How Community and Community Capital Can Influence Historic Preservation Projects

How Community and Community Capital Can Influence Historic Preservation Projects

Historic preservation projects are designed to protect a community’s heritage often through the expansion and enhancement of historic properties for public use. Community capital is designed to empower a community’s investment in itself through public offerings that are structured to engage a variety of investors. Preservation projects could meet their goals faster and gain additional political and monetary support through the use of community capital raising strategies.

Community investment strategies differ from typical private strategies as they allow investment broadly from community members rather than restricting investment only to the highest net worth individuals or institutions. Community capital does not have to be the only source of capital for a project, but it can have an impact beyond the funds raised.

Community members can be great allies (or in some cases, strong adversaries) to real estate development projects. Restoring or repurposing a historic building is made easier if a developer has both capital and community support. Why not combine the two?

Including community members as investors in projects not only affects the project’s bottom line, but also impacts the level of community acceptance of the proposed purpose and use of the property. With a community capital approach, community members share in the potential return on investment and can become great ambassadors for the project as it wends its way through any approval process, and later as the property opens for its new or improved purpose.

At Cutting Edge, we work to identify, design and build capital raise strategies that meet client goals and strive to involve community stakeholders. Depending on the purpose and scope of the project, community capital raise strategies might include single, or multi-state, direct public offerings, Title III Regulation Crowdfund offerings or larger Regulation A campaigns. Or, a developer or manager can put together a community investment fund that can support various enterprises or projects. These approaches work not only for real estate projects but across a wide range of industries.

We will be highlighting these capital raising options in greater detail in a webinar (Crowdfunding Historic Preservation: Direct Public Offerings and Other Ways to Raise Funds) with the National Trust for Historic Preservation hosted by the California Preservation Foundation on Tuesday April 17th from 12:00 PM to 1:00 PM PT. To learn more and register, visit here.

For a free consultation with Cutting Edge Capital, visit here. Questions? Email info@cuttingedgecapital.com.

Opportunity Knocks: New Tax Incentives for Community Investment Funds

Opportunity Knocks: New Tax Incentives for Community Investment Funds

Since 2015, a bipartisan coalition of lawmakers has advocated for tax incentives for those who invest in low-income communities, recognizing that the benefits from the economic recovery have largely bypassed those communities. Their efforts were rewarded when their proposed opportunity zone program was included as Subchapter Z of the 2017 tax law overhaul that was passed in December. While Subchapter Z wasn’t specifically tailored to community capital, it offers tax incentives that will apply to some kinds of community investment funds.

First, here’s how the new law works: A taxpayer with capital gains can defer capital gains tax if they sell their appreciated assets and, within six months, roll over the profits into a “qualified opportunity fund.”

But it gets better. Investors in the qualified opportunity fund who hold their investment for at least 5 years will have their basis bumped up by 10% of the deferred gain (thus reducing their capital gains tax), and by another 5% if they hold it for 7 years. In 2026, there will be a realization event (in which investors are taxed on the other 85% of the original profit invested in the fund, assuming the investment has been held for 7 years). But if they continue to hold their investment for at least 10 years, their basis is bumped up to the market value of their investment, which means any further capital gains tax is eliminated completely.

A qualified opportunity fund is a partnership or corporation with at least 90% of its assets consisting of qualified opportunity zone property (and acquired after 12/31/2017), which can include:

  • Equity interests in a corporation or partnership that is an opportunity zone business (and issued directly by the corporation or partnership, not acquired in secondary sales); or
  • Tangible property (real or personal) located in the opportunity zone that is either first used by the fund or is substantially improved by the fund (the latter meaning that additions to its basis exceed its original basis).

A business is an opportunity zone business if:

  • Substantially all of its tangible property is located in the opportunity zone;
  • At least 50% of its gross income is derived from operations in the opportunity zone;
  • A substantial portion of its intangible property is used in its operations in the opportunity zone; and
  • Securities comprise less than 5% of its total assets by tax basis.

While this new law provides tax incentives to invest in funds that serve low-income communities, it does not provide any new strategies under the securities laws. It is probably inevitable that the vast majority of qualified opportunity funds will be open to accredited investors only, like nearly all private funds.

