ComCap17: It’s About Democracy

ComCap17: It’s About Democracy

“[T]his is a fundamentally pluralist vision, in which multiple forms of public, private, cooperative, and common ownership are structured at different scales and in different sectors to create the kind of future we want to see. The vision begins and ends with the challenge of community. If it does not meet the test of everyday life in the communities in which we Americans live, it does not meet the test of serious long term change.”

Gar Alperovitz writes these words in his introduction to Principles of a Pluralist Commonwealth – in which he shares his vision of a new political economy. In it, he explains how a transformation in the ownership of capital is at the very core of the changes that are needed on the path toward a system that works for all and not just for the wealthiest few.

At last week’s ComCap17 conference in Monterey, we collectively put these words into practice. We brought the ideal down to the ground level and worked through how to actually create these diverse forms of ownership. And indeed, perhaps the most important theme that emerged in the conference is that there are a variety of effective tools in our toolbox to help us get there.

To be sure, much of the discussion at ComCap17 was about one particular collection of strategies – state securities exemptions for intrastate crowdfunding, which is now available in some 37 states. But as pointed out by a number of speakers, including my team from Cutting Edge Capital, there are several other strategies available to raise community capital, including direct public offerings and community investment funds.

And clearly, there is no one-size-fits-all. Each strategy has its advantages and disadvantages, and each has a “sweet spot” where it is most effective. For example, where an enterprise wants to raise capital directly from its community:

  • State-specific exempt crowdfunding can work well for small offerings where the investors are all within one state.
  • Exempt crowdfunding under Reg CF (Title III of the JOBS Act) can be effective for offerings up to $1 million where investors are in multiple states.
  • Intrastate direct public offerings are usually best for larger raises (i.e. any amount over the applicable exempt crowdfunding limit) where investors are all in one state.
  • Rule 504 offerings are often best for offerings up to $5 million where investors are in multiple states.
  • Regulation A offerings are best for offerings from $5 million to $50 million where investors are in multiple states.

Of course, these strategy choices are more nuanced than this, and a big part of our work at Cutting Edge Capital is helping our clients figure out which strategy among these and others best aligns with their values and strategic goals. (And then, together with our sister law firm Cutting Edge Counsel, we take our clients through the regulatory process until they have raised the capital they need.)

And yet, even these direct offering strategies are just the beginning. Indeed, most of them remain underutilized. It remains that case that a typical person living in a typical American town has virtually no local investment options; or if such options exist, they are hard to find. So how do we move the needle much faster toward a world in which community capital is truly ubiquitous and everyone has opportunities to invest locally in any town in America?

Community investment funds are the key to scaling up community capital and taking it from the fringe to the mainstream – whereby everyone thinks about local investing before they think of investing in Wall St. Besides scalability, community investment funds also have the advantages of diversification and greater efficiency in raising community capital, and they can typically offer more liquidity (that is, opportunities to get your money back) than a typical business can.

With investment funds, there are strict legal limits on what can be done, but as with capital-raising strategies, there is an array of options – which my partner Kim Arnone and I described in our ComCap17 workshop on Wednesday morning. A few options that allow a community-scale fund to raise capital from the community include:

  • Charitable loan funds, which raise debt investment and deploy it for some charitable purpose.
  • Real estate funds, which could focus, for example, on urban revitalization, agricultural land preservation, or affordable housing.
  • Supplemental funds that are an outgrowth of some other primary business, such as business services, co-working space, incubator, or grocery coop.
  • Intrastate funds up to $10 million – though these require explicit SEC approval.

And that’s still not all; there are other innovative strategies not mentioned here that can be explored. The community capital movement is ripe for creative thinking about what could be, and what is possible under the law.

At ComCap17, there was much discussion about new laws or changes in the laws that would help our movement; and at Cutting Edge Capital we have our own wish list of changes we believe would help boost this movement. But let’s not let imperfections in the laws distract us from the fact that most of what is described here can be done in every state in the U.S. today. There’s no need to wait.

