Case study – Blended Finance Vehicle – California Rebuilding Fund

Case Study provided by Morrison & Foerster


Morrison & Foerster LLP was a founding member of the California Small Enterprise (CASE) Task Force, which was formed in March 2020 to address the needs of small businesses in California amidst the COVID pandemic. The CASE Task Force (comprised of lawyers, academics, CDFIs, and local business leaders) initially gathered to provide a comprehensive county-level handbook to assist small businesses in navigating the pandemic and also (together with a dozen other law firms) to staff a free, weekly hotline. 

The CASE Task Force then also set out to pull together a financing structure to provide recovery loans to small businesses in California, which resulted in the California Rebuilding Fund. The blended finance structure leveraged state guaranty funds (including the California bank guaranty program), philanthropic funds, subordinated loans (from foundations and program related investment (PRI) investors) and senior bank capital to reach underserved small businesses which have been traditionally under-resourced and disproportionately impacted as a result of COVID. The fund used CDFIs to distribute cash, using a coordinated technology platform (run by CRF – another CDFI) and created a new economic model to strengthen and support CDFIs.

The structure is innovative on a number of different levels including: (i) using third party non-profit (Kiva) as the fund manager to allow for donations and PRI investments, (ii) establishing a governance and allocation committee comprised of local leaders, lenders, academics and lawyers to allow for flexible and impartial approvals of changes as the structure progressed, (iii) leveraging government funds and guaranty programs, (iv) bringing loans off balance sheet for CDFIs which is a major limiting factor in their ability to scale and (v) using a technology platform to allow for insight across CDFIs and to ensure fair and equal allocation among all geographies.

1. Beneficiaries

The beneficiaries of the fund are small businesses in California. So far over loans have been made to over 700 small businesses in 36 counties across the state with a total of over $45 million being funded to date. Of the these loans, over 80% have been made to a business owned be a woman or person of color located in a low- or moderate-income community. Indirectly, we are also helping the CDFIs involved in the transaction.

2. Structure

This California Rebuilding Fund structure is innovative on many dimensions: 

  • It blends government money (either a guaranty of small business loans or providing subordinate first loss guaranty funds into the structure) with donations/grants and PRI capital which forms additional subordinated capital and senior bank capital – this allows us to leverage the subordinated capital to crowd in private capital
  • Has a third party owner and management structure which allows for real time changes and decisions to ensure that the mission of the program is achieved – which is helping the smallest of the small businesses which have been most severely affected by the pandemic and left out of other programs such as PPP (ex. the committee is able to ask CDFIs to prioritize certain geographies if we see that small business owners in those areas are falling out of the pipeline) 
  • Creates a homogenous product so that we can create a pool of assets which we can raise capital for – this is significantly more efficient than each CDFI raising capital on its own
  • Creates an off balance sheet structure for the CDFIs – one of the greatest challenges to CDFIs is that they are required to hold significant net assets and as a non-profit growing those net assets is very hard – this structure moves 90-95% of the originated loans off balance sheet for the CDFIs allowing them to do 20x leverage rather than 4x leverage which is typically what they could do 
  • Uses a single platform for loan applicants – Connect to Capital (CRF’s technology platform) allows for us to see in real time the loans being approved, what loans are not being approved (and the reasons for rejection) and allows us to through the fund structure (committee) to adapt to make sure that we’re reaching the most vulnerable populations (ex. we have found that increasing TA assistance is key to making sure that certain applicants don’t fall out of pipeline), or asking CDFIs to prioritize certain zip codes to ensure equal distribution of funds 
  • Reducing client acquisition costs for CDFIs – CDFIs have a high client acquisition cost. Coordinating efforts and leveraging Governor Newsom’s communications infrastructure allowed us to get the message out with no cost to the CDFIs. In this structure they did not have to go out to find new borrowers. 
  • Reaching underserved communities – using the community partners we are able to ensure that we reduce inequalities programs like PPP experienced. They can provide technical assistance and are a trusted resource which encourages under-represented small businesses to apply. These community TA provides (various local chambers) also allowed us to send rejected applicants links to additional resources that could provide assistance even if they did not qualify for a loan through our fund. 