However, there are at least three strategies that allow a qualified opportunity fund to be open to its entire community, including non-accredited investors:

  1. Real estate fund: A fund whose primary business is investing in real estate and 90% of whose assets consist of real estate in an opportunity zone will be a qualified opportunity fund and will be exempt from the burdensome regulations of the Investment Company Act of 1940 (the “1940 Act”), which paves the way for the fund to raise capital via a direct public offering – making it a true community investment fund.
  2. Small business holding company: This type of fund is exempt from the 1940 Act if most of its assets comprise controlled or majority-owned subsidiaries – the idea being that the fund is in whatever business its subsidiaries are in, rather than in the securities investment business. Again, if 90% of its holdings are businesses in opportunity zones, it will also be a qualified opportunity fund.
  3. Intrastate fund: A closed-end fund of up to $10 million, all of whose investors reside in the same state, is eligible to seek an exemptive order from the SEC that allows it to raise community capital via a direct public offering and while avoiding all or most of the 1940 Act’s regulations. Such a fund could invest in either business or real estate in opportunity zones and thereby also become a qualified opportunity fund.

With any of these strategies, a community-scale fund can open up the opportunity for community ownership of community assets, with everyone able to participate on a level playing field, and everyone able to reap the profits from local ventures.

It should be noted that governors of each state had until late March to designate low-income census tracts as opportunity zones, but some have asked for a 30-day extension. However, only 25% of the low-income communities in each state may actually be designated as opportunity zones. It remains to be seen which communities will actually win that designation.

But community investment funds can be offered to the public in any community anywhere in the U.S. At Cutting Edge Capital we believe community investment funds are an effective way to significantly move the needle toward a more inclusive, democratic and decentralized economy.

If you would like to see this happen in your community, here are some steps you can take:

  1. Look at this map, which shows the census tracts that may be eligible for designation as an opportunity zone.
  2. If your community includes eligible census tracts, write to your governor, asking him or her to designate those tracts in your community as an opportunity zone.
  3. If you would like to see community investment funds serve your community, fill out our intake form to make an appointment with us to explore the kinds of funds that can be offered in your community.
Webinar Replay: Economic Activism Starts at Home: The Impact of Community Investment Funds

Webinar Replay: Economic Activism Starts at Home: The Impact of Community Investment Funds

What if your community can come together to fund local ventures? Watch our webinar with Kim Arnone and Brian Beckon to find out how to utilize community investment funds (CIFs). Get an in-depth look at the array of opportunities CIFs offer.

This is an immensely useful webinar for nonprofit organizations, coworking spaces, accelerators/incubators, community organizers, and economic development specialists.

WEBINAR: Economic Activism Starts at Home: The Impact of Community Investment Funds July 27, 2017 11 a.m. PT

WEBINAR: Economic Activism Starts at Home: The Impact of Community Investment Funds July 27, 2017 11 a.m. PT

Work for or operate a nonprofit organization, innovation hub, accelerator, or incubator? Are you a community leader or economic development specialist? Do you want to learn about community investment funds and community capital raising? Join Cutting Edge Capital’s webinar on July 27th at 11 a.m. PT with Kim Arnone and Brian Beckon to learn in depth about community investment funds and how they can propel your mission and community vision. Click here to save your spot now!

The Presenters

Kim Arnone
Vice President, Cutting Edge Capital
Kim specializes in developing community capital raising strategies for social enterprises, cooperatives and nonprofits. She works primarily on investment offerings that can be publicly offered and that are open broadly to community members. Kim has assisted a wide range of enterprises in successfully raising capital; from a worker-owned green waste recycling company to an organic farm, from a rural community development fund to an urban food coop. Kim has been with Cutting Edge for 5 years and has been practicing law for 20 years. She has her Juris Doctorate from Hastings College of Law, where she was editor-in-chief of the Women’s Law Journal. Kim lives, works, and plays in Oakland.

Brian Beckon
Vice President, Cutting Edge Capital
Brian is an attorney with over twenty-five years of experience working for nonprofits, start-ups, and publicly-traded companies. As a principal of both Cutting Edge Capital and Cutting Edge Counsel, Brian’s work is now focused on direct public offerings, corporate structuring, and strategies for community capital to help build a more equitable economy. Brian has served as General Counsel for RSF Social Finance, Clean Power Finance, and LendZoan; and before that as Corporate Counsel for Sybase and Catellus Development Corporation. He earned his J.D. from the University of the Pacific McGeorge School of Law and started his legal career with the North Bay law firm of Gaw Van Male. Brian is a member of the California Bar and serves on the boards of the Mount Diablo Music Education Foundation and the Neto Community Network.

