Introduction

As a business owner, you recognize that stimulating a local investing ecosystem has great potential benefits for both your business and your greater community.

You’d like to be part of growing this ecosystem by conducting your own community capital raise.

The Community Capital Raising Workbook is a great place to start if you’re considering raising investment capital from your community.

Originally produced for the Sustainable Economies Law Center, this workbook is intended as a tool to help businesses raise community investment capital. Raising community investment capital is challenging for many reasons, but it can be done.

This workbook will empower you to consider and guide that process and ensure that your business can achieve all its goals in the course of this fundraising effort, from growth and sustainability, to impact and inclusion.

This workbook is divided into three sections:

“About This Workbook” provides high-level background on the investment fundraising process, with a particular view towards community capital as opposed to traditional Wall Street style fundraising.

“The Workbook: Crafting Your Community Capital Raise” is a workbook of questions and prompts to help you consider and articulate your capital raising goals and opportunities.

Finally, “Additional Resources” will help you find more resources to continue your community capital raise project.

Download the Capital Raising Workbook

The following is an excerpt from “Community Investment Funds: A How-To Guide for Building Local Wealth, Equity, and Justice,” a joint project of the National Coalition for Community Capital and Solidago Foundation. The handbook can be downloaded in its entirety here.

Here’s a brief introduction to community investment funds:

Here’s an example of community governance and connection with local small business and economic development ecosystems:

These clips are from the webinar CIF Toolkit Launch Webinar. You can watch the full webinar here.

The term “community empowerment” usually sparks images of sit-ins, protest, rallies, campaigns, elections, and a thousand other actions associated with politics. You’re probably not imagining a half dozen smart people sitting around a table and planning how to creatively invest the pool of several million dollars gathered from local investors. But look at the mission of funds like PVGrows or the Boston Ujima Fund, and you see a radical effort to help revitalize distressed neighborhoods by supporting struggling small businesses, often led by women and people of color. funds like these are increasingly being used to open grocery stores in food deserts, build affordable housing, launch work cooperatives, and enhance the energy efficiency of old commercial and residential structures.

Capital is a critical tool for community problem-solving. While money alone cannot solve every local problem, it’s a necessary component for any serious approach to community empowerment. An emerging generation of practical, intelligent activists are reinventing local financial systems, and creating a set of tools we call community investment funds.

To clarify, when we talk about community investment funds, we’re not referring to the nearly 10,000 mutual funds in the United States that invest primarily in Fortune 500 companies and are largely disconnected from community problem-solving. Nor are we referring to the thousands of economic-development funds or microenterprise funds that are underwritten by municipalities, large banks, and foundations, which provide virtually no role for the vast majority of us who are not wealthy enough to participate.

In our view, a community-friendly investment fund has three essential characteristics:

• Local sourcing: Capital for a community investment fund should come from the people living in the community and, if possible, from grassroots investors. Yes, deep-pocket investors are welcome, but so is everyone else, including the 95% of us called “unaccredited investors.”
• Local investing: The fund should put its capital exclusively into local people, projects, and businesses, with a mission of significant social change. Sure, part of the mission of investing is generating a rate of return for investors, but just as important is the social rate of return for the community. Particularly important is investing in people, projects, and businesses run by those with the fewest resources and the least power.
• Local decision-making: A board of people broadly representative of the community should decide how to deploy the capital. Those without power or resources whom the fund is targeting also need to play a role in the decision-making.

One additional characteristic, essential to any fund, is that it should be designed to provide investors with a positive rate of return. Even if the fund is run by a nonprofit, as many are, it can and should pay something to the investors for the use of their capital. A successful community investment fund will benefit both the investors and the community.

A Grassroots Investment Revolution

Even though local businesses are responsible for 60% to 80% of the economy, with literally millions of them being profitable, the securities marketplace has all but shunned them. Americans have roughly $56 trillion invested in stocks, bonds, insurance funds, pension funds, and mutual funds, almost entirely invested in publicly traded corporations. Put another way, we are overinvesting in Wall Street and underinvesting in Main Street. Many of the challenges with which communities struggle — economic, environmental, social, or political — could be remedied, or at least made more manageable, if we changed how we invest our savings.

In a properly functioning marketplace, the 60% to 80% of the economy that’s locally owned would receive 60-80% of the investable capital. That would mean about $30 to $40 trillion moving from Wall Street to Main Street. Just taking the lower end of this range: A neighborhood of 1,000 would have $100 million more in capital for its local businesses; a town of 10,000 would have $1 billion; a city of 100,000 would have $10 billion.

The Role of Investment Funds

Investment funds are institutions where investors put their money into a pool, and the managers running it make prudent investment decisions on their behalf. Most of us are happy to put our retirement savings into mutual funds, because we prefer having a reliable expert make tough investment choices. We’re also put at ease by knowing that unlike investing in one company, where we can lose everything, an investment in a diversified pool is less likely to be wiped out. If one investment goes bad, 100 good investments in the pool will balance it out. (Or so we hope!)

But the evolution of community investment funds has been slow. While the JOBS Act made it easier for small businesses to issue securities to grassroots investors, no comparable legal reforms have been initiated for funds serving small businesses. And the existing law poses challenges.

As we detail in this section, the Investment Company Act of 1940 makes it exceedingly expensive to create and operate investment funds, especially if they accept money from any unaccredited investors. Just the set-up costs for a mutual fund, for example, could be hundreds of thousands of dollars.

Until recently, the number of funds investing in local businesses that were open to unaccredited investors could be counted on one or two hands. Some of the earliest examples are the Vermont Community Loan Fund, the New Hampshire Community Loan Fund, and the Mountain BizWorks Fund of North Carolina. Most took advantage of an exemption in the Investment Company Act for nonprofits. (If a nonprofit creates a fnd to provide modest loans in the service of its mission, it can set up a fund relatively easily and inexpensively.)

