Alternatively,socialimpact metrics could be achieved, but in the absence of a viable business model investorsmaynotbenefitfinancially.TheImpactSecurityhascontingentpaymentsassociated with the impact achieved, meaningtheleveloffinancialreturnislinkedtothelevelofsocialimpact.

Privateequityinvestorsgenerallyareprohibited from taking an ownership stake inanonprofitorganization.Conversely,

the Impact Security allows investment in a nonprofitorganization.

LOANS OR LOAN FUNDSNonprofitorganizationscurrentlyaccesscapitalusingtraditionalloanswherealender,whichmaybeafinancialinstitution,oramultilateralorquasi-sovereign,governmentalentity,amunicipality,oracombinationofthese,willextendaloanorothercreditfacilitytoanonprofitorganization.

TraditionalloansdifferfromtheImpactSecurityinseveralways.First,therepaymentoftheloanisnotcontingentupon the achievement of predetermined impactoutcomes.Second,whiletheloanmay have loss guarantors who agree to repaytheloan,ifthenonprofitorganizationdefaults, it does not have a predetermined donor or outcome payor in place to repay theoutstandingamount.Third,aloanisnotreadilytransferable.Fourth,itmaybedifficultforabroadbaseofimpactinvestorstoparticipatethroughaloan.

PRACTICAL IMPLICATIONS

With a loan or loan fund, investors must be repaidwhetherornotimpactisachieved.With an Impact Security, investors returns areexplicitlylinkedtoimpactperformance.

15

risks

ISSUERWith the Impact Security, an outcome payor, which may not be the issuer, will donatethefundstomeetthecontingentpaymentobligation.Iftheoutcomepayordefaults,theissuerisliableforrepayment.The holder of the Impact Security has the recourse and remedies typically available to adebtholder.

INVESTORImpactinvestingisnewandcaninvolveariskofcapitalloss.Ifimpactisnotachievedatthelevelsrequiredtotriggerrepaymentof principal and/or interest, the investor mayloseallorasubstantialamountofthecapitalinvested.Thespecifictermsofanindividual Impact Security may allow for substantialortotallossofcapitalinwhichcase,thelosscanbewrittenoffasacapitallossagainstcapitalgains.

Like other investment products, the Impact Security is not without risk.AninvestmentinImpactSecuritiesmaynotbeappropriatefororsuitableforallinvestors.Beforeinvesting,youshouldcarefullyreadthedisclosureorofferingmaterialsrelatedtothespecificImpactSecurityoffering.

RISKS

16

benefiTs

DONORThe Impact Security empowers donors with anewwaytomakedonationsthatappliesincentivestooutcomes.UsingtheImpactSecurity,donationsaresuccess-basedanddeferred,maximizingimpactovertime.Theuniquestructurecatalyzesnewsourcesofcapital and unlocks impact data thereby promotingamoreefficient,impact-focusedsector.

INVESTORSThe Impact Security provides a broad range of investors with a new way to invest in nonprofitorganizations.Investorsgaintheopportunitytoearnfinancialreturnsbasedonimpactoutcomes.Inaddition,asastandardizedfinancialinstrument,theImpactSecurityeasesthetransactionandtransferabilityprocesses.

NONPROFIT ORGANIZATIONSThe Impact Security opens up access tonew,differentsourcesofcapitalfornonprofitorganizations,includinginvestmentcapital.Itprovidesflexible,long-termfinancingthatisalignedwithimpactgoals.

INTERMEDIARIESThe Impact Security provides intermediaries with new sources of businessgrowth.

TheImpactSecurityoffersanewwaytofundimpactwithsignificantbenefitstoallparticipants.

BENEFITS

17

benefiTs

IMPACT SECURITY SUMMARYFEATURES BENEFITS

Financing Structure Pay for Success Performance driven structures that link funding with impact

Financial Instrument Standardizeddealstructure:debt Security exempt from SEC registration

Standardized,familiardocumentation

Easyreplication

Transactionspeed

UseofProceeds Proceedsusedbynonprofitorganizations

Opportunitytoinvestinnonprofitorganizations–themajordriversofimpact in the world

Financial Returns Variablereturnscontingentuponachievement of pre-determined andindependentlyverifiedimpactoutcomes

Investor returns increase as impact increases

Marketing&InvestorAccess

Publicofferingopentoallinvestors–accredited and non-accredited

Increased access by broader group of investors

Transferability &Liquidity

Easily held in a brokerage account and transferable

Broader investor market

Increasedpotentialforliquidity

Reporting Enables public disclosures andreporting

Increased transparency

Efficientpricing

TaxReporting Form 1099 Investor preferred

18

ConClusion

The Impact Security represents a powerful new way to fund impactusingastandardizedfinancialproductthatexplicitly linkscapitalwithimpact.

