I spent the day in Grand Rapids, participating in a workshop on new models that are evolving for local businesses to raise capital from lenders, investors and donors, at the 10th annual conference of the Business Alliance for Living Local Economies (BALLE). What follow are my rough notes, for those of you who care about such things. [WARNING: Undoubtedly, there are embarrassing mistakes and unforgivable omissions in the material below. I tried to take good notes, but accidents happen, especially after fourteen hours spent sitting in session. So, please consult a professional before taking any action based on what you read here.]
HERE’S WHAT FOLKS HAD TO SAY…
Michelle Long (BALLE):
We need to move our money from Wall Street to Main Street, and rebuild our economies from the inside out, creatively leveraging the capital that we have.
Cathy Berry (Slow Money):
Slow Money is about nurturing the earth, and our communities. As we’re re-envisioning our monetary system, and how we capitalize our local companies, let’s always keep in the forefront of our minds how we’ll impact the environment, and our neighbors. To illustrate this idea, Berry notes that she has raised money from a variety of sources (banks, investors, and the state) in order to launch a business which now benefits some 600 farmers. She encourages everyone to think about the benefits that their companies, and the companies that they invest in, provide, not only to the owners, but those with whom they interact as well.
Money and the Movement toward Community Capital: North Americans are increasingly interested in shifting their investments and support away from Wall Street and toward interests closer to home – their own communities and the businesses that serve their neighbors and make their place unique. Our speakers will explore what is causing this shift, where it is showing up, and how to accelerate it.
Don Shaffer (RSF Social Finance):
There’s a shift taking place. Ten years ago, everyone was distraught about big box retailers, and there was activism. Now, we’re moving into the next stage, and we’re getting serious about creating new vehicles to take on the big box retailers directly. People are waking up to the reality of the situation, and thinking about investing locally.
The newspaper is full of stories that illustrate how the current paradigm isn’t tenable. In the last 24 hours, we’ve read stories about the instability of the EURO, the massive losses at JP Morgan, Russia’s plans to engage multi-national corporations to re-mechanize its agricultural system, and the harm that may be done to our highly-centralized power grid by solar flares. We need distributed, local systems, he argues. We need to focus on resilience. At RSF, he says, they have an off-the-grid approach to investing. (RSF is a bank and foundation combined, based in San Francisco.) His company doesn’t invest in public markets. We don’t share the same values, he says. “The current system is essentially a casino.” It’s too risky. It’s too interested in short term outcomes. We, in contrast, strive to be transparent and personal. The company, he says, has invested $250 million over 28 years, and they’ve made good returns… Also they’re not FDIC insured. According to Shaffer, they backstop with their own funds.
His organization invests in food system-related projects using a number of different tools (strategic grants, loan guraantees, low-interest loans, subordinated loans, etc.) Their goal, he says, it so help diversify regional food systems. They’ve loaned to Common Market in Philadelphia, to help farmers supply fresh produce to local institutions. They’ve made funds available for a health system in Hawaii that has a six-acre organic farm next to a clinic. In Washington State, they’re helping by providing low-interest loans for immigrants looking to buy land to farm. In the Catskills, they’ve worked with a CSA that focuses on providing produce to low-income families in Harlem and the South Bronx. The CSA went from serving 200 families, to serving 1,100. They’re always exploring new models.
Other groups, he says, should be more creative. Foundations shouldn’t jsut give funds in the way of grants. Toward this end, RSF is beginning to work with community foundations, helping them to explore new ways of delivering financial support. They’re presently working with 12 community foundations, but they could do more.
Someone asks about social stock exchanges. (There’s apparently one in England.) He says that they looked itno a network of local stock exchanges in 2006, and it was too difficult from a legal standpoint at that time. He says that maybe it’s time to look again. It’s driven by investor demand, he says. And things seem to be moving in that direction. “It’s not a faad.” People are looking for mechanisms through which they can invest in local entrepreneurs.