The small number of community investment funds is due to several factors. Because small business securities — the investments that could make up a pool — have been rare, small-business funds have been rarer still. And valuation of these securities is often difficult. You know the value of a small business loan, but what’s the probability of that business failing? And how can you know what the value of local stock is without local stock exchanges, which don’t exist?

But in just the last few years, the number of new funds opening with a community focus has accelerated, many with striking and promising new features. This reflects the growth of public interest in local investing, a growing distrust of Wall Street, and the emergence of crowdfunding alternatives. The rest of the Community Builder section details some of the most cutting-edge of these funds, and provides you with specific strategies for creating your own.

In addition, there are some challenging aspects to starting and managing a CIF, discussed here:

This clip is from the webinar Community Capital Builders Social. You can watch the full webinar here.

Local investing can deliver more than just economic benefits. It can help attract or retain crucial businesses, like farms, retail stores, or conservation projects. Valuable relationships are created and deepened across the community as business owners, citizen investors, economic development professionals, government leaders, financial professionals, business groups, and others work together to catalyze local investing as a key ingredient of a vibrant local economy. Active networking and collaboration ensure that promising local entrepreneurs are discovered, educated, financed, and supported throughout their business lifecycle.

This coalition of different groups and individuals working together to promote and strengthen the local economy are what we call the Local Economy Ecosystem. This section explores the types of groups that should be part of your local ecosystem, and how to collaborate with them on building a culture of local investing.

Your work should begin with what already exists, and expand on that by reaching out to potential allies who are less involved. While the primary focus of your efforts is to spur local investment, the success of that initiative will depend in large part on having as large and interconnected a network as possible.

Here’s an example of how to get involved in a local investment ecosystem in your community:

This clip is from the webinar A Conversation with Isabel Strobing of Mainvest. You can watch the full webinar here.

Here’s a list of groups that can be valuable members of your local economy ecosystem. You should consider key members and leaders of the following locally-based groups as well as locally-focused representatives of chapters of larger regional or statewide groups:

1. Business organizations, such as Chambers of Commerce, Main Street groups, AMIBA, and other “Buy Local” groups, and local industry groups in sectors that are important to your local economy.
2. Economic and business development groups such as Economic Development Councils (EDCs), Small Business Development Centers (SBDCs), and business incubators.
3. Investor groups, including local investing groups and angel (accredited-only) groups.
4. Financial institutions and independent financial professionals such as bankers, financial advisors, and accountants.
5. Educational institutions, especially those that teach entrepreneurship and business-related classes in locally-important sectors.
6. Attorneys, especially those who specialize in business and securities law.
7. Government, including executives, councilmembers, legislators, and their staff.
8. Journalists and media that can help report on local investing developments.
9. Nonprofits that are active in local investing, such as community foundations, community loan funds, and other community development financial institutions (CDFIs).
10. Sustainability groups, such as Transition Networks, that want to increase local financial self-reliance.

SBDCs, incubators, small business technical assistance programs, private business consultants, and financial professionals are extremely important members of your ecosystem. Not only do they provide valuable assistance to entrepreneurs and business owners, they are often the first to know about local investment opportunities and, as such, can make timely and appropriate connections.

Start by convening a core group of ecosystem participants who share your goals and vision around local investing. At one of your early meetings, make a list of who else might be valuable parts of your local economy ecosystem, and decide who in your group is best connected to those groups or individuals, and best placed for reaching out to them. Focus on “centers of influence,” key people who are well respected in the community and whose opinions carry weight with others. You may need to provide basic education about local investing and its benefits to the community. You may want to create a short written overview to help explain the concept and provide links or references to further information, such as this website. Talk about what you are trying to accomplish, who’s on board, and what the potential participant can do to support your mission. Be available to answer follow-up questions, and stay in touch.  Keep them posted about your progress, and try to involve them with your project as much as possible.

The following is an excerpt from “Community Investment Funds: A How-To Guide for Building Local Wealth, Equity, and Justice,” a joint project of the National Coalition for Community Capital and Solidago Foundation. The handbook can be downloaded in its entirety here. For further guidance, please refer to our Community Investment Fund Toolkit, a collection of resources for anyone who wants to develop a CIF in their community.

No single formula exists for creating a community investment fund. But in this section, we’ll walk you through the important questions that will inform your decision-making and guide you through the process of setting up a fund.

The critical areas for setting up your fund follow these three questions:

• Who’s on your team?
• What are your fund’s objectives?
• What’s your business model?

Since the first question involves putting together a team here’s a suggestion: Focus on this area first and skim the rest for now. Once your team is in place, download “Community Investment Funds: A How-To Guide for Building Local Wealth, Equity, and Justice,” and review it as a group as a team-building exercise.

1.) Who’s on your team?

Starting a local investment fund is a long-term endeavor. It takes time, planning, and a committed team of forward-thinking community builders. While the expertise, networks, and other attributes of individuals are important, team building begins with the right organizations at the table. People may come and go as their jobs and lives change, so having key anchor or springboard institutions committed to the team will ensure continuity and longevity — and potentially some seed funding.

Anchor institutions include grassroots organizing groups deeply rooted in the community, nonprofits, CDFIs, local community foundations, or other place-based entities such as hospitals, universities, or even corporations. These institutions have the resources to engage in long-term planning and can help open doors. More important, they’re often motivated to improve the long-term well-being of their communities.

You’ll want to round out your team with representatives from the following entities (some of which are anchor institutions):

• Financial institutions, such as banks/credit unions, CDFIs, loan funds, and other traditional lenders, which can impart sound business thinking to your fund
• Philanthropic institutions, such as community foundations and donor networks, which can help mobilize early capital contributions
• Major community nonprofits, such as churches, food banks, or grassroots groups, which can help to identify the top needs of the community
• State and local government agencies, which can help integrate the fund into their economic development strategies
• Health care providers (hospitals, home health care, mental health professionals, etc.) and educational institutions (universities, continuing education, entrepreneur-focused organizations), which in many communities are the largest employers

It’s important that the team reflect the community members that the fund aims to serve, and prioritize their input.