Each one of these features requires significant and creative legal thinking and structuring to ensure that they work for all parties involved – and never losing sight of the ultimate mission to provide capital to the smallest of the small businesses with an emphasis on traditionally underserved and under-resourced communities.

3. Impact

The CASE Task Force expect to serve at least 3,000 small businesses with an affordable loan product (4.25% interest with interest only payments for the first 12 months) and hopefully many more as the facility has the ability to upsize to $500 million. We expect to reach due to our intentionality and the partners that we have chosen to work with (CDFIs) businesses and communities which have traditionally been underserved and under-resourced.

In May 2020 Calvert Impact Capital launched the NY Forward Loan Fund. This model was replicated (with modifications) for the California Rebuilding Fund which was launched in November 2020. In early 2021, Calvert also replicated this structure to launch the Southern Opportunity and Resilience (SOAR) Fund which includes 13 states in the South East. Additionally, Governor Inslee has announced state commitment to launch a fund in WA state in spring 2021. 

The number of these funds clearly indicates that it can be replicated and each fund contains an accordion feature which allows for it to scale as more capital is committed. The major barrier to scale is finding subordinate capital – state/government funds are key in getting the structure launched quickly. However, the structure does work even without state guaranty (ex. the second CA fund and the SOAR Fund which will have no government money).

4. Goals

The goals of the CASE Task Force is for people, organizations and government to dream big. CASE Task Force would love to see a $10 billion federally funded national program. Initially when we embarked on forming the California Rebuilding Fund, we wanted to launch one or two to prove that this could work and then launch a national program. Unfortunately, since in many circumstances subordinate capital comes from the states, there are geographical restrictions on its use. It is inefficient and costly to create multiple loan funds based upon geography, and our hope is that the Biden administration considers providing loss reserves to support this type of lending. The California Rebuilding Fund and other similar funds have demonstrated that it is effective and easy to scale. A national public-private partnership would enable drastic increases in access to affordable and flexible working capital for small businesses and non-profits owned by women and people of color, those located in LMI communities and who are otherwise un- or under-banked, a population that we think will grow much larger as banks pull back.

5. Case members

The following is a list of participating members of the CASE Task Force:

  • Kiva, Calvert Impact Capital, Morrison & Foerster LLP, California Ibank 
  • CDFIs (CRF, 3Core, Access+Capital, Accion, CDC, ICA, Main Street Launch, Meda, NAAC, Opportunity Fund, PACE, PCV, Working Solutions and others) 
  • Business support organizations (CA black chamber of commerce, CAMEO, CalAsian, CA Hispanic Chambers, SBDC California, Small Business Majority) 
  • Lenders and Investors (some have chosen to remain anonymous so this is not a comprehensive list – Wells Fargo, First Republic, Grove Foundation, Kapor, Panta Rhea, All Home, Self Help) 
  • Other supporters (Berkeley Haas, Berkeley Law, California Governor’s office of business and economic development)

Case Study provided by Morrison & Foerster

Is ‘Place-based’ investing a crisis response strategy for Impact Investors?

From the Covid-19 public health crisis to its subsequent economic downturn and rising protests against racial inequality in the US, the past few months have ignited impact investors to review their strategies both at the portfolio and deal levels. One particular conversation that Toniic and the Impact Terms teams have observed on the rise concerns “place-based investing”. We’ve been internally discussing the scope of what “place-based” means and struggled to hone-in on any fixed definition and strategy. In the spirit of the collaborative and curated approach of the Impact Terms Platform, we decided to extend an invitation to experts in our network to develop a better understanding of what “placed-based investing” means to them, what their place-based investment strategies include, and how they are empowering people disproportionately affected by the recent events, most notably ethnic or racial minorities.

This article is based on the most insightful inputs we gathered from our friends at five US-based organizations, including Blueprint Local, IFF, and Mission Driven Finance.