In the big picture, what we’re doing in this movement is taking back our economy, restoring economic power to communities, and leveling the playing field so that everyone of every economic class has an opportunity to participate fully and reap the benefits of our economy.

But at a deeper level, this movement is about more than just the economy. As Teddy Roosevelt said, “There can be no real political democracy unless there is something approaching an economic democracy.”

Community capital is about true democracy. Let’s make it happen!

Beyond the Money: The Impact of Community Capital

Beyond the Money: The Impact of Community Capital

I was recently at Women and the Environment, an amazing conference in Santa Barbara hosted by Pacific Standard Magazine and the awesome folks at LoaCom. I was fortunate to attend, speak, and  hear about the great work being done, and the great work still to do, on environmental and social justice issues, much of which is being led by women. I addressed the conference participants along with Tracy Gray of 22 Group and LA Cleantech Incubator, Shally Shankar of The Schmidt Family Foundation, and Sharyn Main of the Santa Barbara Foundation on capital financing options.

Often at conferences I talk about the different ways to utilize community to raise capital. But this time I wanted to focus on how community capital strategies are part of social and environmental justice solutions and to discuss why who is allowed to invest matters. In other words, I wanted to discuss why the impact of community capital is about much more than just the money. Here are my notes from my remarks at the conference:

We at Cutting Edge Capital like to call our solutions “community capital” strategies. What are community capital strategies? Investment offerings that are open to both high net worth individuals and institutions, and to community (non-accredited or retail) investors.

The current model for capital raising, even in many social and environmental justice enterprises, is to reach out to the wealthiest accredited investors in our networks when capital is needed. That model is not wrong, but choosing only that approach means that enterprises are missing the opportunity to engage all supporters (regardless of their wealth) and missing out on the impacts that flow from doing so.

Community capital strategies democratize our economy in a variety of ways. Here are some of the impacts community capital offerings can have on investors, enterprises, and the broader community:

Community Investors. Community capital offerings allow everyone to invest in alignment with their values. Currently, non-accredited or community investors are not permitted to invest in most private enterprises, including social and environmental impact companies. Most people are limited to putting investment dollars into Wall Street offerings: publicly traded stocks, mutual funds, and money market accounts. Offerings that are open to community allow those members to invest in businesses, cooperatives, nonprofits or other enterprises that offer innovative solutions, are committed to good environmental practices, and/or are supporting social justice missions. It is the practice of so many impact organizations to reach out to community to help shape their missions and the foci of their work. We need to ask ourselves: why do we leave those community members out of the investment opportunity when it is time to implement the ideas the community helps define?

Entrepreneurs/Enterprises. How do we increase equity and access to capital for women and people of color? This is a question we in the impact capital space have been trying address from the start. To date, much of the focus has been on getting more women and people of color in front of existing traditional, institutional, and accredited sources of capital. However, community capital is an alternative to traditional capital that can organically level the playing field. When a broader segment of community is invited to invest, those investors will be more diverse than most existing high net worth investors and funding institutions. Entrepreneurs that receive funding will likely reflect the community that is investing in them. Community members will choose  entrepreneurs that speak their language (literally and figuratively), echo their values, and are committed to impacts that solve problems in their community. In other words, if more women and people of color are investing, more women and people of color are likely to receive funding.

Community. When community members invest in local businesses those enterprises can use that capital to thrive and grow — creating jobs and a more vibrant local economy. Any returns generated by those businesses  go back to local investors. This creates a cycle of community investment, impact, wealth creation and (hopefully) community reinvestment. The process is one of reinvestment and does not extract resources out of the local economy. 

So, how do we do we achieve this? Investors (both accredited and community) need to search out and ask that investment offerings be open to community investors. Enterprises and entrepreneurs (and supporting organizations) need to explore how to make investment opportunities open to community investors.