Community Investment Funds: Four Models

Community Investment Funds: Four Models

Community capital is about empowerment of communities. It is a set of strategies that allows ventures to raise capital from their ideal investors within their own community, allows anyone of virtually any economic class to invest in their community, and allows communities to build wealth though a cycle of investment, growth, profit, and reinvestment. As I wrote in a separate post, Community capital can be raised directly through direct public offerings (DPOs) and Title III exempt crowdfunding, or indirectly through community investment funds (CIFs). Of these, CIFs have several significant advantages: scalability, efficiency, diversification, and opportunity for liquidity.

With this much going for them, one may wonder why CIFs are not far more common than they are.  One would think that every community should have a least one CIF. Yet most do not – at least not yet. Setting aside cultural factors that I noted in my previous post, the other key reason for their scarcity is the regulatory environment. A CIF must navigate through two layers of securities law. The first, and more commonly understood, are the laws that regulate the offering of an investment to the community. This is regulated at the federal level by the Securities Act of 1933 and by each state’s securities laws. In essence, a CIF must do its own DPO to raise investment. While this must be done carefully, it is not so burdensome as to prevent CIFs from flourishing.

But there is a second layer of securities law that is unique to investment funds and presents  another challenge. The Investment Company Act of 1940 (the 1940 Act) imposes burdensome regulations on an entity that raises money from investors and then invests that money in other companies. This is the law that regulates mutual funds, and the compliance costs are well into the six and seven figure range for funds of that type. Among other requirements, such a fund must conduct a full registration under the 1933 Act.

However, the 1940 Act also includes a number of exemptions. And that is where the opportunities lie for a small CIF that cannot afford 1940 Act compliance. With all that in mind, the following are four models for a CIF that can raise capital from its community without running afoul of the 1940 Act:

Charitable Loan Fund

The simplest (and by far the most common) type of CIF is the charitable loan fund. This is because the two key federal securities laws noted above (the 1933 Securities Act and the 1940 Investment Company Act) both have a blanket exemption for charitable organizations. To be clear, this does not work for other types of nonprofits, such as cooperatives and mutual benefit corporations. The entity must be truly charitable—basically a 501(c)(3) organization. Most states also have an exemption from securities offering registration for charitable organizations, though a few do not, including California.

With those exemptions, it can be relatively straightforward to set up a charitable loan fund – with good legal guidance, of course. It is still a securities offering, which requires comprehensive disclosure of all material facts, risk factors, state level review (in some states), and so on.

There are two key limitations of this model. First, the assets of a charitable organization may only be used for charitable purposes. And charitable is not the same as socially beneficial. While an analysis of what makes a loan charitable is beyond our scope here, let it suffice to say that a charitable organization needs to be careful, so as to avoid jeopardizing its charitable status.

A second limitation of a charitable loan fund is that it can only raise debt investment, not equity, because no one can own a charitable organization. Moreover, a charitable organization is forbidden from sharing profits with investors. And while a charitable fund could in theory raise debt investment and deploy it in equity investments in other local business, that kind of leveraged equity investment is considered too risky and therefore an unwise strategy. So, charitable funds generally only make outgoing loans with little or no opportunity for capital appreciation. Then, after subtracting a spread to cover its operating costs, the fund typically pays its investors a fairly low interest rate, again with no opportunity for capital appreciation.

And yet, the charitable loan fund is a very effective model for community investment and there are many success stories. Here are a few charitable loan funds that appear on CuttingEdgeX.com, along with their funding focus:

Real Estate Fund

The purchase by a fund of real estate is most likely not a securities transaction at all; and even if it is, the 1940 Act provides an exemption for funds that invest in real estate. Therefore, a real estate CIF need not be concerned about 1940 Act compliance. On the other hand, there is no exemption from the other federal or state securities laws for a real estate fund, so a true real estate CIF typically must raise capital via a state-registered DPO.