Initially your team will be all volunteer. But finding some early funding, even if just for business planning by a consultant, will be invaluable. Engaging an attorney and a finance expert can help structure the fund properly.

Keep in mind, however, that not all attorneys and finance people will be a good fit. Look for those with expertise in the field of funds who are also simpatico to the objectives of making funds community friendly. It’s common, unfortunately, for conventional legal or financial professionals to advise that community finance strategies are impossible or not advisable.

One person on your team will need to step forward as the project champion. Your leader should be committed to running things at least through launch and early fundraising efforts. The leader will act as point person for scheduling meetings, delegation to committees, finding and managing consultants, and other leadership tasks.

Other factors to consider as you build your team are the members’ personal strengths, work experience, networks, and leadership styles. There will be plenty of work to do, so a team with only leaders and without implementers could stall. Think about how to ensure that all the following attributes and roles are covered as you recruit members to your team.

 

Key Attributes	Key Roles
Visionary	Leadership
Problem solver	Marketing/Community outreach
Influencer	Finance/accounting
Doer	Logistics/operations
Bridge builder	Advisory
Barrier remover

In order to help you think about building a team, NC3 has created the CIF Team Builder Matrix, a downloadable excel spreadsheet designed to assist grassroots organizers creating a well-rounded, representative, high-performing team. You can find the Team Builder Matrix here (in addition to the other resources in the CIF Toolkit).

2.) What are your fund’s objectives?

Once you’ve assembled your team, the fun part begins. What’s your fund’s purpose? Among the questions you’ll want to answer as precisely as possible: What is your theory of change? What geographic area constitutes your community focus? What’s your economic mission? What kind of risks and rewards do you want to provide to investors?

The downloadable Investment Thesis Worksheet will help you craft a simple and straightforward statement that can and should be revisited on a regular basis.

Theory of Change

A theory of change is “a comprehensive description and illustration of how and why a desired change is expected to happen in a particular context.” It goes beyond what your fund does, and helps define how your actions will achieve your long-term goals. Figuring this out is a great team-building exercise and will help keep your priorities aligned and focused.

Geographic Focus

What are the appropriate geographic boundaries for your community investment fund? How local do you want your local fund to be? Define an area that fits well with your envisioned market of investors and businesses.

Investing in just your town may not be at a large enough scale to facilitate the fund’s financial success. But expanding the geographic range has risks and challenges too. Your region may begin to overlap with other funds that could be competitors. If you expand your region too far, you’ll be less capable of intimately knowing the businesses you’re serving, and your investors will be less capable of establishing their own relationships with the businesses.

As your team works through this step, clarify whether your geographic boundary pertains solely to your target businesses, your target investors, or both. Do you want to allow investment from residents outside your region?

Your main goal is to have a positive impact on your local community, so you need to define your geographic boundaries. But building connections with other communities is also crucial to this work.

This clip is from the webinar CIF Toolkit Launch Webinar. You can watch the full webinar here.

Economic Mission

Your economic mission will flow from your theory of change. But there are other questions to ask: Which social or economic problems are you trying to solve? What kinds of local businesses do you wish to support? Or do you prefer focusing not on businesses at all but rather on nonprofits, municipal projects, or individuals?

The answers will require an analysis of your local economy — its history, strengths, needs, barriers, and existing infrastructure. This analysis might take the form of formal research or asset mapping.

Here’s an example of an economic mission:

This clip is from the webinar CIF Toolkit Launch Webinar. You can watch the full webinar here.

Addressing Gaps

A fund’s economic mission will acknowledge the unique capital challenges facing target businesses. A common response from traditional funding sources when presented with the proposition of a community investment fund is: “There’s already plenty of money in (your region’s name here), we just need better businesses to lend to.” To which we say: it’s not a pipeline issue, it’s an access to capital issue!

Even if capital were theoretically available for every worthwhile business, which is rarely the case, it’s often not the right kind of capital. In many regions, lending resources are abundant, yet your team may determine that debt financing is not always the best form of capital for the types of businesses you want to support. You may want to fill the gap with more “equity-like” investment structures.

A final consideration regarding mission: how will it resonate with a critical mass of local investors? What issues do people care deeply about? Is gentrification driving local residents out? Might it be worthwhile to conduct some focus groups of potential local investors to find out?

Risk and Return

Balancing risk and return is a core issue for every fund — and the subject of the next set of questions. How much risk is the fund prepared to tolerate? What kind of returns are needed to attract investors? Ultimately, these decisions must be presented to the target investors: Are they prepared to lose their money, and how much money do they want to make?

A community investment fund may want to take on enough risk to serve businesses that cannot access more mainstream sources of capital, but not so much risk that business failures wipe out the fund. Balancing investor risk with the community’s values is not easy. No one knows for sure how likely it is that a given portfolio of companies will succeed or fail. Even the best research cannot predict the future. Any number of unforeseen factors can impact a company’s market, management, or prospects. To mitigate these risks, a fund should develop expertise in a particular sector, learn as much as it can about applicant companies and entrepreneurs, specialize in one or two styles of local investing, and focus on first-rate execution.

How else can you mitigate risk? A well-defined geographic community can help by making it easier to understand local market conditions, get to know local entrepreneurs, and tap into the “wisdom of the community.” You could focus on existing businesses that wish to expand, rather than startups. Or if you want to fund startups, you can provide mentoring and technical assistance as many CDFIs do. Wrap-around services like these can be valuable for growing businesses as well. Hands-on, relationship-based lending has helped keep default rates low for CDFIs, for example.

