After shopping locally and eating locally, the next step necessary to building a livable future is investing locally.
I make the case for it in this podcast – From Wall Street to Main Street: an interview with Marco Vangelisti on local investing and Slow Money.
Most understand by now the importance of local investing yet very few people have actually made any local investments.
Why is local investing so difficult?
The answer lies in part with our securities laws introduced at the beginning of the Great Depression to protect investors.
In the roaring 20s an army of snake oil sellers managed to swindle thousands of people out of their savings with the promise of quick paybacks and large returns.
When FDR finally reigned in the excesses of the financial system, he created, among other regulatory bodies, the SEC – the Securities and Exchange Commission – to oversee investment offerings to the public. Since then, anyone offering an investment to the general public had to register with the SEC and produce audited financial statements regularly.
The process is called an IPO (Initial Public Offering) and requires registering the stock offering with the SEC and all 50 states. All the companies with stocks trading on the major exchanges, available for purchase by the general public, went through an IPO – a process that can cost millions in legal fees.
Over time the SEC created a number of exemptions from full registration. It introduced the concept of an accredited investor – an individual with substantial assets or income capable of absorbing the financial loss and assumed to possess the financial sophistication to “fend for herself” when it came to making investment decisions.
Entrepreneurs are welcome to privately approach accredited investors with investment opportunities. Alas, the general public usually does not have access to these private deals.
Another common exemption is the intra-state exemption. If a business operates primarily in a particular state and all the investors reside in the same state, then the business would be exempt from registering with the SEC and would only need to register with its state.
When a company is able to publicly advertise its investment opportunity and accept both accredited and unaccredited investors, this is called a DPO, or direct public offering – an avenue for raising capital that has been in effect since the 30s but has recently found resurgence thanks to the work of Jenny Kassan and Cutting Edge Capital.
Here is the list of companies that Cutting Edge Capital assisted in doing a DPO. Most of these investments are open to residents of certain states (the states where the offering was registered) and most have minimum investments between $1,000 and $2,500. The legal cost of doing a DPO is around $10K to $30K, still out of reach of a number of smaller businesses, and the minimum is a hurdle for many investors.
Enter crowdfunding investing and the JOBS act!
The Jumpstarting our Business Startups (JOBS) act was signed into law in April 2012 and just this month the SEC has finally come up with the rules to implement its Title III relating to crowdfunding.
The Title III of the law promised to usher in an era in which innovative companies could easily raise capital from many investors, with each providing small amounts. The reality may fall short of expectations and Title III of the JOBS act as currently structured is deeply flawed.
For the purpose of local investing, its major drawback is the prohibition placed upon entrepreneurs from speaking directly to their community about the investment opportunity. All they are permitted to do is point to the platform where their offering is listed. Also, for companies raising over $100,000, reviewed financials are required which can be expensive.
A number of states – now around 30 – have jumped the gun and passed their own crowdfunding laws or registration exemptions in order to tap into the nascent desire for local investing.
California does not yet have a crowdfunding law, but one is under consideration by the legislature. It is LESA, the Local Economies Securities Act, the brainchild of SELC – the Sustainable Economies Law Center in Oakland.
LESA, also known as AB2751, carves out securities exemptions for Farms, Agricultural Land Trusts, Renewable Energy Projects, nonprofit organizations, and other specified enterprises so they can raise small investments without a costly permit.
If you reside in CA and want to see more local investments become available to the general public, please add your voice of support to LESA.
You can find out more about LESA here, including template letters of support you can send to your representative.
The moral challenge of our generation is to take responsibility for our agency in the world as expressed through our investments, and enlist them in the task of building a better world. The best place to start is investing close to home.
Marco came to the US as a Fulbright scholar in mathematics and economics at the University of California in Berkeley. After a stint in the financial industry, Marco worked as visual artist on a full-time basis for 5 years and obtained a MFA focusing on the intersection between public art and ecology. He later worked for 6 years managing investment equity portfolios primarily on behalf of large foundations and endowments. In April 2009 Marco left the finance industry and has since been instrumental in the formation and development of the Slow Money Northern California chapter. He is sharing his experience doing direct Slow Money investments with communities around the country to help them increase their capacity for local investing. Marco is currently developing Essential Knowledge for Transition – a curriculum for engaged citizens to understand the money and banking system, the economic system and the financial system and how we need to transform them.