In the aftermath of the protests and marches of the past year or so, community wealth building has emerged as an often-discussed strategy of economic justice. Community wealth building is really another term for community capital, and it’s been at the core of our work at Cutting Edge Counsel since our firm’s founding. It’s also the focus of the National Coalition for Community Capital (NC3), where I’m on the board.
In particular, there is a growing interest in community investment funds as a tool for community wealth building – something we’ve been writing and talking about in recent years. In this blog, we wrote about why these vehicles represent the ultimate impact investment – in short, because instead of seeking to remedy the harmful impacts of the prevailing system, they represents a systemic change in who invests and where profits go.
In the conventional system, only the wealthy can participate in the most profitable investments, which means the wealthy can grow their wealth at a rapid clip. The rest of us are generally stuck with investment options that, on a risk-adjusted basis, pay less than inflation. So instead of growing wealth, these options tend to erode wealth, which means the non-wealthy are effectively penalized for investing while the wealthy are generously rewarded. Naturally, this system contributes to a widening wealth gap.
But community capital (and community investment funds in particular) represents an entirely different approach to moving capital that decentralizes it, democratizes it, and recognizes that wherever your investors are, that’s where your profits go. If you want to get profits into the hands of non-wealthy people in your own community, you need to source capital from those same people.
However, community investment funds must be structured to comply with the Investment Company Act of 1940 – a rather restrictive federal securities law that hasn’t been updated significantly in a very long time. Previously, we wrote about four ways of building a community investment fund under current law. These included a charitable loan fund, a real estate fund, a supplemental fund (aka diversified business fund), and a business development company. Then, in this blog, we added another to that mix, a pooled income fund – which is generally considered a planned giving device, but can also serve as a type of community investment fund.
Then last year, the National Coalition for Community Capital published this handbook on community investment funds, which I co-authored along with Michael Shuman, Amy Cortese, and fellow NC3 board member Janice Shade. The handbook covers a lot of territory that would be useful for anyone who is thinking about launching a fund in their own community. In the chapter on legal strategies, we dug into a number of ways it can be done – again, right now, under existing law – including those mentioned above and a few more.
And yet, despite all the legal strategies that are currently available, there is still a big gap, which we discussed in this blog. What’s still missing is a way to build a simple community-scale equity fund – meaning a for-profit fund that can take investment from the community (including, of course, non-accredited investors) and deploy it in debt, equity, or revenue share investments into local companies, with the profits distributed among community investors – and all this in a cost-effective vehicle with a minimal compliance burden under the securities laws.
NC3 has recently taken the lead on an initiative to expand the investment fund options under the 1940 Act – advocating both a legislative change by Congress and rulemaking by the SEC. We have already had discussions with key people in the SEC about this. While securities regulators will, of course, apply a healthy dose of skepticism to any new ways of doing things (that’s their job!), the SEC specifically reminded us that they have created new exemptions for new types of investment vehicles in the past and could do so again. The door was left open for us, and NC3 is continuing to push on this front.
In the meantime, if you want to launch a community investment fund as a wealth-building tool in your own community, there are great options available now. There’s no need to wait, though we hope the menu of options will expand soon. Don’t hesitate to reach out to us at Cutting Edge if you’d like to talk about what might work for you.
Finally, I want to give credit to the late Sam Cooke, who penned the song referenced in the title above. And if you haven’t seen the movie One Night in Miami, I recommend it. You’ll see the connection. The struggle for equal opportunities for all Americans clearly didn’t end in the 1960s. I see our work to expand community wealth building options as within the arc of change that Mr. Cooke foresaw all those years ago. It’s been a long time coming. But a change is gonna come.