Like many Americans, I have my retirement savings in 401 (k), 403 (b) and other investment accounts, and every once in awhile, I meet with my financial planner to assess performance and make adjustments. “Diversify,” “invest for the long-term” is the mantra. As I look at my portfolio, there’s very little that seems tangible to me. International growth funds park my money in investments far, far away. Meanwhile, storefronts in my own neighborhood are dark and empty.
“Is there a local growth fund?” I ask. My financial planner looks at me as if I am crazy. “If diversifying my portfolio is key, is there a way for me to invest a portion of my money in businesses right here in my own region, if not in my own neighborhood?”
Just prior to my annual summer vacation, I came upon Locavesting: the Revolution in Local Investing and How to Profit from It, a new book by Amy Cortese that explains the barriers that small businesses face in getting funded, the regulations that prevent the vast majority of Americans from investing in them, and some ways in which community-minded investors can put their money where they live.
It’s very difficult for entrepreneurs to get bank loans these days. Banks have tightened their credit standards, and many small businesses no longer qualify. The banks find them too risky. In fact one entrepreneur told me that the only companies able to get a loan from a bank these days are ones that don’t need it.
Blue Sky laws instituted in the early 20th century and SEC regulations put in place after the stock market crash that occurred at the beginning of the Great Depression, are intended to provide reliable information and protect investors from fraud. Yet, they have the unintended consequences of creating a mountain of regulations that most small businesses can’t comply with.
They’ve also created two tiers of investors. Those with assets of more than $1 million or annual income of at least $200,000 (now $300,000 for couples) are considered sophisticated enough to be able to invest in whatever they like. That leaves the vast majority of Americans. They can invest in publicly traded stocks, bonds and mutual funds, which are highly regulated, but not in small, private ventures. The government protects them from doing so because those investments are considered too risky.
There are some exceptions. If your family member or friend asks you for a loan for his small business, the SEC allows you to lend money or invest in the business. But, you can’t invest with a stranger, and how would you find out about that opportunity anyway?
Cortese examines many models for locavesting, everything from moving your money to a local bank or credit union to joining a co-op. Participating in a CSA (Community Supported Agriculture), an arrangement in which consumers buy a share in a local farmer’s produce at the beginning of the growing season to finance food production and then receive weekly dividends in fresh produce as the crops mature, is a form of locavesting.
We do have a few local financial institutions in Northeast Ohio. First Federal of Lakewood is one. Liberty Bank in Beachwood is another. Steel Valley Federal Credit Union has a branch in the basement of Cleveland Heights City Hall.
The two options that I found most the most intriguing are community development loan funds and LIONs, local investment opportunity networks.
First, there are the community development finance institutions (CDFIs), which serve underserved and low-income communities and make loans to small business owners and individuals that regular banks consider too risky. But most have a low default rate because they provide technical assistance to their borrowers. They are certified by the Treasury Department and typically focus on specific geographic areas. Although they don’t advertise the opportunity, many allow individuals to invest and receive a fixed rate of return.
I was able to find a few CDFIs in the Cleveland area. The WECO Fund is one. You can search for one, at www.cdfi.org. But, we don’t have one that specifically serves the Heights that I am aware of.
The other option that intrigues me is a LION, a local investment opportunity network. The book tells the story of a group of investors in Port Townsend, Washington who wanted to create a resilient local economy and keep more of their money local. Their idea was to connection local investors with small businesses that needed capital to expand. LION members don’t invest as a group, rather the group facilitates bringing together local investors with local businesses. LION members are not necessarily accredited investors so the group promotes networking events that enable preexisting relationships to be established so that the transactions qualify for a private offering exemption from the SEC. While these investments are generally riskier, the rewards of are more than financial: they add to the quality of life of the local area and support the local economy.
Apparently, the LION in Port Townsend has had enough interest in its model that it has created a special website that contains information and copies of documents, such as a membership application, membership agreement, policies and procedures form and an investment opportunity submission form. The website is http://www.confiso.com/shop/page/1?shop_param=
The book also documents a group in Lancaster, PA that is trying to resurrect a local stock exchange, which would help make local investments more liquid. The United States used to have many local stock exchanges before the SEC regulations instituted in the 1930s made it more difficult for companies to be listed. Resurrecting them would help make local investments more liquid and help communities promote their local economies. Cleveland had its own stock exchange, which operated from 1906 until it merged with the Chicago Stock Exchange in 1949. So far, it’s been slow going as both logical and legal challenges abound. It would take an innovative leader, such as our own Cleveland Foundation, to help jump start such an effort here.
Finance is not my forte, yet I see it as a primary challenge for our community. How can we enable regular folks to invest in the place that they are already invested in by virtue of the fact that they own homes, their primary asset, in the community? And, what could the Heights if residents invested a small portion, say two to five percent, of their nest egg into the local economy? I have to believe it would make a big difference.