Wealthier Investors Are an Essential Part of Community Capital Markets

Wealthier Investors Are an Essential Part of Community Capital Markets

The Securities and Exchange Commission has recently estimated that approximately 10% of all U.S. Households are now in the “Accredited Investor“ category (for individuals, that means $1m in net worth not counting primary residence, or $200k of income). Assuming that’s accurate, there are now over 12 million households in the U.S. that meet the definition of Accredited Investor (“AI”).

The SEC defines the AI to determine their eligibility to invest in Private Placement offerings (i.e. funding rounds of securities that are sold not through a public offering (IPO), but rather through a private offering, and mostly to a small number of chosen investors). And as the private placement market edges toward $60 billion of deals a year, that may seem to most people as a sizable amount to participate in, with lots of opportunities to get in on the next big home run deal.

Some of those AIs, however, have begun to look for more than just a company swinging for the fences, but rather companies that look out for profits, people andthe planet. The rise of socially responsible or impact investing has now begun to take hold. And there are now more financial advisors becoming familiar with these kinds of investments, and helping their clients to find such deals.

Unfortunately, financial advisors feels constrained (for good reasons) to only show their clients deal opportunities of a certain size and nature. Many even limit their scope to only companies traded on public markets so that they reduce the risk of breaching their fiduciary duty to their clients. Other more adventurous advisors will brave the private investment landscape, where, with the right amount of due diligence, they can recommend impact deals to their clients that will also provide something close to market returns (whatever that really means).

But there’s another opportunity for AIs to make a significant impact. They can invest AND play an essential role in the stabilization, growth and resilience of the communities they live in or relate to. They can do this by participating alongside of the rest of the non-accredited investor community into investments offered by community entrepreneurs.

The kinds of investments I refer to here are Direct Public Offerings and certain state securities crowdfunding opportunities, both of which allow for investors to directly interact and engage with the entrepreneur/issuer. I wrote recently about this in previous blogs here, and also earlier today in a Locavesting article. As these crowdfunding offerings and the platforms they list on become more populated, investors will begin to find it easier to find offerings. Also, as we help clients obtain their approvals for DPOs, we post the offerings up on our CEX site so that investors can more easily find the issues and link to their sites.

The role AIs can play to support these much needed community enterprises cannot be emphasized enough. For one thing, as companies begin to turn more to using tools like DPOs to raise their funds, the size of the raise is going to increase well above the $1 million limit that the state or federal crowdfunding laws impose. DPOs, if done via the Intrastate exemption, are typically unlimited, as long as the state regulators approve them, and we are starting to see many more offerings in the $5-10 million range. Companies offering stock will want to limit the number of non-accredited investors to 500, and the total number of investors to 2,000, or face becoming “publicly reporting,” which is expensive to maintain. This means the offerings truly need the AIs to meet their targets.

Another key reason is the experience AIs may be bringing to these offerings. Clearly just because one is an AI does not mean one has the financial expertise of a typical VC or Angel who do this for a living or hobby. But there is no doubt that many AIs have some experience with investments, and likely more than their non-accredited counterparts. This can be very important when a company is even considering how to structure their offering, if they can learn beforehand what an AI will want to see before they participate.

And then there is, of course, the leverage an AI can bring to the offering, just by signing on and showing up. Some AIs provide the “prime to the pump“ so that the offering can take hold. Some even offer a matching approach. It can be an important signal to the non-accredited investors that they don’t have to shoulder the offering alone. Also, regardless of the wealth divide that exists, every member of the community can come together to make an offering successful. AIs can be an important kind of hero to this movement, while still obtaining enough of a return. Their participation can also lend the right kind of pressure to the entrepreneur to keep them on their toes, and striving to meet their mark.

AIs might do their own homework (due diligence), as they look at these investments, or they may be able to find a new breed of financial advisor who are willing to help analyze the offering, even if they stop short of making recommendations and risk their duty. And there are also new pioneers, like Marco Vangelisti, who has taken it upon himself to begin offering daylong workshops for community investors.

Marco is a veteran of global finance who walked away from the industry in 2009 after a 25-year career, and is now helping communities around the country understand the role investors can play in support of community. He created Essential Knowledge for Transition – an initiative to empower communities with a basic understanding of the large systems affecting our lives. Marco’s next workshop will be in Irvine CA the 7th of May, and after that, we intend to try cloning him so that we can help ALL kinds of investors, AIs and non-accrediteds alike, everywhere, to align their investments with their values, and create the world we want, and need.

