April 25, 2012
Investing in Main Street Instead of Just Wall Street
By John Tozzi
For a certain breed of conscious consumer, shopping locally is paramount. It signals support for independent stores over big chains, urban downtowns over sprawling shopping centers, small farmers and craftsmen over multinationals. The theory is that a bigger piece of each dollar spent locally stays in the community, as those business owners buy from local suppliers and reinvest profits close to home.
Even the most dedicated local shoppers, however, have trouble extending that philosophy to their savings. While some people have shifted deposits out of Wall Street banks and into local lenders and credit unions, most investors have no way to steer portions of their long-term savings,such as retirement accounts, to Main Street companies. “There are 7,500 mutual funds. Not one invests in local businesses,” says Michael Shuman, an economist and author of Local Dollars, Local Sense (Chelsea Green,2012).
Shuman and other supporters of local investing hope the new law enabling crowdfunding will make it simpler to include local businesses in investment portfolios alongside the S&P 500. Right now it’s difficult to do, but Shuman expects companies and nonprofits interested in local investing to begin building the tools to make it easier. Small businesses seeking capital will need software to help them meet heightened financial reporting requirements under the new law, he says, and investors will want arm’s-length evaluators to vet offerings. Mechanisms such as self-directed IRAs could be used to direct some retirement money into local businesses.
One of the inspirations for the new crowdfunding exemption was a petition to the Securities and Exchange Commission two years ago to allow businesses to raise up to $100,000 with no more than $100 coming from each investor. The author of that plan, Jenny Kassan, is chief executive of Cutting Edge Capital, a financial consulting firm in Oakland, Calif., that helps small businesses raise money through lesser-used exemptions in securities laws.(Shuman is a researcher there.)
What eventually passed into law is much broader than Kassan’s original idea: People will be able to invest $2,000 or 5 percent to 10 percent of their wealth, depending on their earnings and net worth. “Under this law, you can raise more, you can have more per investor, but it’s also much more highly regulated,” Kassan says.
The SEC still has to write the rules for how crowdfunding will work. Kassan says it might be two years before anyone starts raising money through crowdfunding, and other exemptions may still be better choices for businesses looking to raise money.
While concerns about fraud or just plain lousy investments abound, investing in local businesses is one way to give people some measure of confidence about where their money is going. Shuman sees it as a potential fit for “any business with a fairly consistent and loyal clientele, where the purchase of the security is another piece of that loyalty,” he says. “These are businesses that have been around for a long time. You say, ‘That’s a part of my community. Sure, I’ll invest in that.’”
Still, investors should go in with eyes wide open. Investing locally may involve higher risks, lower returns, and almost certainly less liquidity than more conventional investments. Frank Knapp, president of the South Carolina Small Business Chamber of Commerce and a supporter of local investing, says investors will be motivated as much by opportunity to aid a treasured local restaurant or indie bookseller as they are by the potential financial return.
“If they make it, wonderful. If they don’t, you know, I helped, we tried to help,” he says. “You’re investing in your local community. You believe in it, you want it to grow. You’re not risking a lot. You’re going to live there, your kids are going to grow up there. If you can maybe make something back on your investment, great.”