Someone in the audience asks about liquidity… “If you want liquidity,” he says, “get a checking account.” Equity investing, in his opinion, shouldn’t be about liquidity. It shouldn’t be like the stock market, where you can get in and out rapidly. 99% of companies, as he says, can’t get the the rapid growth in three-to-seven years that VCs demand. And, yet, that VC mindset has permeated our culture. And he doesn’t think it’s sustainable. “We’re not going to get those kinds of returns in the future,” he says. We won’t be able to exploit the earth and its people the same way.
John Fullerton (Capital Institute):
He’s worked for a number of years at JP Morgan. And, at some point, he went though a conversion experience. He left investment banking in 2001. He got involved in banking and finance right out of college, he says, thinking htat he’d eventually go to wht World Bank, and “do good.” That didn’t happen, though. And, when Chase took over Morgan, he took time off, thinking about how the underpinnings of the system were fundamentaly wrong. “It’s not just bad people doing bad things,” he says. It’s our whole economic system. “Economics is misguided… We see the planet as something to exploit.” We strive, above all else, to optimize the efficiency of capital. We should flip it so that it’s the financial system that serves the biosphere, and not the other way around. We need a radical transformation… He looks at natural systems for models that are sustainable.
“We need a balance between efficiency and resiliency.” Economics is all about efficiency. We had an incredibly efficient system. But with efficiency came fragility. The system was extremely brittle, he said, and this led to collapse. This was his area. He was working in derivatives. Mortgage backed securities, he says, were about makeing investing and funding more efficient (borrowers pay less, investors make more) and, as a result, it broke. He offers another example – The EURO, he says, was about efficiency at the expense of resiliency, and now, as we’re seeing Greece, we’re paying a price.
We need to apply natural systems, and implement biomimicry at a system design level. “When people talk aobut sustainability, they generally mean less unsustainable. We need to make things regenerative. That’s different.”
The value, he says, is in the networks. When you eat at White Dog Cafe, for instance, you get a great meal, but you’re making change. The impact is cumulative. In the whole scheme of things, it’s a drop in the bucket, but it adds up. (Right now, CHase loses more in three hours than we’ll raise for small businesses in our lifetime.) But it starts at the molecular level, and ripples though the system. “Your work,” he tells the people in the audience, “is important.”
“We need to rethink what wealth means. It’s not money… We need a humble retreat of finance.”
He talks a bit about the “edge effect,” saying that, in natural systems, there’s lots of life at the edge of systems, where they meet one another. He talks of the abundance of life at the point where oceans and rivers meet. The same thing, he says, happens when various public and private funding sources meet.
He talks of “regenerative capitalism.” He says there are three types of capital – financial, social, and natural. Currently, we deplete natural capital (the earth’s resources) in order to maximize financial capital. We need to change the paradigm so that financial capital has a more modest growth rate, while natural capital stabilizes, and social capital grows exponentially.
He shares a case study about a grasslands project that he’s working on. Grasslands, he tells us, comprise the second largest carbon sink on the planet, after the ocean. They account for 5 billion hectares. And they’re becomming desert. They have created a range management business that’s profitable for the ranchers, and has a non-profit component. Essentially they put cattle on the land, and have them graze on it, like buffalo would have historically, which helps stabilize the ecosystem. And, in the future, they plan to sell the grass-fed beef, in addition to providing land managment services… They are looking for invstors who don’t want an exit. “The idea of an exit is a flawed idea” There will be dividends, however, he points out.
He recently attended a public banking conference in Philadelphia. While he has some concerns about the state being too involved, he says that we need to consider it. The State Bank of North Dakota, he says, is well managed. They use the bank as a community development tool. In Germany, he points out, half of the banks are state-owned. So, while cautious about it, he concedes that public banks should probably be part of the banking ecosystem.
Someone asks about alternative stock exchanges. He says, our current exchanges have been taken over by high-frequency traders, and suggests that the practice be curtailed. But he has concerns about creating new exchanges as the infrastructure costs are massive. He’s rather, it would seem, leverage the infrastructure that’s already built, changing the rules of the game to encourage longer-term values-based investing.
