American Alliance for Equal Rights (AAER) is suing Fearless Fund Management LLC (a black women-run company) for claims of racial discrimination and violations of Section 1981 of the Civil Rights Act of 1866 (Civil Rights Act). All companies should be aware of five key things regarding American Alliance for Equal Rights v. Fearless Fund filed in federal court in Atlanta on August 2, 2023.
- AAER alleges that Fearless Fund is operating a racially discriminatory program that violates section 1981’s “guarantee of race neutrality” in making “contracts.” AAER claims that Fearless Fund’s grant program discriminates against other races by awarding $20,000 grants, business support services, and mentorship specifically to Black women-owned businesses. AAER is seeking relief to end Fearless Fund’s grant program. The plaintiffs in the recent Harvard College and University of North Carolina Supreme Court cases outlawing affirmative action in college admissions also lead and operate AAER.
- Fearless Fund is an Atlanta-based venture capital fund founded by women of color that invests in women of color led businesses seeking early-stage investment. Fearless Fund’s mission and business objective is “to bridge the gap in venture capital funding for women of color founders for potential high-growth and scalable companies.” In addition to grants and investments for small businesses, Fearless Fund provides programmatic support and technical resources that early-stage companies require for success. Fearless Fund is an impact venture capital fund, which is a venture capital fund structured to achieve a traditional return on investment as well as to support and foster positive societal outcomes for relevant stakeholders not limited to the direct recipients of such support. Impact investors like Fearless Fund play a critical role in providing resources to companies that may otherwise not receive venture capital funding, thus broadening the profile of businesses and founders that receive venture capital investment and related support. Recent studies report that companies led by Black women typically receive less than 1% of all venture capital funding.
- The Court will need to determine whether Fearless Fund’s grant program is an enforceable contract protected by the Civil Rights Act. AAER is also asking the Court to enforce a temporary restraining order and preliminary injunction against Fearless Fund by August 17, 2023, to prevent the company from identifying its next round of grant recipients at the end of August 2023. The Fearless Fund case differs from the recent affirmative action cases because plaintiffs are not alleging that Fearless Fund is a governmental actor. As of today, no legally enforced restrictions prevent private parties from providing grants to specific interest groups.
- Any decision in American Alliance for Equal Rights v. Fearless Fund may have broad implications for a wide range of groups, including publicly listed companies, large and small private businesses, foundations, endowments, scholarship programs, non-profits, grantors of wills, and private estates to the extent such parties have programs that include race-based criteria for eligibility of awardees to receive funds. These groups should carefully consider any changes in the law to the extent the same may affect their current and contemplated programs.
Grant givers and impact investment funds have multiple options to consider even before a decision occurs in American Alliance for Equal Rights v. Fearless Fund. These options include:
- Continuing to give grants and scholarships to whomever they see fit.
- Defending their programs under the “business judgment rule” applied in many jurisdictions to validate the organization’s legitimate business objectives to invest in and support underrepresented groups.
- Documenting early any specific past discrimination in violation of the Constitution or a statute that the program seeks to address, if applicable.
- Evaluating how recent court decisions may influence the development of new “risk factors” in private placement memorandums of impact venture capital funds.
Interested parties should continue to keep a close watch on the case and related developments. Most importantly, they should engage legal counsel to help them evaluate the pros and cons of available options considering the American Alliance for Equal Rights v. Fearless Fund complaint. Please use our contacts below for more information.
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