There are a number of tools that Cutting Edge Capital has identified (as offered in our community capital toolkit) that work for enterprises at various stages of growth including: Direct Public Offerings, Regulation A+ Offerings, Regulation Crowdfunding, and Community Investment Funds. We are happy to talk about how your business or enterprise can use these tools. Click here to set up a free consultation.

Community Investment Funds: The Ultimate Impact Investment

Community Investment Funds: The Ultimate Impact Investment

There’s a refrain we’ve been hearing recently at gatherings of community organizers: “Nothing about us without us is for us.”

While these words echo a centuries-old Latin slogan (“nihil de nobis, sine nobis“), they reflect a profound truth as relevant today as it has ever been. Their meaning is something like this: “Don’t try to solve our community’s problems for us. We understand our problems and their solutions better than anyone. We simply lack the resources and tools to solve our problems. You can help us by providing those resources and tools.”

The distinction is subtle, yet critically important. It’s about community empowerment.

In the world of impact investing, wealthy (yet conscientious) investors and institutions seek to invest in ways that help to improve the plight of others, typically while still making a good return on their investment.

And while this type of impact investment is certainly a good thing, the “impact” too often addresses the effects of underlying systemic problems without addressing the underlying problems in any meaningful way. By continuing to concentrate wealth (and reinforce the class distinctions between the haves and the have-nots), this type of impact investing could even exacerbate the very problems they seek to remedy.

 

The Community Capital Solution

What if there was a type of impact investing that had the power to solve some of the underlying systemic problems and bring about positive improvements in the economic structure of our economy? As my partner John Katovich explained in a Huffington Post blog, investing in institutions of community capital does precisely this. Community capital refers to community-focused investment opportunities that are open to the public, including both wealthy and non-wealthy investors; in other words, everyone can participate in community capital.

Why is this so important? It’s because most investment opportunities are available only to the wealthy, and investment opportunities beget more opportunities, and so on. The non-wealthy have very few options, and those few options typically pay a much lower rate of return than that earned by wealthy investors. But community capital is much more than just a way for a venture to expand its pool of potential investors. It is part of a revolutionary change in the structure of the local economy, because:

  • It allows ventures to raise capital from their own community, rather than putting their fate in the hands of the wealthy institutions and investors who currently control the economy.
  • It allows everyone everywhere to invest in their local community, in local ventures, in something that’s meaningful to them.
  • When the community invests in local ventures, those ventures grow, hire local workers, generate profits locally, and pay those profits to community investors who can then reinvest. It’s a cycle that allows the community – any community – to build wealth.
  • With broadly shared ownership and participation, the community can now channel resources to where they are most needed. The community is empowered to solve its problems, leveraging the abilities and experience of all its constituents.

Community capital might be thought of as a separate asset class and an essential component of any investment portfolio, because it serves as a counter-balance to the global gyrations of the Wall Street-dominated economy while contributing to a healthier local economy.

Note that while we mainly use the term “community” in the sense of a geographically defined area, it could also be a dispersed community based around a common affinity or goal, such as renewable energy, biodynamic agriculture, or arts education.

What are the mechanisms for raising community capital? In general, a venture (nonprofit or for-profit) can raise capital from their community either directly or indirectly. The direct approach is sometimes referred to as investment crowdfunding, a term that includes both direct public offerings (DPOs) and Title III exempt crowdfunding. The indirect approach to community capital is where a community investment fund (CIF) aggregates investment from the community and then invests in local ventures. (See our separate post on several models of legally compliant community investment funds, including the charitable loan fund, the real estate fund, and the diversified business fund.)

While Cutting Edge Capital is best known for our work with DPOs, we also work with a number of CIFs, and we believe that a healthy local economy will feature a thriving mix of both. A CIF can be a particularly important component of a healthy local economy for four key reasons: Scale, efficiency, diversification, and liquidity.