The way private equity works, is that you determine a company’s valuation by working backward from the exit you envision. That, he says, is backward.
What’s Hot, and Is it Legal? Popular Community Capital Lending and Investment Approaches, and their Current Legal Landscape: There are many emerging focus areas in the growing world of community capital. We’ll explore a handful of those that are currently most popular and discuss the boundaries of what’s possible and replicable across many communities.
Jenny Kassan (Cutting Edge Capital):
She speaks on securities law. Anytime you ask anyone to invest in someting, you’re probalby offering a secutiry. And that’s highly regulated. The Securities and Exchange Commission, and state regulators, will come down on you hard if you do it incorreclty. The federal laws in this area date back to the 1930s. The states pushed for the laws at the time – not the feds. Kansas led the charge. They did it because people from New York were flooding into Kansas, selling out-of-state investments, essentially pulling the money out of their local economy. Ironically, it’s now flipped, and these same laws make it difficult to do anything but invest in the large companies listed on the New York stock exchanges.
According to the rules of the SEC, if you’re worth a certain amount of money, it’s assumed that you’re more sophisticated, and you have more flexibility with regard to how you invest. If you’re rich, you can do a lot of things. The laws are onerous, however, for small, “unaccredited” investors.
As a business entity seeking to issue a security, you need to register federally, and register in the state that you intend to solicit investments in. This could cost up to $100,000. There are expemptions, however, which can lessen the filing fees, etc. For instance, it’s generally accepted that you can sell to people that you already know. Also, co-ops and charities have some exemptions that associated businesses can make use of… These laws, as she points out, vary from state to state.
She talks about her clients, like REI and Kiva… Little City Gardens utilized crowdfunding, raising over $17,000. These are donations. You don’t get anything back… except maybe a low-value perk, like a t-shirt… Another client pre-sold gift cards to raise capital… Some partner with a non-profit to access money that they otherwise couldn’t.
Direct Public Offerings (DPOs) are another vehicle. Gather restraunt in Berkley had a private offering, as did Workers Diner, and MERC in Powell, Wyoming. Market Creek Plaza in California also came about in a similar way. Individual, unaccredited investors came together to make these things happen.
People have been looking for ways to create a fund, so that interested individuals could raise a non-specific DPO, and then invest in a lot of different things. No one, however, as of now, has figured out how to do it legally.
With some of these ideas, liquidity can be an issue. How do people get their funds out, if they need to extract them? (A lot of the debate this first day concerning liquidity, and how necessary it is.)
We discuss the crowdfunding legislation that was recently introduced as part of the Jobs Act… BALLE fellow, Michael Shuman, had proposed, in a journal article, that ordinary, unaccredited investors should be able to invest $100 of their own money in a local business without all of the legal hurdels, and the idea gained support across the country. BALLE and others took the idea to the SEC. 150 letters of support were filed, the idea continued to grow. And, within two years, President Obama signed it. The version that was signed was a little different than what was originally proposed, but, all things considered, it still seems like a good thing. The version signed by Obama allows for individuals to invest up to 5% of their annual income or net worth. Businesses will be able to raise up to $1 million through this mechanism. And, anyone can invest up to $2,000. But, you need to do it through an intermediary. Congress wanted intermediaries because they believe it would be easier to regulate them. We won’t know how it all shakes out for a year or more, but it’s in motion, working its way though the system, as the SEC and others try to figure out oversight, etc.
A few more things added to the crowdfunding legislation… If you want to raise more than $100,000, you have to have professionally reviewed financials. If you’re seeking over $500,000, you need audited financials. Both of these add a significant expense, making it more difficult for small, struggling businesses to utilize.
The legislation also says that states cannot regulate these offerings, which is good.
She suggests two books… Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street and Achieve Real Prosperity–A Community Resilience Guide and Locavesting: The Revolution in Local Investing and How to Profit From It.