ThestandardizationandtransparencyinherentintheImpactSecuritystructurefostersintegrityandpromotesbroaderparticipationintheemergingimpactinvestingandpay-for-successsectors.

Byexpandingtheoptionsofdonors,investorsandnonprofitorganizationsinanefficient,performance-focused way, the Impact Security will accelerate the growth of the impact marketandmarketinfrastructure,furthertransformingthewaytheworldfinancesimpact.

CONCLUSION

Investment

Impact Security

Payment of donation,principal, returns, and/or bonus based on impact

1

2

3

19

aPPendix

Diagram 2 – Alternate Flow of Funds (Multiple Service Providers)

INVESTOR(S)UpfrontInvestment

Capital

OUTCOME PAYOR(S)Performance Based

Donations

ISSUER

SERVICE PROVIDER(S)Implement Services

& Report Impact

SERVICE PROVIDER(S)Implement Services

& Report Impact

SERVICE PROVIDER(S)Implement Services

& Report Impact

Diagram 3 – Alternate Flow of Funds (Issuer Is Outcome Payor)

INVESTOR(S)UpfrontInvestment

Capital

ISSUER + OUTCOME PAYOR

SERVICE PROVIDER(S)Implement Services

& Report Impact

SERVICE PROVIDER(S)Implement Services

& Report Impact

SERVICE PROVIDER(S)Implement Services

& Report Impact

APPENDIX

DonationPledge

Investment

Impact Security

Payment of donation,principal, returns, and/or bonus based on impact

1

2

3

4

ISSUER + SERVICE PROVIDER + OUTCOME PAYER

Issue Impact Security, Implement Services,

Report Impact, & Make Outcome Payments

20

aPPendix

Diagram 4 – Alternate Flow of Funds (Issuer Is Service Provider)

INVESTOR(S)UpfrontInvestment

Capital

OUTCOME PAYOR(S)Performance Based

Donations

ISSUER + SERVICE PROVIDERIssue Impact Security, Implement Services,

& Report Impact

Diagram 5 – Alternate Flow of Funds (Earned Revenue)

INVESTOR(S)UpfrontInvestment

Capital

SERVICE PROVIDER EARNED REVENUE

DonationPledge

Investment

Impact Security

Payment of donation,principal, returns, and/or bonus based on impact

Investment

Impact Security

Earned Revenue

Payment of principal and/or returns based on impact

1

1

2

2

3

3

4

4

NPX, INC.+1 (415) 598-8354 info@npxadvisors.com www.npxadvisors.com

Copyrightdesignation:ThisworkislicensedundertheCreativeCommonsAttribution-NoDerivativesInternational4.0License, that allows the copying, displaying and distributionofthismaterialifcreditisgiventotheauthors.

Revised: July 2016

IncollaborationwithArtisansCollaborative

DISCLAIMERThissummaryisintendedtoprovideanoverviewregardingaproprietary,novelfinancialinstrument,anImpactSecurity.ThissummarydoesnotprovidethetermsofanyspecificseriesoforofferingofImpactSecurities.ThetermsofanyofferingofImpactSecuritieswilldiffer.PriortoanydecisiontoinvestinaspecificseriesofImpactSecurities,investorsshouldcarefullyreviewthedisclosuredocument,whichwillcontainadetailedexplanationofthetermsofthatoffering,aswellastherisks,taxtreatment,andotherrelevantinformationaboutsuchImpactSecurities.Additionally,investorsshouldconsulttheiraccounting,legal,andtaxadvisorsbeforeinvestinginanyImpactSecurities.

ImpactSecuritiesmaybeissuedasprincipal-protectedorasnon-principalprotectedsecurities.ImpactSecuritieswillfeaturecontingentpaymentcharacteristics.ThetermsofanyissuanceofImpactSecuritieswillbespecifictothatofferingandwillbedesignedtomeetspecificobjectives.ThereturnonImpactSecuritiescomesfromtheachievementofspecifiedimpactobjectives.AninvestmentinImpactSecuritiesmaynotbeappropriatefororsuitableforallinvestors.Beforeinvesting,youshouldcarefullyreadthedisclosureorofferingmaterialsrelatedtothespecificImpactSecurityoffering.