  • What does “place-based” investing mean?
    All 5 organizations define place-based investing as a focus on communities:

“Long-term investing consistently and systematically in communities with the goal of encouraging an inclusive economy” – David Robinson Jr., Blueprint Texas

“Investing with a geographic lens in addition to other impact goals, and building an interconnected portfolio of companies that reinforce each other and the power of community” – David Lynn, Mission Driven Finance

“Long-term commitment to a community; ensuring capital and development decisions are made at the invitation of and in service of community.Yi Wei, IFF

“Investing in local communities over time – investing with folks who know the community, are part of the community, and investments that help build wealth in local communities.” – Executive Director of a large US Foundation

  • What are the investment strategies they are deploying?
    Most focus on building wealth in local low-income communities.

Mission Driven Finance uses debt and debt-like structures in the sectors of education, health, jobs, and community development.

IFF helps non-profit organizations own their real estate, which in turn gives them more control over staying in place and stronger programmatic outcomes.

Blueprint Local/Blueprint Texas targets whole neighborhoods (as opposed to one-off deals) and focuses on undervalued assets and companies that have the potential to grow and reinvigorate neighborhoods.

  • Is there a focus on empowering people disproportionately affected by economic and racial disparities?
    Most responded that they are committed to continuing to provide capital to underserved communities and organizations unable to access affordable capital from traditional sources. One organization, which is currently adjusting its strategy, will be specifically targeting opportunities in Black communities.

We are interested in further developing this article and invite you to collaborate with us. Please share comments in the section below or reach out to our team to expand on this topic. 

Stock Transfer Restrictions

Investors and founders may agree to restrictions preventing the transfer of shares to buyers deemed not to be aligned with the company’s mission. This provision goes beyond the traditional right of first refusal applicable to transfers, and flatly prohibits transfers to buyers who are not considered mission-aligned.

The parties will likely want to agree on what standard the board will use to make this judgment. 

Sample language: No Stockholder may transfer any shares of the Company’s equity stock to any entity or person that, in the good faith determination of the Board, does not share the Company’s commitment to [describe purpose/ mission] OR [to operate pursuant to standards described in Exhibit X]

Impact Oversight

The company’s board of directors can empower a committee or director to oversee mission-related decisions. But there are limits to a board’s ability to delegate its authority, so oversight clauses should be drafted with care.

An impact committee or director could assume responsibilities such as one or more of the following:

  • overseeing the development of an impact strategy and work plan
  • monitoring and reporting to the full board on the progress of the plan and the company’s impact performance
  • addressing the divergence of views on mission that will inevitably arise from time to time
  • monitoring compliance with PRI-related obligations

The Company’s board can limit the committee’s or director’s authority to an advisory role, or the director or committee may have the authority to make binding decisions for the board. There are limits, however, on the board’s ability to delegate its authority, so the scope of any authority to make binding decisions should be drafted with care and specificity.

If a specialized committee or director is desirable, the parties must spell out what powers the committee or director will have, how the individuals will be chosen and how decisions will be made.

Delegating oversight

Sample language: The Company shall have [an Impact Committee composed of X directors, at least  X of whom shall be independent] OR [an Impact Committee composed of X members, including the Series ?? Director(s)] OR [an Impact Committee composed of  X members with relevant experience, X of whom shall be appointed by the Board and X of whom shall be appointed by [the Investors][the Founders] OR [an Impact Director who shall be a member of and appointed by the Board].

Limited oversight duties

Sample language: The Impact [Committee] OR [Director] shall monitor the Company’s compliance with the Impact Policies described in Exhibit X, and shall be responsible for the Company’s reporting thereon as described in [reference term describing impact reporting requirement].

Comprehensive oversight duties

Sample language: The duties of the Impact [Committee] OR [Director] shall include but not be limited to overseeing the development of the Company’s impact objectives, strategy and work plan; reviewing the Company’s progress in achieving its impact objectives and recommending to the Board any changes to the strategy and work plan that the Impact [Committee] OR [Director] believes are warranted; recommending to the Board the standards the Company uses to measure impact; monitoring the Company’s impact measurement procedures and internal reporting; reviewing and approving the Company’s annual impact reports; providing a forum for any conflicts between the Company and the Investors relating to the Company’s [mission] OR [the Impact Policies described in Exhibit X]; and advising the Board concerning all aspects of the Company’s social and environmental impact.


