What Is Local Investing?

INTRODUCTION

Local small businesses help create the color, culture, and uniqueness in our communities and neighborhoods. They’re owned, managed, and staffed by our friends and neighbors. In what’s called the “local multiplier effect,” the money we spend and invest with local small businesses has a much higher probability of being re-spent at other local small businesses, circulating more of our money throughout our community, increasing prosperity for all.

Yet, local small businesses face challenges when they need start-up or growth capital. In the past, securities laws and regulations were difficult and expensive for them to navigate, making it harder for them to legally raise money from investors, often limiting their options to high interest credit cards and hard-to-get bank loans. Recent changes have opened new opportunities for local investment from anyone regardless of wealth status.

WHAT IS LOCAL INVESTING?

We define local investing as putting one’s money to work for the mutual benefit of the investor, local small businesses, and the community as a whole. These benefits can be financial, in-kind (products & services), cultural, and more.

By using their money to help start, expand, and support local businesses, local investors catalyze many positive changes, such as:

• Bringing essential and/or desired products and services to their communities
• Putting their money to work close to home, rather than in global markets and corporate banks
• Growing their local economies, enhancing the local quality-of-life
• Creating new relationships with local business people, building community

Local investing is very different from conventional investing. In today’s globalized world, investing has become a way of putting one’s money into shares and debt of multinational corporations and governments via high-speed, electronic trading platforms. A vast network of funds, brokers, advisors, and investment managers disconnect investors from knowing what their money is really doing.

“Consider that in the early days of investing, all investments were local, as neighbors came together to pool money and help start essential businesses in their communities. In so many ways, local investing brings us back to our roots.”

Local investing, by comparison, is slow and engaging. Local investors must have the passion, time, and energy to find and evaluate local investing opportunities, and for getting to know the people who offer these opportunities. In return, investors can make money on their investments, which is very important, but local investing is about impact as much as it is about profits. Local investors can help start or expand businesses, create jobs, and increase the prosperity in their communities. They build relationships and goodwill that last well beyond the investment time horizon.

DIFFERENT WAYS TO MAKE LOCAL INVESTMENTS

Local investing opportunities come in many forms, with varying degrees of complexity and risk. Broadly speaking, there are two main categories:

Securities: legally regulated, generally more complex, risky, appropriate for experienced investors
Non-securities: not regulated, generally more simple, appropriate for novice investors

SECURITIES

Any kind of agreement in which an investor gives money to someone else with the expectation of receiving repayment plus a profit in return. Even personal loans made between friends and family at any interest rate greater than zero (because zero-percent loans are not often considered securities; see below), are considered a security. Since the eventual return of the investors’ principal (the money they put in) plus any profit depends on the management and business skills of the borrower or investee, there are inherent risks in securities, which is why they are carefully regulated by governments and are generally more appropriate for investors (and their advisors) that are ready to do the work to evaluate those risks and decide if they are appropriate to take.

Common types of securities are:

• Equity: ownership stake in a business
• Debt: loans to a business (also called promissory notes)
• Royalty: revenue or profit sharing agreements

To learn more about these and other types of securities, check out this clip from the Navigating the Money Map webinar:

This clip is from the webinar Navigating the Money Map for Investors. You can watch the full webinar here.

NON-SECURITIES

While not considered an investment in the legal sense, the financing opportunities below do enable you to create a positive local impact with your money while receiving benefits in return.

• Deposits at local banks & credit unions: these institutions can lend your money back out to local small businesses and nonprofits. BankLocal is a great website that can help you identify which banks near you reinvest in your community the most.
• Donation-and-reward crowdfunding: popularized by platforms such as Kickstarter and Indiegogo, contributors help fund businesses, nonprofits, and other projects, and in return receive non-financial rewards, such as products or services. This type of crowdfunding is particularly well-suited to very early stage business ideas.
• Peer-to-peer lending: zero-percent interest loans through Kiva.
• Pre-sales: paying for products or services up front in order to provide startup, expansion, or operating funds to local small businesses. Community Supported Agriculture (CSA) is a great example of this, as farmers are paid for their work before the season, when their expenses are the highest, and deliver their harvest weekly throughout the season. Credibles is a website that facilitates pre-sales for growing food businesses so that they can expand their operations to meet demand. Sometimes, creative local businesses such as restaurants, bakeries, or breweries will run their own pre-sales campaigns to fund their growth.

To learn more about how the U.S. Securities and Exchange Commission (SEC) defines various investment terms, check out their “Jargon from A to Z” page.