Now let’s turn to anticipated rewards. If your fund makes loans that generate a fixed interest rate of a share of revenues, and makes a reasonable assumption about the default rate, you can probably estimate likely returns. But if the fund makes equity, or equity-like, investments, the return will be very uncertain. Most of the securities your fund holds will be difficult, perhaps even impossible, to resell. For some securities, like stock, you have no idea what an eventual payout might look like until there’s an actual liquidity event — for example, if the business is sold. (It’s also possible to make equity investments that allow the entrepreneur to buy back the shares over time, eliminating the need for a sale of the company.)

Unfortunately, little data exists on the return rates of direct local investments within a particular community. This means that most of your investors must be willing to accept returns below market rates, at least at the early stages of the fund. Perhaps the smartest strategy is to promise small, and deliver big.

Here are some ways your team might consider maximizing social impact, while managing risk:

• Know your sector well enough to judge the future performance of your portfolio businesses
• Screen out exceptionally high risks, like pre-launch companies, or at least only allocate a small portion of assets to such high-risk investments
• Invest only in entrepreneurs and companies you know reasonably well
• Place clear, stringent performance standards on all clients, and develop clear plans in advance for what happens if anything goes wrong
• Provide technical assistance (or connections to technical assistance providers) to help client businesses address potential weak points and take advantage of opportunities
• Create a portfolio of local businesses that are buying and selling to one another, so that the success of each boosts the others
• Encourage your investors, especially if they include anchor institutions, to buy from the supported businesses, because as “brand ambassadors” they can increase the businesses’ chances of success

Unaccredited Investors

Whether to include unaccredited investors in your fund is an important choice. From our perspective, this is a defining feather of a community investment fund. But the inclusion of unaccredited investors in a fund presents federal compliance challenges — and operational challenges. Your fund could end up with hundreds, even thousands, of unaccredited investors rather than a few dozen accredited ones. The more people involved, the more administrative hassles, the more customers to “care for and feed,” and the more things that can go wrong.

However the suggestions and examples provided here illustrate that the inclusion of grassroots investors also brings myriad benefits. Grassroots participation can generate community excitement about local businesses, which in turn helps them — and you — recruit more investors. Small investors are usually less demanding about the rate of return and more appreciative of the community’s social return on investment than wealth investors (including those who profess to be “social impact” investors). Grassroots investors can also mitigate the risks of your businesses failing. By becoming “brand ambassadors,” who buy the products and help spread the word about portfolio companies, they become part of a virtuous circle that improves the chance of success for the businesses, which in turn improves returns to the fund.

3.) What’s Your Business Model?

Among the current examples of community investment funds, target fund amounts range from $2 million to $50 million, although most tend toward the lower end of the range. Setting a target amount for your fund will be an iterative process among your team members that answers these questions:

• How much can we reasonably expect to raise from our community?
• Is it enough to make significant change in our community?
• Are there enough investment opportunities to deploy a significant amount of the fund?
• Do we have the ability to manage the expected activity at the envisioned scale?

To answer the first question, your team can take a page from the nonprofit fundraising world. You might construct a table to estimate the number of investments you’ll need at varying amounts to reach your target. This online tool is a great example. Also, NC3’s Fund Calculator will help you pinpoint the total dollar amount you want to raise from your community.

Once the number of investors and size of the fund are generally agreed upon, evaluate the potential impact of your fund and what will be the costs to manage it. The potential impact will be determined by the size, number, and types of investments you make. For example, will you focus on startups and early-stage businesses that need launch capital in amounts of $10,000 to $100,000? These are typically more risky investments and may be best structured as equity or equity-like investments (perhaps convertible debt). Or will you focus on established businesses that are seeking growth or transition capital? These investments may be larger ($150,000 to $500,000), and could take the form of debt or royalty agreements. Or perhaps you want to do some combination of all of the above to meet the needs of your community as well as to diversify your portfolio.

Again, there’s no right answer or magic formula to follow. It really depends on your theory of change and the economic mission, as well as the business needs and investment appetites within your community. This is the stage where it may be beneficial to engage legal, financial, and tax advisors to help your team work through the details. The Operational Structure Checklist on the National Coalition for Community Capital’s website will help you identify these and other cost drivers associated with designing, launching, and managing your fund.

What’s Your Legal Structure?

This section on legal models for community investment funds will provide the information you need to decide on the best structure for your fund. Some key questions you’ll want to answer:

• Will you include unaccredited investors?
• Will you focus on certain types of businesses that carry special legal challenges, such as real estate?
• Will you be structuring investments as debt, equity, revenue share, or some combination thereof?
• How many investors do you anticipate?
• Will you be sharing profits with investors?
• What are the regulatory burdens imposed by your state?

What’s Your Operational Structure?

The final step in defining your business model is to determine the human and financial resources required to manage the fund’s day-to-day operations. This will depend greatly on the legal structure you choose, and the sized and extent of your financial goals. While it’s beyond the scope of this website to describe all the forms your operational structure could take, we offer some insights below into the legal and compliance costs that accompany various fund types. We also share some important questions your team might answer to determine your fund’s initial framework and management team.

You will need an attorney to help set up your fund and to operate compliantly. How much you need to budget for that work will vary considerably by the type of fund.

For most of the fund described in Determining the Optimal Legal Structure for Your Fund, the lion’s share of initial legal costs will go toward the selected capital-raising strategy, particularly if that strategy is a direct public offering registered with state securities regulators (or, in the case of a Regulation A offering, which allows you to raise up to $50 million from the general public, with the federal SEC).For an exempt charitable offering, these costs could be as little as $15,000 to $20,000; a direct public offering registered with a state might cost around $25,000 to $35,000 (and somewhat more for real estate funds, because of additional regulations that apply). For a Reg A offering, it could be $50,000 to $75,000 plus considerably more in notice filing fees if the offering is nationwide.

