The principal qualification requirements for a tax-exempt 501(c)(3) bond issue can be stated relatively simply.

1. All property financed with the proceeds of the bonds must be owned by a 501(c)(3) organization.

2. No more than 5% of the proceeds of the bonds may be put to “private business use,” or be secured by or be derived from payments respecting property put to such private business use.

3. Private business use means use by a 501(c)(3) organization that produces “unrelated business taxable income” or use by others in any non-governmental trade or business.

4. The property financed must be the subject of an appropriate public hearing and governmental approval.

Finally, “arbitrage,” the practice of using bonds to acquire higher yielding investments, or to replace funds used directly or indirectly to acquire higher yielding investments, is limited by law and regulation.

Despite the simple statement of these requirements, the concepts and rules are complex and their application to particular circumstances can be difficult. The nonprofit will have had the benefit of the analysis and advice of nationally recognized and expert bond counsel in putting together and closing the bond transaction. Following closing, the nonprofit may be largely on its own, except to the extent it determines to further consult qualified experts from time to time.

 BRIEF OVERVIEW OF BONDING PROCESS 

The following is an outline of the process of issuing 501(C)(3) bonds in South Dakota.

STEP 1.  Set hearing date. (This can be done by resolution-administrative act, nothing is binding)

STEP 2.  Publish notice of hearing.  (Also called  TEFRA  hearing.  Publication must be 14 days prior to hearing.)

STEP 3.  Hearing. (Allow public comment)

STEP 4.  At hearing or thereafter, pass resolution authorizing issuance of bonds.(Subject to referendum.  Does not become effective until 20 days after publication)

STEP 5.  Finalize terms of Bonds, due diligence and set closing date.

STEP 6.  Close bond issue.