A real estate CIF can be a powerful tool for urban or rural revitalization. The concept is simple: The community invests in a fund that acquires, renovates and leases out properties that have become blighted. A portion of the profits may be reinvested in further revitalization, but any remaining profits are distributed to investors. As a result:

  • New businesses are attracted to newly renovated properties;
  • Property values rise as blight is eliminated;
  • Safety improves, as more workers and customers generate more foot traffic;
  • City tax revenues rise as all those people spend more money locally;
  • Local investors share in the profits of the business and reinvest in the community.

We believe this model has enormous potential, and we hope it will be replicated in every city in need of urban revitalization. But there are other potential uses for a community real estate fund, such as:

  • Affordable or workforce housing
  • Agricultural land (perhaps in conjunction with a community land trust that acquires a conservation easement)

Equity Investment Funds

There is no general exemption from the 1940 Act for funds that make equity investments in other companies. To be sure, many modestly-sized funds do invest in other businesses: hedge funds, private equity funds, and the like. What those all have in common is that none of them is open to non-wealthy investors. In other words, they are not community investment funds.

But there are ways to build a true community investment fund that can invest in equity positions in other companies (along with other types of investments) and share profits with its investors. The idea behind this model is that the entity is exempt from the 1940 Act because it is not primarily in the business of investing in securities. We will discuss two variants of this model.

The first of these variants begins with Section 3(a)(1) of the 1940 Act, which excludes from the 1940 Act’s coverage any fund that is not primarily in the business of investing in securities, and where investment securities comprise less than 40% of the fund’s total assets. As we’ll discuss further below, this type of fund will necessarily be fairly diversified; hence we have called it the “diversified business fund.”

The first requirement for the diversified business fund is that the fund is primarily in some other business besides investing. In other words, the fund’s investing activities must be supplemental to another primary purpose. There is a lot of flexibility in the kind of primary business that would support this type of fund, but three business types that would work particularly well are a start-up incubator, a business accelerator, and a co-working facility – or some combination of those. The fund could also be in the primary business of providing education or other services.

The second requirement of the diversified business fund is that no more than 40% of the entity’s total assets consists of investment securities. Fortunately, there are several types of investments a diversified business fund can make that are not counted as investment securities for purposes of the 1940 Act. These include:

  • Majority-owned subsidiaries: If the fund acquires a majority ownership position in a target company, that won’t count toward the 40%. Note that while such an investment would ordinarily be treated as a “security,” it is specifically excluded from the definition of “investment security” for purposes of the 1940 Act. One challenge here is that the entrepreneur behind a potential target company may (understandably) not want to give up a majority position in their company. That concern can be addressed through two sub-strategies. First, the equity structure of the target company can be designed to ensure the entrepreneur has majority voting power even with a minority ownership position. The second is that the investment can be coupled with a redemption right giving the entrepreneur the right to re-acquire a majority position at some time in the future.
  • Real estate: As long as it is directly held by the fund, real estate is not a security at all, as noted earlier. A syndication interest, or an interest in a real estate partnership would likely be an investment security. But real estate that the fund owns for its own use or to lease to others would not be.
  • Secured loans: For purposes of the federal securities laws, not every loan is a security. Where a loan is privately negotiated between lender and borrower, is not offered broadly to potential lenders, and is secured by assets, it will probably not be deemed a security at all, so it will not count toward the 40% threshold.
  • Non-securities assets: The fund may also invest in equipment and other assets that are not securities.

So, as long as at least 60% of the entity’s total assets comprise these types of assets that are not counted as “investment securities,” the diversified business CIF will meet the second requirement. The remaining 40% or less can be any other type of investment, including minority positions in portfolio companies, as well as publicly-traded stocks, bonds and other investment securities. From an investor’s point of view, one key advantage of the diversification inherent in this model is that it may very well reduce the fund’s risk and make it a more attractive investment.