For most of these options, the ongoing compliance costs in subsequent years can be fairly minimal, perhaps a few thousand dollars annually. But for a fund that has conducted a Reg A offering, the ongoing legal costs are higher, perhaps $20,000 or more, plus the costs of an annual audit. A fully registered offering, such as for a business development company or a registered mutual fund, would likely incur $100,000 or more in annual compliance costs. A mutual fund, due to its heavily regulated nature, would also likely incur another $200,000 in annual compliance costs.

A host of other expenses will be required to start and run a fund. Another way to look at the cost of different types of funds is to consider the size at which they become cost-effective. In other words, at what scale to the fund’s revenues cover the operating costs and provide the desired return to investors? Here’s our hunch based on what we’ve seen:

• Charitable loan funds can achieve break-even at around $1 million to $2 million in portfolio size, if they’re part of an existing nonprofit such as a community foundation or a community development corporation. The fund then can use the nonprofit’s infrastructure and staff, with only incremental additional operating costs.
• A stand-alone exempt fund that hires its own staff might need to reach around $10 million in assets before it breaks even — or higher if it’s offering very-low-interest loans along with technical assistance.
• A fully registered mutual fund would likely need to have at least $20 million in assets to break even.

These, of course, are rough ballpark numbers and don’t take into account cash-flow issues or any of the peculiar challenges that arise when a fund is doing something innovative. Most of the costs of setting up a fund will be incurred before revenue comes in, which means there are special needs for start-up funding to cover the initial costs, including any operating losses until the fund breaks even.

As a business, your fund will have ongoing operational costs. These will be determined by your answer to four questions:

• Who will manage the fund?
• How will the voice of investors and community members be included in investment decisions?
• What’s the lifetime of the fund?
• What’s the level of risk you’re assuming?

The first question concerns management. Some models of community investment funds, such as a charitable loan fund or a pooled income fund, can be run within existing nonprofits. An investment club requires the active management of all member-investors. Democratically-run structures rely on member votes. Other structures may require the involvement of a registered investment advisor.

You can bring down your costs if you can hire, part-time, an existing manager associated with an established CDFI, a fund management organization, or another financial professional in your region. Some funds have partnered with CDFIs or other such experts to manage the fund. Their proven investment expertise and familiar with your community’s needs might facilitate your fund’s quick set-up and launch, and their professional credibility will build confidence with potential investors.

Regardless of whether you source management from within your community or bring in an outside expert, mission alignment will be critical. As noted earlier, you’ll need good legal counsel whose responsibilities include making your operations as transparent to the community as possible.

On the second question, the decision to include a large number of unaccredited investors increases costs of marketing, communications, and accounting, and a further decision to engage many of these people in your operations will add to the costs.

The third question focuses on fund longevity. Will you have a defined end point for investments in/out of the fund, or will it be designed to operate in perpetuity? A fund with a short lifetime will be less complicated to administer and manage, although this might hamper the fund’s ability to deliver on its mission. Balancing budget with mission is an important challenge.

The last question, on risk, also fits into the operation cost picture. Among the risks to consider:

• The fund is launched but no one invests
• The fund is launched and funded, but not enough businesses in your region seek investment
• The fund is launched, funded, and deployed, but more businesses fail than anticipated.

Use NC3’s Operational Structure Checklist to help identify the new and existing resources you may need in order to launch, manage, and maintain fund compliance. The Financial Modeling Guidelines provide an overview of the various components you’ll need to balance mission with revenue and expenses. Check out our Directory for examples of existing community investment funds. And for consultancy or other hands-on resources to help you get started, contact NC3 directly or reach out to an expert on NC3’s Technical Assistance Directory.

Local investing groups are driven by a common inspiration to put money to work for the mutual benefit of investors, the local businesses they invest in, and the community as a whole. They can be an important force in driving local economic development, effectively mobilizing millions of dollars out of traditional “Wall Street” investments and into local small businesses. The local multiplier effect of dollars being invested locally, and then spent many times over, illustrates how local investing groups can help enliven a whole community and enhance its prosperity.

The most effective groups form collaborative relationships with a wide variety of players in their local communities, including people in business, banking, economic development, nonprofits, government, media, higher education, and more. The easiest way to form a local investing group is to organize as a club or network. For those who are ready to take local investing to the next level, Community Investment Funds (CIFs) are an emerging structure to aggregate larger amounts of community capital for bigger and more long-lasting impact, and they often include some form of professional or formal management. Read more about CIFs here. 

There are two main types of local investing groups. Local investing clubs are groups of investors that pool their money and make collective investing decisions, while local investing networks are groups of people that do not pool their money and make their own independent investing decisions. Since they pool their money in what is essentially an investment partnership, investment clubs are marginally more costly and complex to manage, because they must manage and account for the club’s money, file tax returns, and deal with partnership and investment legal issues. Many local investing clubs have aspects of networks, with some members making their own separate local investments on the side, and these groups can be considered hybrids. 

Among networks, there are two different approaches to membership: members-only networks, and open networks which have defined leaders, but not defined members (for example, an open network’s “membership” could be loosely composed of everyone on an email list that attends group events). In this guide, and on this site, we refer to local investing groups to include all types: clubs, networks, and hybrids. “Peer-to-peer local lending networks” and variants on that term are other names for local investing networks that focus on making loans rather than a variety of investment types.

These groups have different features and can be helpful under different situations. We have outlined the distinctions here to help you decide which form works best for your community:

	Local investing club/Hybrids	Local investing networks
Main function	Pool money from (non-accredited) investors and make investments together	Provide information for investors and investees
Structure	Usually partnership and LLC	Nonprofit membership organization
Pool money from investors?	Yes	No
Investing decisions	Made by club	Made by investors individually
Hold private showcases	Can	Can’t
Due diligence committee	Can	Can’t
Negotiation of an investment	Can involve	Can’t involve
Relative laws	Securities Act (Membership interests in the investment club may be securities under the Securities Act of 1933); 1940 Act (An investment club may be an investment company under the Investment Company Act of 1940); Advisers Act or state law (A person who is paid for providing advice regarding the investments of the club or its members may be an investment adviser under the Investment Advisers Act of 1940 or state law)	No specific laws or regulations
Cost	Relatively more They must manage and account for the club’s money, file tax returns, and deal with partnership and investment legal issues; Have to choose a legal structure, because a brokerage account cannot be opened without a legal structure.	Relatively less Investment negotiations, legal structures, legal agreements, and all other investment and legal related documents, terms, and activities are not the responsibility of networks. They may be neither regulated nor approved by any Financial Institution.
Benefit	Have the ability to do large market transactions with lower transaction fees; Can educate amateur investors.	Exist solely to facilitate networking between local business owners and managers and interested network members. Members should consult with their own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of any investment made by them.