  • A CIF can be more scalable because it can potentially raise an unlimited amount of money and finance an unlimited number of local ventures. Note that we don’t use “scale” in the Wall Street sense of bigger transactions. In a CIF, the transactions should always be at a human scale, but we need a lot more of them to truly change the economy and to create a culture of community investment.
  • A CIF can be more efficient because each investor only needs to do due diligence once on the fund, and then the fund handles due diligence on outgoing investments.
  • A CIF is more diversified when compared to having each investor invest in one or a small number of local ventures.
  • A CIF may be in a better position than individual ventures to offer its investors liquidity (i.e., a way to sell the investment). A CIF can be set up to redeem investors who need to exit the investment.

Community investment funds and individual DPOs (or other types of investment crowdfunding) are not mutually exclusive, and there will always be a need for DPOs, particularly for ventures who prefer a direct connection with investors. Indeed, CIFs could play an important role for organizations conducting a DPO by:

  • Making a small short-term loan to cover the costs of a DPO.
  • Lending to the business on the strength of the equity raised in the DPO.
  • Providing a sounding board to the venture on pricing and other terms of their DPO.
  • Investing in the DPO early to seed it and inspire others to follow.
  • Investing late in the DPO process to backstop it and ensure its success.
  • Providing liquidity to DPO investors by purchasing their investment if they need an exit.

 

A Problem of Culture

Even though the mechanisms to raise community capital are available, they are not commonly used. Cutting Edge Capital has specialized in DPOs for years, and we have helped build several successful community investment funds. And yet, these are the proverbial drop in the bucket compared to what is needed to significantly move the needle toward a more equitable and democratic economy.

What is standing in our way? In short, the problem is that in the US we lack a culture of community capital. Most investors (both wealthy and non-wealthy) are unfamiliar with DPOs and other legal strategies of community capital. Unfortunately, so are most investment professionals and lawyers. (After all, they don’t teach these strategies in graduate school.) This unfamiliarity breeds skepticism, which is probably the biggest barrier to widespread adoption of the strategies of community capital. And making matters worse, the non-wealthy (those who don’t meet the SEC’s definition of “accredited investor”) have been trained for decades to see themselves as unqualified to invest.

This is where visionaries, philanthropists and impact investors can make a big difference. To change the culture so that community capital is as ubiquitous as a corner convenience store, we need visionaries and thought leaders to help educate their communities about the game-changing potential of community capital. We need philanthropists to donate to nonprofit organizations who are seeking to promote community capital in their local areas. We need investors who will invest in the structures of community capital (for example, as founders of community investment funds), as well as investing alongside community investors to give credibility, strength and momentum to this revolution. And, of course, we need innovative leaders to make it happen.

Together, we can build an economy in which every community is served by a constellation of community investment funds of various types, along with DPOs by local ventures, which together contribute to a vibrant community capital marketplace in which all can participate on a level playing field, and together build a more equitable, prosperous, and empowered community. In other words, this is the ultimate impact investment.

Note that this discussion is for informational purposes only and should not be taken as legal or investment advice. For more information about Cutting Edge Capital and the services we offer or to set up a consultation, please visit www.cuttingedgecapital.com or email us at info@cuttingedgecapital.com.

Exit Opportunities for DPO Investors

Exit Opportunities for DPO Investors

When considering an investment in a direct public offering, potential investors may want to understand how they can get their investment back, i.e. their exit strategy. Organizations raising capital via a DPO should expect questions from potential investors on this subject.

An investor’s sale of their investment is itself regulated by securities laws, so in addition to the pragmatic question of finding a buyer, the investor needs a strategy for compliance with these securities laws.

The following summarizes a number of exit strategies that may be available to investors in a DPO, depending on the type of security and other circumstances. The discussion is organized into four sections: i) exit strategies that are built in to the security itself, ii) those that may arise based on future events, iii) those that may be available on an investor’s initiative, and iv) trading mechanisms that may be available.

I. Exit strategies designed into the security

These strategies are built right into the investment from the beginning and don’t generally raise additional securities compliance issues at the time of the exit.