A second variant on the equity investment fund model is similar to the diversified business fund but doesn’t require the 60-40 split in its portfolio. Under Section 3(b)(1) of the 1940 Act, a company is exempt as long as it is clearly in a primary business other than investing in securities. For that reason we call this the “supplemental investment fund.” For this purpose, the following factors are considered important in determining whether it really is in another primary business:

  • Company history: A company with a history as an operating company in some primary business other than investing is less likely to be deemed an investment company.
  • How it represents itself to the public: If investors are likely to invest because of the investment portfolio, investing is more likely to be deemed its primary business.
  • Activities of its officers and directors: Whatever the officers and directors spend most of their time doing is likely to be deemed the primary business.
  • Nature of its assets: The more of a company’s assets that are associated with a line of business, the more that will be considered their primary business. However, courts have recognized that some businesses are asset-light, and that fact should not by itself transform an operating company into an investment company.
  • Sources of its income: Both net and gross income should be considered. An activity that produces a majority of both will likely be considered the primary business.

We note that while business accelerators and other similar organizations in the US have often provided funding to their clients, to our knowledge none of them has yet done so using community capital. Therefore, the model as described here has not yet been utilized as of this writing, though CEC is working with several organizations who are pursuing this model.

Registered 1940 Act Fund / Business Development Company

We now come to the fourth model: A CIF could embrace, rather than avoid, the 1940 Act. While this strategy will clearly be out of reach for a small fund for cost reasons, it may be that a true community investment fund targeting a larger metropolitan area could achieve the scale necessary for full compliance with the 1940 Act to become cost-effective.

We won’t dwell on this model, except to point out that Calvert Foundation, through an affiliate, has offered a menu of Calvert mutual funds for several years. While they don’t have a specific geographic focus, they do have a strong social mission, and their success suggests strong potential for this model to serve large communities.

An interesting variation on the fully registered 1940 Act fund is the business development company (BDC), a type of investment fund that provides managerial assistance to its portfolio companies. While this model is technically an exemption from the 1940 Act, the BDC is exempt from only some of its more burdensome requirements. It must still register its offering with the SEC under the 1933 Act. And yet, a BDC with a state or regional focus could make financial sense. We will be observing a few BDCs (such as Hill Capital in Minnesota) with an eye toward the potential use of this model as a true community investment fund.

Other Possible Strategies

There are a number of other exemptions from the burdensome requirements of the 1940 Investment Company Act, each with its own limitations. At Cutting Edge Capital we will continue to explore alternative strategies that may work for community investing. Here are some possibilities:

  • An intrastate fund: The 1940 Act includes an exemption for a fund of up to $10 million where all investors reside in the same state where the fund is based. While this sounds promising, it has two key limitations: First, it must be a “closed-end fund”—meaning that the fund has a specified life (say, 7 years); investors come in at one time and are cashed out at the end of the fund, with little opportunity to come in and out of the fund during its life. Second, this is not a self-executing exemption; rather, the fund would need to request an exemptive order from the SEC, and the SEC would have the power to impose any requirements they believe are needed to protect investors. This exemption has rarely, if ever, been used.
  • Microloan fund: An exemption is available for a fund that makes “small loans”—a term that appears to be interpreted by the SEC to mean personal and consumer loans, not business loans. One possible example: A solar fund could use this strategy to make loans to homeowners to finance rooftop solar installations.
  • Manufacturer/seller loan fund: Another exemption covers a fund in the business of lending to manufacturers and sellers of merchandise or services.

Finally, we should mention one more strategy that may not be a true CIF, exactly, but might be used to achieve a similar result: the investment club. This is where a group of investors pool their resources into a single entity (typically a limited liability company) to make investments. As long as every member of the club is actively engaged in the management of the club (i.e. votes on investment decisions, etc.), the club will not be deemed to issue securities to its investor/members, and therefore it will not be subject to the 1940 Act. Because of the requirement that every member of the club be actively engaged in management, it usually works best for smaller groups of investors; but it can be open to anyone, wealthy or not.

All of the Above

Of the models described above, there is no “best” model. At Cutting Edge Capital we envision a more localized economy in which every community is served by a constellation of community investment funds of various types, each of which responds to a need in the community. For example, a real estate fund could build workforce housing, if housing is in short supply; a charitable loan fund could lend to agricultural and food-related businesses; and a diversified business fund could invest in homegrown tech start-ups.

Together with DPOs by local ventures, these CIFs would contribute to a vibrant community capital market in which everyone can participate on a level playing field, and help build a more equitable and prosperous community.

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 schedule a consultation, please visit www.cuttingedgecapital.com or email us at info@cuttingedgecapital.com.

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.