 

Of course, there are many challenges involved with organizing local investing groups, but this guide will address the primary ones. As with any group, a local investing group must be able to organize and govern itself, usually on a volunteer basis. Its members often organize and host community outreach events and Local Business Showcases; both are educational networking events that are intended to grow the group’s membership and facilitate connections between local investors, business people, and other community members. In order to be effective, groups and their members must maintain a good reputation and draw support and trust from many parts of the community. Finally, to a reasonable extent, the group must be able to navigate federal and state securities laws and regulations for itself, its members, and indirectly, the local businesses that work with the group.

Local investment groups have become much more common in the last decade. Slow Money, a nonprofit, has inspired the creation of local investing groups around the country that focus on food system investments. Other pioneering groups like the Local Investing Opportunities Network (LION) of East Jefferson County, WA began with a more broad focus on all types of local investments. Collectively, these groups have experimented with different models, including networks, clubs, and hybrids. They have worked hard to improve conditions for local businesses, build quality relationships within their communities, navigate the legal issues, and recruit many new local investors to their cause. As a whole, they have had considerable success at facilitating investments in local small businesses, many of which would not exist, or be thriving, without them.

Angel groups are another kind of local investing organization. They are comprised exclusively of accredited, or high net worth, investors, and they typically focus on high risk, high growth venture capital investments. Local investing groups, on the other hand, usually include unaccredited members, and they tend to make more conservative local investments, such as loans. Angel groups don’t always have a requirement to invest locally, though most prefer to do so. Some angel groups will hire professional investment managers and outsource their research process, while local investing groups don’t. It’s important to know that businesses that choose to raise money exclusively from angel groups and accredited investors generally have simpler and clearer (and therefore, less expensive) legal and regulatory requirements than businesses that choose to engage with regular, unaccredited investors. Because of this, and the simple fact that accredited investors have more investable money to begin with, angel groups are generally more attractive to businesses that fit the high growth business model that angels typically seek. However, many profitable local small businesses do not fit this model, and many business owners do not want to raise money exclusively from wealthy investors, as they see a greater value in engaging with their broader community. Local investing groups can play an important role in financing these kinds of local businesses, which is why this guide focuses on local investing groups that are not structured as accredited-only groups. Accredited-only local investing groups may wish to consult some of the extensive online accredited-only resources, such as the Angel Capital Association website.

It’s safe to say that local investing cannot happen without the participation of informed and motivated citizen investors. Approaching people to talk about money can be daunting. It can be hard to know who has money to invest, and difficult to broach the topic of investing without seeming like you are trying to sell something. One way to help with this is to introduce local investing as a part of a broader local economy initiative, like a “Buy Local, Invest Local” campaign that all kinds of citizens can engage with, not just people with wealth.

Start by reaching out to reputable, well-connected community members who share your values about supporting local small businesses and already have a track record with investing some of their money locally. Investors tend to know one another, so they can more easily recruit others to the cause. Often, the people who are most open to, and comfortable with, investing in local small businesses were successful entrepreneurs themselves. They already understand the small business environment, how to read financial statements and projections, how to evaluate management, and best of all, they may be open to mentoring the business people they invest in. These kinds of investors are also great because they can help inspire confidence in novice local investors who may not have entrepreneurial backgrounds.

Are you in a position to be a local investor? It’s far easier to “lead by example,” than it is to persuade others to do something new. Even if you can only invest small amounts, you can make a stronger argument for investing locally if you are doing it yourself, or at least starting to engage in the process. Generate some excitement, and new recruits for the cause, by organizing community outreach events to educate and attract new investors, and business showcases to connect investors with business people.

The following is an excerpt from “Community Investment Funds: A How-To Guide for Building Local Wealth, Equity, and Justice,” a joint project of the National Coalition for Community Capital and Solidago Foundation. The handbook can be downloaded in its entirety here.

Many different kinds of funds are possible under the Investment Company Act of 1940, and this section aims to provide a brief overview. A more thorough description can be found in “Community Investment Funds: A How-To Guide for Building Local Wealth, Equity, and Justice.”

Nearly 100 years of legislation and regulations determine what is and isn’t possible, as well as the likely costs and difficulties of setting up and operating a fund. While state laws matter, the field’s framework is largely set by the federal Investment Company Act of 1940 (the 1940 Act). The costs of setting up and meeting ongoing compliance burdens for funds, such as mutual funds, can be extremely high. The key to structuring a fund that can be economically operated at a community scale is to find an exemption in the 1940 Act so that it will not be subject to its heavy compliance burden. The good news is that a number of exemptions are available for communities — at least 15, in fact!

We’ll describe a few of the most commonly used models or “compliance strategies” here. A more comprehensive description of all 15 compliance strategies, along with examples (if they exist), can be found in the community investment fund handbook (CIF handbook) referenced above.

The compliance strategies described here fall into one of two categories: nonprofit funds and funds not primarily in the securities business. All of the strategies below raise community capital through some kind of public offering, which means the offering can be publicized and non-wealthy investors can participate. In addition to complying with the 1940 Act, most of the strategies below involve issuing securities to investors, which means the fund also must comply with the Securities Act of 1933. In most cases, a community investment fund will do this through a direct public offering registered with state securities regulators (or through an exempt offering for charitable funds in many states). In some cases, this could be done through a crowdfunding offering (Regulation Crowdfunind of the JOBS Act) or Regulation A.