Debt: Many of our DPO clients offer investment notes, which are debt instruments with a specific maturity date. Of course, an issuer offering debt needs to think about how it will repay the principal at maturity. Some may establish a sinking fund, or will make annual principal payments rather than a balloon payment at maturity.

Revenue share: Also known as revenue-based financing (or RBF), this is an increasingly popular investment model in which payments to investors is a function of the issuer’s top-line revenue, so that the issuer pays less during lean times and more when it’s flush with cash. There are several variations on the theme, but in the most common variations the investor’s rights expire when the investor has received a pre-set multiple of their original investment (typically 2x to 3x).

Preferred stock with redemption feature: Preferred stock can be designed with a built-in redemption feature. There is a lot of flexibility in how to do this. Key decisions for issuers who want to go this route are:

– Who has the right to initiate a redemption? In other words, does the issuer have a call right or do the investors have a put right? Or should it be automatic upon some triggering event?

– When does the redemption right arise? Often it arises after some period of years, say five or seven years.

– How should the redemption price be calculated? To avoid having to pay for a professional appraisal, it could simply be the original purchase price (which means those investors won’t share in any appreciation), or it could be based on some formula based on revenue, profit, or other metrics.

– How should the redemption price be paid out? If it is at the investor’s election, the issuer should have the option of paying in installments over, say, five years.

II. Exit strategies based on future events

These exit strategies involve someone other than the investor taking the lead – someone who typically handles securities compliance issues.

IPO: An initial public offering (IPO) entails a full registration with the US Securities and Exchange Commission (SEC), usually accompanied by a listing on a national trading market, either over-the-counter (OTC) or on a stock exchange (like NASDAQ or the NYSE). This usually allows existing investors to buy and sell their shares freely. For example, Annie’s Homegrown raised capital through a DPO in 1995 and then went public with an IPO in 2012.

Merger or Acquisition: A number of companies that have done a DPO have subsequently been acquired by a larger company. Perhaps the most prominent example of this is Ben & Jerry’s, which completed their a DPO in 1984 and was later acquired by Unilever in 2000. Annie’s Homegrown, following its IPO, was acquired by General Mills in 2014. When an acquisition happens, the acquiring company makes a tender offer to all shareholders to purchase their shares, often in cash at a premium over what investors paid. Sometimes, if the acquiring company’s stock is publicly traded, it may offer to exchange the shares of the acquired company for its own shares, which can then be sold.

Listing on the OTC Market, or stock exchange: Even without going public via a full IPO, a company that has raised capital via a direct public offering may decide to register its shares to trade on a national market such as NASDAQ or the NYSE. Since doing so does not raise capital and can be expensive to accomplish, however, there may be little incentive for the company to go this route.

Issuer’s Tender Offer: Even if an investment has no built-in redemption feature, an issuer can still redeem investments by making a tender offer. This typically occurs in conjunction with a new investment into the issuer — so the new investment proceeds are used to redeem the earlier investors. This new investment can be in the form of a private placement, or it could be a subsequent (or renewed) DPO. The issuer has some flexibility as to which classes of investment and which investors it will redeem; and it can structure the transactions so only a portion of the new investment will be used to redeem earlier investors, so as to have a net new infusion of capital. As with other types of securities transactions, tender offers must comply with a set of rules that govern them.

III. Exit strategies at the investor’s initiative

If none of the strategies above are available to an investor who wants an exit, there are other ways to sell an investment, as long as the investor is careful to comply with securities laws. These laws generally forbid an offer or sale of an investment unless it is either registered or exempt from registration; and this is true at both the state and federal level.

Federal law provides an exemption from registration for sales by someone other than the issuer, an underwriter or a dealer. While that would appear to allow secondary sales by an investor, there is an important nuance: A selling investor might inadvertently be deemed an underwriter. In other words, if an investor buys shares of stock in a DPO and then later turns around and sells them (a “secondary sale”), the investor could be deemed to have participated in a distribution on behalf of the issuer. In that case, the exemption is not available.

