By Michael H. Shuman
As the movement for socially responsible investing (SRI) matures, a growing number of its movers and shakers are appreciating the importance of local investment. One reason is that there is compelling evidence that locally owned businesses are the key to community prosperity. Another is that the close proximity between investors and local companies increases corporate accountability and reduces the probability of fraud.
But if you’re a non-wealthy investor—part of the 98% that securities regulators deem “unaccredited” – common wisdom suggests that you have few options for investing locally. Nonsense. To dispel this skepticism, I’d like to share the top ten ways grassroots or retail investors can participate in the SRI revolution by going local:
- Invest in Yourself – Before thinking about investing in any other business, you should invest in yourself. The best rates of return to yourself and to your community—far greater than the average 2.7% per year return from Wall Street–come from getting rid of credit card debt, becoming a homeowner (mindful to take on only a mortgage you can afford), paying off your home (if you already are an owner), generating your own heat and electricity with solar power, and growing your own food. Think of these options as becoming your own fund manager.
- Move Your Money – Move all your day-to-day financial activities, including your checking, loans, credit cards, and mortgage, to a local bank or credit union. These institutions recycle their capital locally—so much so that every dollar placed on deposit in a local financial institution is three times more likely to be lent to a local business than a dollar in multi-state bank.
- Create Targeted CDs – By law, even local banks and credit unions must be very conservative with their money, so they are often wary of loaning money to any local businesses without full collateral. A few banks, such as Ithaca’s Alternatives Credit Union, have agreed to set up special certificates of deposits that fully collateralize loans to high-priority local businesses. Eastern Bank in Boston has a CD that collateralizes a line of credit to Equal Exchange, a local fair-trade company. You can nudge your local financial institution to set up a similar program, which will instantly give local investors a new option.
- Stretch Your Coop – Coop members find that their membership investments pay off better annual returns (in discounts and patronage dividends) than Wall Street does. Some coops are also willing to pay their members handsomely to borrow money for capital projects. The La Montanita Grocery Coop in New Mexico has created a revolving loan fund so that members’ capital can support local farmers and food processors.
- Pre-Purchase Local Goods and Services – In most U.S. states, preselling is not regarded as a security, so businesses can raise capital without attorneys by convincing their most loyal customers to make purchases in advance. Pay attention to the growing number of local stores in your region that are offering such deals. For example, Credibles is a pre-selling web site that makes available such deals from small food businesses, coast to coast, seeking to expand.
- Weave Investor Networks – The Local Investment Opportunities Network (LION) of Pt. Townsend brings together local investors and businesses each month to establish “preexisting relationships” that facilitate the circulation of business plans and investment opportunities, and new LIONs are spreading around the country. Unlike traditional angel-investor networks, where entrepreneurs present their business plans at periodic dinners, LIONs welcome unaccredited investors.
- Direct Public Offerings – Until recently, it has been very expensive to restructure a small business so that it could accept funds from unaccredited investors. But thanks to “crowdfunding reforms” that have been passed or are pending in nearly half the states, the legal costs of “going public”—but just intrastate, so local ownership is protected—are coming way down. Grassroots investors will soon be flooded by local stocks purchasable on a new generation of “community portals.” If the federal JOBS Act ever is implemented by the SEC commissioners (thus far they have tried to kill the law with three years of needless delay), even more local stocks will be available.
- Create a Local Investment Fund – Pools of capital are preferable to one-off investments because they diversify risk. There are thousands of local-investment pools around the country, most of them linked with local economic-development programs, but nearly all of them are only open to accredited investors. Important exceptions that allow unaccredited investor participation include MountainBizWorks in North Carolina, the New Hampshire Community Loan Fund, ECDI in Columbus, Ohio, and PV Grows in Western Massachusetts. These funds will certainly multiply in the years ahead.
- Form a Local Investment Club – If you can’t find a local fund that allows unaccredited investors to participate, you and your friends can form your own investment fund on the cheap in the form a “club.” The legal key is that all your decisions have to be made together, as a group. A great example of No Small Potatoes, a project of Slow Money Maine.
- Use Self-Directed IRAs – Almost all the options above are also possible to unaccredited investors who wish to move their tax-deferred IRA savings out of Wall Street. By rolling over your funds into a Self-Directed IRA, you can direct a custodian (for about $200-300 per year) to invest instead in any and all of the items above. The only restriction is that you cannot invest in your family’s business or home. But you can invest in your neighbor’s business or home, and your neighbor can invest in yours!
Thirty years ago, the mainstream finance industry scoffed at the SRI movement, warning participants that they would lose money in their silly causes. Today, everyone involved in SOCAP knows better. The naysayers on local investment are about to learn a similar lesson, as we start to see dozens—and soon thousands—of local investing strategies that can simultaneously save Main Street and beat Wall Street.
About the Author
Michael Shuman is the author of Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street and Achieve Real Prosperity (Chelsea Green, 2012) and more recently The Local Economy Solution: How Innovative, Self-Financing Pollinator Enterprises Can Grow Jobs and Prosperity (Chelsea Green, 2015). He blogs at michaelhshuman.com
Want to learn more how we can create community wealth for all by investing locally? Join the community at the intersection of money and meaning at SOCAP19 at the Fort Mason Center in San Francisco, October 22 – 25, 2019. Get tickets here.