A detailed description of these offering strategies is beyond the scope of this website, so you’ll want to discuss them with an attorney before creating a fund. Right now, as you read about the available legal options, just think about which model fits most closely with your community’s needs.

Nonprofit Funds

Let’s begin with the two types of charitable funds:

 

Charitable Loan Fund

A fund that is itself a charitable organization, where the fund is used to carry out the charity’s mission, is exempt under the 1940 Act (see 1940 Act, Section 3(c)(10)(A)(i)). Because compliance is relatively simple, this is the most common type of community investment fund: By virtue of being a charity, it is automatically exempt not only from the 1940 Act but also from registration under the Securities Act of 1933. It is also exempt from registration under the securities laws of most (although not all) states. Some states allow a charitable loan fund to be launched on a public basis with no filings with any securities regulator, while others require a simple notice filing.

But a charitable loan fund has two key limitations: First, its outgoing investments must have a charitable purpose. A fund that is serving a predominantly disadvantaged population will probably meet this requirement easily, though the purpose must be more than just sustaining the charity. The second limitation is that investors in a charitable loan fund can only make loans to the fund, and there can be no sharing of profits with investors. Charitable loan funds typically issue investment notes with a fixed interest rate. Adding a revenue or profit share component to the notes would generally be inappropriate.

Charitable Equity Fund

A lesser known variation is a fund managed by a charity that uses all the income from the investments as part of its charitable resources (see 1940 Act, Section 3(c)(10)(B)). In this case, the fund can make investments that don’t necessarily have a charitable purpose. An example of a fund that fits this model is the Pooled Income Fund (PIF).This structure has long been used as a planned giving vehicle. Contributors transfer assets to the fund, which is a trust administered by a public charity. Each contributor (or the life beneficiaries designated by the contributor) receives income for their life based on the fund’s performance. Upon the death of a life beneficiary, his or her assets are then distributed out of the trust to the charity.

The PIF is a promising vehicle for community investment because it allows anyone to participate, can invest in virtually any kind of asset, and distributes profits (but not capital gains) to its lifetime beneficiaries. The fund could take minority equity positions in local businesses, for example. While it does not allow investors to get their money back, it allows donors to do more with their money than just make a donation. It offers a tax deduction at the time of investment (measured by the actuarial value of the remainder interest that will eventually go to the charity). It also allows investors to avoid capital gains tax on the transfer of appreciated assets (but not land) into the fund. PIFs have the further advantage that their offerings are exempt from registration under federal and state securities laws, which makes them relatively easy to deploy.

Many PIFs have been established by universities, community foundations, and other charities, although they have seldom been deployed for local community investment.

Funds Not Primarily in the Securities Business

The 1940 Act was designed to regulate companies that raise capital from investors and are in the business of investing in securities. The law, however, carves out several categories of funds that are exempt because they’re not primarily in the business of investing.

 

Supplemental Fund

 

If a company is primarily in a business other than investing in securities, it will be exempt from the 1940 Act (see 1940 Act, Section 3(b)(1)). For example, if a consulting firm wants to invest in its clients, it can raise community capital to fund both the primary consulting business and the supplemental investment fund. This would work in any number of primary business models, including a business incubator, a co-working space, or a food co-op.

The courts have established a 5-prong test to determine whether a company relying on this strategy really is in a primary business other than investing:

• 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 subject to the 1940 Act.
• How it represents itself to the public: If investors are more likely to invest in the company because of the investment portfolio, investing is more likely to be considered its primary business.
• Activities of its officers and directors: Whatever the officers and directors spend most of their time doing is likely to be considered the primary business.
• Nature of its assets: The more of a company’s assets that are associated with its non-securities business, the more likely that will be considered its 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.

No single one of these factors is determinative. The SEC tends to look first at the last two factors, assets and income, as they’re the most objective. If the company’s primary business isn’t clear from those objective factors, the SEC will focus on the subjective factors, the most important of which is investors’ perceptions and motivation.

Note that the primary business could be conducted through one or more subsidiaries, but only if they are wholly-owned. The further requirement, however, is that the subsidiaries must be formed or acquired for the purpose of carrying out the business activity rather than being resold.

 

Section 3(a)(1) Holding Company or Diversified Business Fund

 

A variation on the supplemental fund is suggested in the definition of “investment company” in Section 3(a)(1) of the 1940 Act (see 1940 Act Section 3(a)(1)). An investment company is a company that is primarily in the business of investing in securities or holds investment securities valued at more than 40% of the total value of its assets (excluding government securities and cash). If a company does neither of these, it doesn’t meet the definition of an investment company under the 1940 Act and doesn’t need an exemption.

As a practical matter, this model is similar to the supplemental fund, since both rely on the company being in a primary business other than investing in securities. But in this model, that primary business could be conducted through majority-owned subsidiaries.

This model is sometimes called a diversified business fund, in recognition that since no more than 40% of its assets can comprise investment securities, it will likely have a fairly diversified portfolio of assets. It is important that the holding company’s investments be made for the purpose of entering into the subsidiary’s line of business, and with a view to selling the subsidiary for a profit.

Real life examples of Holding Company model:

• Orthogonal
• CoPeace

 

Section 3(b)(2) Holding Company

 

This variant on the holding company model is based on Section 3(b)(2) (see 1940 Act Section 3(b)(2)). Under this model, if a fund controls or holds a majority stake in a subsidiary, the subsidiary’s activities are deemed to be the activities of the fund. As with the previous model, the holding company’s investments must be made for the purpose of entering into the subsidiary’s line of business, and not with a view to selling the subsidiary for profit.

This appears to be the model used by Berkshire Hathaway — which is why Warren Buffet’s company is not regulated as a mutual fund. Berkshire Hathaway, of course, is a large publicly-traded company registered with the SEC, but the model also could work for a community-scale fund.