However, there are three strategies an investor can use to ensure that a sale of their investment complies with federal law:

Rule 144 sales: Under Rule 144, if an investor that is not an affiliate of the issuer (that is, not an officer, director, or 10% shareholder of the issuer) holds the investment for one full year, they can’t be deemed an underwriter and can sell the investment. However, the investor would also need to comply with their state’s securities laws.

Private sales: Another way to ensure the investor is not deemed an underwriter, even if a full year has not elapsed, is to offer and sell the investment privately. This requires that the investor have an established relationship with someone before offering the investment to them. As with Rule 144, the investor would also need to comply with state securities laws.

Section 4(a)(7) sales to accredited investors: Section 4(a)(7), which was added in 2015 to the 1933 Securities Act, provides a new exemption from registration for secondary sales to accredited investors, as long as there is no advertising and as long as the issuer provides disclosure of key information about the company. This is a federal exemption that preempts state law, so investors don’t need to be concerned about their specific state rules. An individual is accredited if they have either $1 million in net assets excluding their primary residence, or $200,000 in annual income (or $300,000 together with their spouse).

With secondary sale strategies that also require compliance with state law, the selling investor is responsible for understanding what their particular state requires. In California, for example, Corporations Code section 25104(a) provides an exemption for secondary sales if there is no advertising and the sale is not conducted through a broker-dealer in a public offering. Many states have a similar exemption.

An investor looking to sell their investment should be aware of other restrictions that may be imposed due to the nature of the original offering. Perhaps most prominently, if the investment was made in an intrastate offering (a common DPO strategy), the investment may not be resold to a resident of another state for at least nine months after the date of the last sale by the issuer in the intrastate offering.

IV. Secondary Sales Mechanisms

The above strategies are the legal compliance strategies. Some practical mechanisms for secondary sales under these legal strategies include:

Broker-managed trading platform: Companies like NASDAQ Private Market (which acquired SecondMarket), OpenShares, and SharesPost operate platforms on which securities acquired in a DPO can be sold. Since they receive compensation for their services, these platforms need to be licensed as a securities broker-dealer.

Trading bulletin board hosted by issuer: This may be similar to a broker-managed platform; but as long as the issuer is not receiving any compensation for facilitating securities transactions, it does not need a securities broker-dealer license.

Privately negotiated sales: An investor can sell their investment in a private transaction to a buyer in their network, as long as they follow the rules, such as not advertising or announcing the potential sale in any public way.

Looking ahead…

While there are a number of exit strategies available, each has its limitations, and an investor in a particular situation may very well find that none of them is feasible. One of our goals at Cutting Edge Capital is to eliminate barriers to a vibrant and efficient community capital market. Therefore, we are exploring two possible strategies that could help alleviate investor concerns about a future exit from a DPO investment:

– A nonprofit market participant that can purchase securities that were acquired in a DPO, hence creating a kind of market appetite. It could raise capital via a debt offering (like other nonprofit investment funds).

– A for-profit investment fund that would invest in DPOs, as well as in privately offered securities of social enterprises. As an open-ended fund, it would itself issue shares to investors and redeem them as needed.

A Call for Systemic Impact

A Call for Systemic Impact

Foundations, Families and Funds can play a very important role in helping to redirect capitalism toward a more fair and just application, while also finding the right social enterprises to support.

By playing a more comprehensive role in the creation and support of Community Capital Markets, these funding sources can build impact into a systemic approach. In addition to investments they make into the social enterprises either directly or through other intermediaries, they can also facilitate opportunities for the 90% of households that are prevented from participating in the private capital markets by investing in the structures that form alternative capital markets open to everyone.

