There are exciting projects underway utilizing impact investing for the development, revitalization and health of urban and regional areas. These projects include a very important Community-Financed component that opens the investments up to everyone, unlike traditional private offerings open only to wealthy investors.
The importance of a Community-Financed approach cannot be emphasized enough. Through the use of crowdfunding tools that have been legal for decades, i.e. Direct Public Offerings (DPOs), or using the newly amended Regulation A+, or even crowdfunding under the new Title III JOBS Act for smaller offerings, everyone within the community can participate in a securities funding designed to provide at least two kinds of returns on an investment – financial and community-health-related returns.
Private offerings (even if intended to be “sustainable” or “impact”) give investment opportunities to only 10% of U.S. households (i.e. the “accredited investors”). And while some private opportunities may have the intention of improving urban/regional conditions, they fail to address one of the major contributors to the problems – i.e. the rapidly increasing wealth and income gaps. These private deals, even if well intentioned, continue a paternalistic approach to community revitalization, and fall very short on addressing the important economic gap-related problems of how to help the 90% to grow wealth.
Community-Financed revitalization projects, on the other hand, aim toward making a positive impact on where people live, while also offering each individual the opportunity to invest, which is an essential solution to ultimately closing those gaps.
Here are examples of Community-Financed projects underway or recently funded:
Fulton Street Investors, LLC is using a California Intrastate DPO to raise $4.5 million for a real estate investment fund for a major overhaul of downtown Fresno, by purchasing and rehabilitating properties for retail and other uses. Fresno sits in one of the most productive agriculture regions on earth, yet has some of the highest levels of poverty in California. Decades of disinvestment have led to a ghost town-like status in downtown Fresno, in sharp contrast to the abundant agriculture lands outside of the city. This DPO gives all Fresno residents a chance to invest in its revitalization and to be a part of the city’s success. The fund will never take on debt (which goes to the safety of the investments) and will be marketed specifically to local investors. And decisions will be based on the need for the revitalization of the area, not connected to the typical shareholder-primacy pressures brought on from a few wealthy investors. The offering is also devoid of the typical wiggle room that real estate developers typically add into their offerings that allows them to change the direction of the plan once it is funded.
Guerilla Development- an Oregon real estate company focused on “creating inventive and experimental projects that use both hemispheres of the brain.” Guerilla has been busy engaging both “hemispheres” of investors: accredited investors and non-accredited investors (the other 90%). They are using one of the newest legal strategies for ventures to “crowdfund” investment capital, via Regulation A, through which they are offering $1.5 million of preferred equity in the Fair-Haired Dumbbell, an office building with ground floor retail in Portland, Oregon. The offering is open to residents of California, Oregon, Washington, Massachusetts, Virginia, and the District of Columbia.
People’s Community Market - a neighborhood grocery store that will help West Oakland families thrive by offering quality fresh foods, affordable groceries, health services and a place for community building and recreation. Their first DPO brought in almost $1.3m, and now that they have secured the land for the building, they are again using the Intrastate Exemption for their new DPO.
Economic Development & Financing Corporation (EDFC) - a 501(c)3 non-profit, Community Development Financial Institution (CDFI) founded in 1995 with the mission of connecting money and ideas with entrepreneurs to create sustainable prosperity in Lake and Mendocino Counties. EDFC used a Direct Public Offering using the Nonprofit Exemption, and exceeded its target and the offering is now closed. EDFC is now in the planning stages for several more DPOs to fund other community businesses in its counties.
Our Katahdin - an all-volunteer nonprofit organization working to promote community and economic development in the Katahdin region of Maine, takes a broader approach to downtown revitalization by including both small town and rural geographies. Seeing an opportunity to allow Maine residents to invest in the region’s development, this non-profit loan fund cycles in capital from Maine residents through a DPO, before either loaning it out at a slightly higher interest rate to qualified ventures for their growth and development, or actually purchasing land for the non-profit to develop. Maine entrepreneurs will benefit from the access to capital; Maine investors (of the lending variety) will benefit from a modest return on investment; the region and its communities will benefit from enhanced economic activity; and the non-profit loan fund will benefit from the revenues for making it all happen.
RSF Social Investment Fund – operated by RSF Social Finance, provides a way to invest in a diversified, direct loan fund comprised of over 90 leading non-profit organizations and for-profit social enterprises, many of which are working to improve urban and regional living conditions . This Fund is designed to provide substantial social and environmental “returns” while generating a financial return similar to that of a bank CD.
Of course, like any fundraise, a Community-Financed offering can have challenges.
Issuers need to reach the right audience and tell the compelling story that connects on levels much deeper than what a private offering would (i.e. Return-on-Community versus just the Return on Investment and a fairly quick exit). Cost is also a consideration. If a company is raising less than $250k, a DPO may not be right for them due to the preparation, filing and marketing expenses. For Reg A+ offerings, the raise amount must be considerably higher due to the higher legal, accounting and audit fees. Finally, for the new Title III JOBS Act crowdfundings, a $1m limit on the offering may not get very far when considering the purchase and revitalization efforts, and having to use a third-party platform to showcase your offering without the benefit of a direct approach to your community has serious limitations for how you connect directly about the offering.
For investors, the size of these offerings (and possibly the age of the companies) makes the comparison of information typically found in public or private deals challenging, so investors need to find new ways to educate themselves about the offerings. And investors should always consider whether exit strategies are important and available, which my colleague Brian Beckon has written about here.
Understanding how to invest and gaining experience with direct investments is very important when considering these kinds of offerings, but this is how we can begin to help U.S. households regain financial footing for their future, and begin to reduce the increasing wealth gap we see today.
Democratization of investment for purposes of urban or regional revitalization solves a number of issues if done right. Not only does it serve as a practical way to access capital for impactful projects that can breathe life into towns, urban cores or rural regions, but it also serves to empower communities to take charge of their own futures, and it allows everyone to begin to close the gaps in income and wealth.
When entire communities invest in themselves through local ventures, everybody can benefit.