More on Income Share Agreements: Will Proposed Legislation Fix their Marketability Problem?

By: Diane Ring

Last week I blogged about the apparent resurgence of income share agreements (ISAs), noting for example, Purdue University’s planned offering to juniors and seniors this fall, and the $30 million capital infusion received by ISA provider Cumulus Funding. I discussed how regulatory uncertainty is one likely barrier to more widespread market interest in these instruments. This week I thought I would take a look at the current round of ISA-related legislation in the House and the Senate, which is aimed at addressing some of this uncertainty.

The current legislation is actually the second go round at legislating the consequences of some ISAs. In 2014, Senator Rubio and Representative Petri introduced the Investing in Student Success Act of 2014. That legislation went nowhere. In 2015, Senator Rubio introduced a revised version of his bill, following the introduction of a similar bill in the House by Representatives Todd Young and Jared Polis. Both 2015 bills have much in common, although the Rubio bill tracks the structure of his earlier version. The point of each bill is to clarify the legal and regulatory treatment for those ISAs that fall within the bill’s definition by providing affirmative legal treatment for covered ISAs. ISAs that don’t fall within the bill’s parameters aren’t necessarily barred—they just aren’t covered by the legislation and presumably are left in the same legal limbo in which all ISAs currently operate.

As my co-author Shu-Yi Oei and I have discussed elsewhere, trying to craft one set of rules to cover many types of ISAs is problematic, and as a result, the 2014 bill was both under- and over-inclusive. For example, although it might make sense to regulate ISAs used for education in a manner similar to student loans – such student loan treatment might be inappropriate for ISA funding used to start a business rather than for education. Also, we expressed concern about the possibility of long-term ISAs in which an individual effectively assigns away a significant percentage of future income for what might be virtually all of his or her working life (e.g., a 30 year ISA). The 2014 bill did not limit such agreements.

So, do the 2015 bills do any better?

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A New Wave of Income Share Agreements

By: Diane Ring

Just a few years ago, Income Share Agreements, or ISAs, were garnering popular attention. ISAs are arrangements in which an individual receives upfront funding from investors, perhaps for education or a start-up business, in exchange for agreeing to pay a percentage of his or her future income for a period of time. Well-known examples included Fantex (which involved a stake in the future earnings of a professional athlete), as well as Upstart, Pave, and Lumni (which generally involved funding for education or business ventures). Although the structures and terms varied, the feature these ISAs had in common was the absence of a guaranteed return of principal and the degree to which the investor was investing in the personal, financial success of the funding recipient – a relationship some criticized as owning a piece of the funding recipient.

Ultimately, though, the market did not show tremendous interest in these instruments. Upstart and Pave shifted to traditional loan models, and Lumni reportedly has issued fewer than 30 ISAs in the United States. Fantex has remained active, but Fantex was always a little different, because it actually involved an issuance of stock in a corporation whose value effectively tracked the earnings performance of a pro athlete. Additionally, the Fantex investment had a novelty dimension, appealing to sports enthusiasts.

Why, though, was the market not that interested in ISAs? There are a few likely reasons:

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Introductory Post: Diane Ring

I am delighted to have joined my fellow tax bloggers in this consolidated blogging endeavor. I am Diane Ring, and I teach tax law in its many forms at Boston College Law School. Not surprisingly, my research has also focused on tax, with a primary emphasis on international tax, ethics, and corporate tax.

In the past few years, my international tax work has been examining the impact of contemporary trends in tax transparency and disclosure. On a separate track, my co-author (and fellow blogger) Shu-Yi Oei and I have been exploring a range of issues in the sharing economy, human capital contracts and other evolving commercial arrangements.

Although posts will likely reflect some of my formal research interests, I see tax everywhere and hope to share this view of the world through the blog. Although my students have pointed out that dogs have featured disproportionately (some might say excessively) in my exams over the years, I imagine canines will play a less prominent role in my posts — although I hold out hope.

My colleague at Boston College Law School, Jim Repetti, and I host a tax policy workshop bringing in outside speakers to present on a variety of interesting and diverse tax topics. These workshops will prove a great source of ideas, debates, and conversations, which I look forward to sharing in my posts.