In my last posts on Invest In Who You Know Pt.1 and Pt.2, I end with Community Capital Markets as a pathway. So what is a Community Capital Market? To answer that, it's important to understand what a capital market is.
Most people think of capital markets as what goes on in the national exchanges (e.g. New York Stock Exchange), but one of the oldest definitions of capital markets is "the efficient transfer of individuals' savings to companies for research, development, marketing, stability and growth."
That simple but important definition is a far cry from what goes on in the "markets" today. Consider the menacing-sounding "Dark Books," basically a new playground for alternative trading systems and exchanges that are hidden from the average investor, but which count for possibly half or more of all volume today (billions of trades each day). And High-Frequency Trading (trades measured in nanoseconds) now dominates stock prices, where trading firms locate their servers as close to an exchange as possible (even a few feet away) to gain a nanosecond on their competitors. These designs have been defended under the premise that they increase "liquidity" and lower costs. And those lower costs may actually mean something -- if you are flipping trades all day.
It's no wonder pension and retirement account managers are frustrated and confused. Consider new exchange orders called "Investor Tier," "Ultra Tier," "Mega-Step-Up Tier 1" and the "Mega-Step-Up Tier 2," where an identical order gets different pricing depending on how frequently a trader uses that exchange. And consider, as a new RBC study has found, that exchanges are adding or changing their pricing about once every month. Maybe the exchanges just can't make up their mind about what they need to charge. Or perhaps their focus is just about increasing their own volumes, and selling more data to these sinister-sounding trading shops, where an individual investor is less than an afterthought.
Now consider what happens when investors "who care where their money spends the night" (as Vince Siciliano at New Resource Bank in San Francisco says) divert just a small amount of their funds and, together, provide companies with a means to hire, and to spend on other local companies. Here's just a few of the many examples out there today that did a Direct Public Offering:
EDFC - a non-profit Community Development Finance Institution that recently raised $370,000 to support a wool mill for the community of Mendocino. Their mission is to connect money and ideas with entrepreneurs to create sustainable prosperity in Lake and Mendocino Counties.
CERO Cooperative - a community funded, worker-owned cooperative on a mission to encourage composting and create jobs in the low-income Boston neighborhoods of Roxbury, Dorchester, and East Boston. They raised $340,000 in 2015 from 83 accredited and non-accredited investors in Massachusetts.
Farm Fresh to You (Capay Farms) - a much-loved family farm and CSA that delivers organic produce to customers throughout California. They created a "Green Loan Program" so investors purchase promissory notes with a variable interest rate tied to current market rates. And part of the interest on the notes can be paid in credits toward organic produce rather than in cash. Farm Fresh to You has renewed its permit every year so that it can use the Green Loan Program as a permanent source of capital. So far, it has raised approximately $2 million.
People's Community Market grew out of eleven years of creative efforts to provide access to fresh produce, affordable groceries, and education about nutrition to a neighborhood of 25,000 people with no real grocery store in West Oakland. It successfully raised $1.2 million to open a new, high-quality grocery store in the neighborhood, and just recently renewed its offering. Investors purchase non-voting preferred stock with an annual 3% cumulative dividend. Investors can also receive a discount card to use at the store when it opens. The minimum investment is $1,000.
Community Capital Markets are happening NOW. People who can afford a little or a lot are pooling their funds to support not only the companies, but the entire community where they're located. These are not handouts, or donations, but a fair exchange of savings in return for a healthy return, or for an ownership interest. These are not your national exchange markets that have only the slightest connection back to funding a company after it goes public. And this not a kiddie pool filled with sharks, that strip companies of their leaders, alter the course of their missions, and lead them to an early exit that likely disconnects them from the community.
There's no question that investing in these community companies poses some additional burdens and risks that a typical investor might not be accustomed to. Also, the "return on investment" that the professional investors typically look for needs to be combined with a "return on community" if one wants to understand the true value of the investment. And with low-to-no liquidity via a secondary market for these investments, they should be looked at in a very different light.
Here's an analogy that might work - if you invest in your child's education, are you looking for "market rate" returns, a quick exit, or the ability to trade out whenever you like? Granted your children are not the same thing as an investment in a company, but investing in your community may not be that far removed. We hope to see some kinds of returns, maybe even a healthy financial return with a community company, but at least there's the chance of joining in the upside if it succeeds, and there's the bigger benefits we also get by helping our community grow, flourish and become resilient to the greater outside economic madness.
Join us in Portland for the ComCap Conference (and share discount code "CUTTINGEDGE" for 20% off) where my community capital colleagues and I will be speaking about Direct Public Offerings and new securities crowdfunding laws to grow Community Capital Markets.