New Examples of Permissible Program-Related Investments

On April 25, 2016, the Treasury Department officially published final regulations providing nine new examples of permissible program-related investments (PRIs). The new examples were first drafted as foundations came to sense that the existing regulations were too narrow and did not adequately address the full range of investment opportunities available.

More Info: What is a PRI?

The announcement is the culmination of a formal process more than five years in the making, prompted by conversations started years prior in the philanthropic community. The Council worked alongside partners in the field such as the Council of Michigan Foundations, Mission Investors Exchange, the National Advisory Board on Impact Investing, and others to provide input on the new regulations.

A More Inclusive View of the PRI

The new regulations bring the total number of examples for permissible and impermissible program-related investments to nineteen. In discussing the new regulations, the Treasury Department laid out seven principles they hoped to demonstrate through the given examples. They are:

  1. An activity conducted in a foreign country furthers an exempt purpose if the same activity would further an exempt purpose in the United States.
    (Examples 12, 13, 15, and 16)
  2. The exempt purposes served by a PRI are not limited to situations involving economically disadvantaged individuals and deteriorated urban areas.
    (Examples 11, 17, 18, and 19)
  3. The recipients of PRIs need not be within a charitable class if they are the instruments for furthering an exempt purpose.
    (Examples 11—16)
  4. A potentially high rate of return does not automatically prevent an investment from qualifying as a PRI.
    (Examples 12 and 13)
  5. PRIs can be achieved through a variety of investments, including loans to individuals, tax-exempt organizations and for-profit organizations, and equity investments in for-profit organizations.
    (Examples 11—19)
  6. A credit enhancement arrangement may qualify as a PRI.
    (Examples 18 and 19)
  7. A private foundation’s acceptance of an equity position in conjunction with making a loan does not necessarily prevent the investment from qualifying as a PRI.
    (Example 13)

Taken in sum, these principles greatly expand the scope of what form a PRI can take and what it can be used to accomplish. While the original regulations focused primarily on their usefulness in addressing questions of economic development, foundations have increasingly looked to PRIs as a tool to advance science, support the arts, prevent environmental degradation, and more. The regulations go much farther to recognize and promote these many applications.

Changes to Final Regulations

When Treasury announced its intentions to finalize these regulations, it opened a new round of public comment. Hearing the reactions of practitioners and experts, the final regulations incorporate three key changes.

  • Example 11 addresses an equity investment in a pharmaceutical company in order to finance research of a vaccine for a neglected disease and to provide that vaccine to individuals in developing countries at a below-market rate. Treasury clarified in the final regulations that the company may still seek market rate returns selling the vaccine in developed countries without compromising the exempt purpose of the PRI.
  • Example 13 examines a combined debt/equity investment in a developing country. The hypothetical foundation makes a below-market rate loan to a company and in return receives an equity stake. The proposed example included an exit trigger wherein the foundation would liquidate its share in the company were it to turn profitable. That portion was removed from the final regulations, but importantly, the IRS and Treasury did note that this type of exit mechanism could help to substantiate the charitable purpose of a PRI.
  • Finally, Example 15 looks at microlending in a developing country. The proposed regulations had described a scenario wherein the microlending program targeted economically disadvantaged individuals in a developing country that had recently suffered a natural disaster. The final regulations removed the reference to a natural disaster as the support for indigent individuals in a developing country was a sufficient charitable purpose.

The full discussion of the new regulations is available from the Federal Register.


Program-related Investments (PRIs): A PRI was initially conceived as an exception to Section 4944(a) of the Internal Revenue Code, which imposes an excise tax on investments that jeopardize the charitable purpose of a private foundation. Specifically, a PRI is an investment that—despite its potential to lose money—advances the charitable purpose of a private foundation. To qualify, a PRI must satisfy three basic requirements:

  1. That the primary purpose of the investment is to accomplish one or more of the foundation’s charitable purposes;
  2. That no significant purpose of the investment is the production of income or the appreciation of property; and,
  3. That the funds not be used for politicking, lobbying, or other prohibited political activity.

If an investment satisfies these tests, it can be treated as a PRI. Once made, a PRI counts towards a private foundation’s distribution requirement. Any funds that are repaid as a condition of the investment must then be recycled, either as a grant or as a new PRI.

To help illustrate the requirements of a PRI, the IRS and Treasury Department have published eighteen examples of permissible PRIs and one example of an impermissible PRI. See all nineteen examples.


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