Michael Suman (BALLE Fellow; Cutting Edge Capital):
Individuals have an incredible amount of wealth tied up in stocks and bonds. Americans, while they have $8 trillion in banks, thrifts and credit unions, have over $30 trillion in long term investments, stocks and bonds. “Move Your Money” campaigns have been successful, and people are leaving big banks for credit unions, but that amount is trivial compared to what’s in the stock market. And, almost 100% of those investments in securities are in Fortune 500 companies. Local businesses don’t benefit.
We, according to Shuman, need to get the money of the 99%, who are unaccredited investors, into the 99% of businesses that can’t currently access funds through the market.
Shuman lays out a number of different investing mechanisms available to us.
1. Specialty CDs… Presently, we can buy Certificates of Deposit (CDs) at local credit unions. And, some are now being developed to target local businesses. People are creating specialty CDs, the procedes of which are going to assist specific community-based ventures. He shares the case of Equal Exchange, which now has a $1 million line of credit thanks to a successful CD initiative.
2. Co-op Investment… Co-ops can borrow money from their members, to open new stores, etc. And, co-ops can invest up to 40% of the funds that they raise in other entities. One food coop, for instance, started a fund to help their suppliers, offering short-term loans for local farmers, etc. The group Coop Power invests their 40% in other startup initiatives. (More on Coop Power in a later post.)
3. LION (Local Investing Opportunities Network)… Shuman mentions a man that throws parties during which investors and business people are introduced. Once introduced, said business people can then solicit investment from these investors. (This gets around the SEC law that I mentioned above, which prevents solicitations to unknown individuals.) He notes the LION group in the 10,000-person town of Port Townsend, WA has invested $3 million in local businesses.
4. Sponsorships… Non-equity investments can be made through organizations such as Kickstarter and IndieGoGo. Kikstarter has put $100 million into companies and products in the past year. The important thing is that contributors don’t receive anything significant in return. (If they were to receive something more than a nominal gift, like a t-shirt, it would violate SEC law.)
5. Internet Lending… Companies like Kiva and Prosper offer business loans. As most of the investments that they facilitate are outside of the country, however, in emerging economies, a dollar spent through these networks is a dollar that isn’t available in our communities… He notes that we could use something like the UK site, Funding Circle, which is tailored to our specific areas.
6. Slow Munis (municipal bonds)… Bonds are issued by economic development groups for business attraction and other “stupid” things now. We need to rethink them.
7. Pre-selling… He’s worked with Your Local Market in Seattle. They wanted to raise money quickly, so they offered memberships in advance of actually opening. The campaign was successful.
8. Local Stock…. The new crowfunding law is discussed.
9. Local Stock Exchanges… These will develop. People will want to sell their investments at some point, even if rapid trading is off the table. LznX and Mission Markets are moving into this market.
10. Grassroots Loan Funds.. we need intermediatries to create a forum. but it’s hard for unaccreddited investors. 7,5000 utual funds in the US. Not one invests in local small buesinss. There’s no reason they couldn’t
11. Investemnt club
12. self directed IRA… Apparently, you can move your IRA to a custodian, at a cost of about $200 per year, and then invest in anything. “Even your neighbor’s house,” says Shuman. “Just not your own.”
He notes that the average real rate of return on Wall Street over the past four years has been a little over 2%. A lot of local investments, however, have been paying over 5% per year. It makes economic sense to move your investments.
Ten years ago, all of these things that we’re talking about were fanciful.
$30 trillion, at this very moment, is being invested in bad Wall Street investments. If we had the right mechanism, that money would move. People want to invest in local companies… What happens when we shift the first $1 trillion over? The second? The third? The first one will be hard, the next ones will go more quickly. A radical change is coming, and we, in this room, are going to make it happen…
[note: The rest will have to wait… I’m falling asleep… It’s been an overwhelming day… I’ve spent close to 15 hours listening to brilliant people talk, and scribbling notes… Good night….]