Invest  in Who You Know – Part 2

Invest in Who You Know – Part 2

Most people don’t have the ability, flexibility or funds to invest like a professional, and a more common approach for ‘investing in what you know’ takes the form of how well you can follow a company, mainly by looking at what you (or others who you trust) know about the company, or what the company has disclosed or reported about itself.

In the public markets, this means what a company publicly reports, and we (or the analysts) will read their “Form 10-Qs” and “10-Ks,” which publicly reporting companies must file with the SEC every quarter and year, respectively. We might also listen in on their webcasts, track their progress in the news, and even monitor their competition as a comparison.

The SEC reporting is still based mainly around financial information, with much less attention devoted to other material actions and impacts, but this is starting to change. There’s a lot of great work underway by organizations such as the Global Reporting Initiative (GRI), and Sustainable Accounting Standards Board (SASB), who are creating sustainability performance measures for these publicly reporting companies, and then monitoring and reporting on them separately. The largest database of corporate sustainability reports is still the UN Global Compact Initiative, which they publish on their website.

For private companies, there are also some new approaches, such as the GIIRS rating system for companies or funds, allowing companies to voluntarily report measurements on social and environmental impacts. B-Lab’s “B Corporation” label allows a company to do a self-assessment, which they claim leads to “B Analytics to help investors consider whether a company is properly managing its socially responsible impacts, with as much rigor as their profits.”

While these new reporting approaches try to help investors assess whether companies are meeting certain “sustainability” standards, trying to define these standards are can be a daunting task, especially as the definitions are too murky or continue to change and new reporting tools are created.

We first saw screening tools applied to companies (e.g. no oil, weapons or bad actor sovereignties) in an attempt to label the good ones as “socially responsible investments.” Then came the dawn of “sustainability,” which sounds good, but has many different definitions. Nor has “triple bottom line,” “ESG” (environmental, social, governance), or even “Impact” given us clarity in terms of a definitive metrics-based idea for understanding whether a company is really contributing to our world in a positive and replenishing way, or simply another extractor of resources leading us closer to the demise of our species.

Even if the definitions or surveys are well thought out, is a company’s reporting enough for us to rely on to know that they are really making the kind of “impact” we want to see? When a company receives a “good company” sort of label, in whatever new socially responsible format we like, does that mean that the label was strict enough to ferret out all of its behaviors? Can companies fudge, omit, or cleverly interpret the ratings questions so that the answers fit the right frame they want to display?

While the efforts to bolster transparency about private companies is a great step in the right direction, reliance on only the reporting approach to make investment decision poses meaningful risks. Borrowing the famous quote from Albert Einstein, I would refer to this as the investment equivalent of Spooky Action at a Distance. A potential investment candidate may have received high marks from an outside rating group, and only later might we find them to be acting in ways we deem distasteful. Maybe we didn’t realize they were hoarding revenues offshore to avoid paying U.S. taxes, or providing their services to any kind of planet damaging company while espousing high-minded values, or grabbing federal funds while really only focusing on driving profits to its shareholders.

How do we know from a label whether a company truly practices all of the values they received high ratings on? Similarly, how do we know from a report whether they might be making certain private compromises to what they publicly report in order to bolster their bottom line?

If we don’t know the people behind the company, we may be left with only our faith in the reports, provided mainly or only from information supplied by the company itself, with little if any recourse for misrepresentations or omissions (except possibly a future rescission of their seal of approval, or being publicly shamed for their hypocrisy). Unfortunately, there are likely as many forms of greenwashing today as there are new efforts to heighten transparency, so relying only on modern internet-based tools or chat groups should be done at every investor’s peril.

Some who work directly in the area of socially responsible investment advising have seemingly given up on trying to identify the right term or the right actions, now hoping they can simply determine whether a company is behaving “responsibly.” And perhaps it really may be more meaningful to apply a “smell test” than to blindly rely on a label or a report. To paraphrase SCOTUS Justice Potter’s famous line from the Jacobellis pornography case…trying to define terms like Sustainability, Impact, or Socially Responsible using shorthand descriptions can quickly become unintelligible. But, like Justice Potter, perhaps we can apply that same personal test… I know it when I see it!

And that then begs the question…how do you see it? One very well tested method is to invest in who you know, and that means being able to find and get to know the companies, and the team, before you invest. Community capital markets provide just that opportunity. Community capital markets enable companies and investors, connected geographically or in fellowship, to engage with each other on a personal level. These kinds of capital markets can take the spooky out of the action, by bringing a personal touch to our awareness, and engaging with each other in financial transactions that support each other.