We are better informed today than ever before about the rapidly expanding wealth and income gaps. Many recent studies show the top 10% of U.S. households now have over 75% of all the wealth in America. The next 24% of American households make up almost all the rest of all the wealth, leaving the bottom 40% with 0% wealth, and the bottom 60% with a whopping 3%! And the gap is growing fast, not shrinking, which portends many new challenges to our society.

Clearly we need to think about whether the current approaches are working, and if not, shift the paradigm.

As economists like Thomas Piketty have thoughtfully surmised, this growing gap will not improve without either government intervention or opportunities similar to what the wealthy have had – i.e. the same chances to invest and to begin to grow some wealth of their own. For anyone out there who follows the current dysfunctional state of our government, I would not hold out much hope for the first option anytime soon.

Regardless of the causes, our current state of affairs seems to point toward us having to right this very serious problem ourselves, and right it we must.

In the U.S., our government actually limits 90% of households from having any access to the private capital markets, leaving their investment options only in either the public capital markets, or alternatives that I’ve written about here, via Direct Public Offerings, or perhaps through the new state and federal crowdfunding options.

The irony is that, in the interests of protecting the 90%, only the very wealthy 10% continue growing their wealth. They have access to opportunities that far surpass anything found in the public capital markets. The 10%er’s may also use the public capital markets to hedge, speculate, or even arbitrage if they like, but their real wealth generation comes mostly from those private markets. But neither of these kinds of markets helps us to form the systemic structure we need to build healthier communities.

Which leads me back to how Foundations, Families and Funds can help.

The list of impact investors is growing every day, and we will all continue to work toward better identification of who is truly acting as a social enterprise, e.g. companies building business models to tackle some of the most difficult and seemingly intractable social and environmental problems, including climate change, poverty, water, energy and real estate, etc.

I refer to the entrepreneurs above as our new community of social enterprises, which includes those with a clearly defined mission, who are focusing on achieving impact at scale for all stakeholders (workers, customers, community, environment), but who also understand the importance of connecting via deep impact into their local populations. These kinds of entrepreneurs place a high degree of importance on the generation of mission aligned revenues (from clients or others who’s mission is aligned), and tracking/publicly reporting on their impact on a regular basis (transparency).

It’s encouraging to know that many investing organizations are now looking to make real impact via their investments by seeking out these entrepreneurs, even if we’re still in the nascent stages of trying to square that with the goal of getting back “market rate returns.” Leslie Christian just posted a great blog on this conflict here.

However, supporting those entrepreneurs with an investment is only one of two key components we need to have a healthy Community Capital Market. Focus also needs to be provided to the 90% of households so they can participate as well, even if half or more of them currently have no wealth to employ as investments into a market. These households need opportunity, which they are now starting to see with the alternative investment vehicles mentioned above, but even more important, they need experience, education and understanding in terms of what it means to be an impact investor – one that may not need those “market based returns,” whatever that means.

We need a whole system approach in place for community investors and community entrepreneurs to be able to find each other, which is what a Community Capital Market can be.

10 years ago, my good friend Don Shaffer (now at RSF Social Finance) and I embarked on a project to develop Local Stock Exchanges. I wrote about the need for these in several publications and even took a position at the Boston Stock Exchange to mirror a national exchange at a local level. But looking back, there is one critical element I got wrong. We don’t need to replicate the public capital markets with a lively secondary trading component that fosters speculation and arbitrage (using the need for liquidity to justify the madness they have become). We need a much more simple system in place that allows for the efficient transfer of individual’s savings into socially responsible companies, allowing for modest healthy returns, and some reasonable offerings of an exit if necessary. We need to power it with the right tools, education and mentors to help guide the ones that have not had access until now. We also need to reconsider what a capital market needs to be today, and not fall for the trap of manic returns and unlimited growth.

Foundations, Families and Funds can get behind this new kind of capital market by funding the system that can facilitate the Impact we need, and if they desire, they can also play a member-based role in how we operate it – much like exchanges used to be structured, before they turned into the same shareholder primacy driven entities that list on them today.