Oversight for PRIs

Sample language: The Company will establish a PRI oversight committee (the “PRI Oversight Committee”). The PRI Oversight Committee will monitor the Company’s compliance with the Company’s PRI related commitments. The prior consent of the PRI Oversight Committee will be required for the following actions:

(a)   Any disposition of PRI funds;

(b)   Reviewing and approving reports to PRI investors;

(c)  Any deviations from the Company’s business, strategy or purpose that could impact the specific program for which PRI funds were invested

Protecting Voting Rights

Investor preferred stock generally requires that the company secure the approval of the preferred stockholders to take certain actions. The parties could agree to expand the traditional list of approval items for investor preferred stock to include impact-related actions (e.g. changing the company’s purpose).

Although less common, company founders can demand similar voting rights as part of a special class of founders’ shares. Founders, for example, may hold preferred shares with voting rights that allow them to veto any change of control they view as not aligned with the company’s mission.

If founders hold the voting rights, investors may try to negotiate for a provision that requires founders to buy (or find a buyer for) the investor shares that would have been sold in a vetoed transaction, at the price offered in that transaction. Conceptually, these rights could also apply to a capital raise, with founders reserving some period to find more mission-aligned capital, even after the board has approved a funding round.

The parties will need to agree on the areas that the voting rights will cover, as well whether a simple majority or super-majority of rights holders will be required to block changes.

Sample language (Founder Version): As long as the Founders hold at least [X percent] of the [Series Y] Shares, the vote of at least [X %] of the [Series Y] Shares, voting as a separate class, shall be required for the Company to (1) enter into a Change of Control transaction, or (2) amend or repeal the [purpose/mission] set forth in [Article X of the Company’s charter document] OR [the “best interests” provisions set forth in Article X of the Company’s charter document] OR [the corporate citizenship standards described in Exhibit X].

Sample language (Investors version): As long as the Investors hold at least [X percent] of the Shares purchased, the vote of at least [X percent] of the Shares, voting as a separate class, shall be required for the Company to (1) enter into a Change of Control transaction, or (2) amend or repeal the [purpose/mission] set forth in [Article X of the Company’s charter document], OR [the “best interests” provisions set forth in Article X of the Company’s charter document] OR [the corporate citizenship standards described in Exhibit X].

Sample Language (debt deal): During the term of the Loan, the consent of the Investor shall be required for the Company to (1) enter into a Change of Control transaction, or (2) amend or repeal the [purpose/mission] set forth in [Article X of the Company’s charter document], OR [the “best interests” provisions set forth in Article X of the Company’s charter document] OR [the corporate citizenship standards described in Exhibit X].

Including “Use of Proceeds” Language

When the company and investors agree that the investment serves a defined social or environmental purpose and earmarks proceeds, in whole or in part, for that purpose, including in a formal written statement at the term sheet stage may be helpful:

Sample language: Proceeds of the investment shall be used for [operations designed to achieve impact goals] OR [the impact goals described in Exhibit X].


Including “Use of Proceeds” Language in PRI Investments:

Specifying the use of proceeds is particularly important for PRI investors, as they are responsible under US tax law for understanding how PRI funds are being spent. See Sample term sheet: loan with impact-triggered default for an example of terms that specify the use of proceeds. 

Sample language for PRIs: The purpose of the investment is to provide working capital for [the defined charitable goals] and operations designed to achieve them. The investment is intended to qualify as a Program-Related Investment under section 4944(c) of the US Internal Revenue Code of 1986, as amended (a “PRI”).

Proceeds of the investment shall be used exclusively for the purposes described in the preceding paragraph. None of the proceeds may be used to influence legislation or elections, or in any other manner which would disqualify the investment as a PRI. The investment documents will include terms reasonably required to qualify the investment as a PRI (the “PRI Requirements”).