This type of holding company is somewhat more flexible, since its focus is not on an allocation of assets but rather on the nature of the fund’s business. If, like Berkshire Hathaway, a fund invests mostly in controlling or majority interests for the purpose of actively engaging in those businesses, it’s deemed to be in the business of whatever those subsidiary companies are doing, and not in the business of investing in the securities of its subsidiaries.

For purposes of this model, ownership of 25% of the voting securities of a target company is presumed to constitute control. A qualifying holding company need only acquire 25% of most of its target companies. However, the wording of the exemption suggests that any portfolio company that is merely controlled (and not majority owned) should be in a type of business similar to that of a majority-owned company in the fund’s portfolio.

To rely on this exemption, the company would need to get an exemptive order from the SEC. This will add to the cost and cause some uncertainty. But unlike with exemptive orders under the intrastate exemption (discussed in greater detail in Chapter Three of the CIF handbook), the SEC doesn’t appear to have the power to impose additional rules on the fund, so this is a one-time ask and a one-time cost.

Two strategies, built around either Section 3(a)(1) or Section 3(b)(2), can be used for holding companies, but with two key differences: Section 3(b)(2) requires an exemptive order from the SEC, while Section 3(a)(1) does not. And Section 3(b)(2) affords more flexibility as to the composition of the fund’s portfolio, in that it doesn’t limit investment securities to 40% of the holding company’s assets. This suggests that if a holding company can meet the 60-40 test, Section 3(a)(1) is the preferable strategy. Section 3(b)(2) should be reserved for holding companies that don’t meet that test.

Under either strategy, it may be challenging for a fund structured as a small business holding company to find suitable investment targets that are willing to give up a majority or controlling interest in their company. However, the strategy may become increasingly useful over the next decade as baby-boomer business owners retire. Traditionally, mom-and-pop business owners have trouble finding a buyer, and many such businesses simply close, which often represents a significant loss to the community. A holding company model could acquire small businesses and strengthen them, perhaps incorporating an element of worker ownership. Eventually, the holding company could spin off these businesses and could facilitate an eventual transfer of ownership to their employees or to a cooperative of employees, but as noted earlier, it is important that they be acquired with an intent to keep them and not with the intent to sell them. This would be a strategy to preserve the character of a community.

 

Real Estate Fund (or REIT)

 

The 1940 Act exempts a fund that is primarily in the business of acquiring mortgages and real estate (see 1940 Act, Section 3(c)(5)). We address it separately because of its importance. Housing and commercial properties lie at the very heart of community development, and shifting ownership of real estate is an important strategy for shifting power within a community.

A community real estate fund could be used for several different purposes:

• An urban revitalization fund could acquire blighted downtown properties, renovate them, and lease them to new tenants. This would have the effect of eliminating blight, increasing foot traffic, improving safety, and increasing sales tax revenues for the city.
• An affordable housing fund could develop housing in the “missing middle” between subsidized low-income housing and high-end “market rate” housing. In severely housing-constrained regions like California, this would meet a critical need and ease the upward pressure on housing prices.
• An agricultural land fund could acquire and hold land for agricultural uses, thus saving the land from development and thereby preserving a community’s agricultural character. This could be done alongside an agricultural land trust, which uses charitable money to acquire a preservation easement and reduces the net cost of the land to the fund. Land could be leased to farmers at affordable rates, while community investors earn a decent return.

The SEC has taken the position that this exemption strategy is available to a fund if three criteria are met:

• At least 55% of its assets consist of mortgages and interests in real estate (which appears to include holding real estate through an LLC as long as the fund is the managing member);
• Not more than 20% of its assets have no relationship to real estate; and
• The rest of the company’s assets consist of “real estate-type interests” — which includes securities issued by other real estate funds.

Even without this express exemption, a fund that’s primarily in the business of acquiring, improving, leasing, and selling real estate is probably not in the securities business, and therefore such a fund would also be exempt under Section 3(b)(1), even if some of its portfolio consists of securities investments. So a real estate fund could rely on either of these 1940 Act strategies. Of the two, the Section 3(b)(1) strategy is more ambiguous, as it depends on the analysis of what the “primary” business of the fund is. Therefore, a real estate fund that can meet the numerical criteria noted above may be better off using the express real-estate strategy.

Unfortunately, regulation crowdfunding (Reg CF, or Title III of the JOBS Act) is not available for any fund that relies on the real-estate exemption. Instead, a real estate fund that raises capital via Reg CF would need to rely on Section 3(b)(1).

When an offering for a real estate fund is registered with state regulators, there is typically an additional layer of regulation that can increase legal and compliance costs. The rules for real estate funds are more stringent, for example, if they haven’t yet identified their specific acquisition targets at the time they register the offering. For this reason, a real estate fund may want to start off with an identified property that it already owns or to which it has secured rights, perhaps through an option contract. These state rules for real estate funds, however, do not apply at the federal level. Therefore, a community real estate fund might consider raising capital via Reg CF or a Regulation A Tier 2 offering rather than a state-registered offering.

It should be noted that real estate investment trust (REIT) is a type of real estate fund. Most real estate funds are structured as partnerships or limited liability companies (LLCs), because of the tax pass-through treatment. But if a real estate fund has at least 100 equity investors and meets certain other requirements, it can convert to a REIT, which is a corporation but with some of the tax characteristics of a partnership or LLC.

Real life examples:

• Tulsa Real Estate Fund
• Northeast Investment Cooperative
• Iroquois Valley Farmland REIT

Final Thoughts

Unless you’re an attorney — and sometimes even if you are one — choosing among these options can be daunting. While most of the community investment funds we’re aware of use the charitable fund exemption, the more significant reality is that there’s too little experience with all these exemptions to know, with confidence, which will be best, easiest, and cheapest. The jury is still out. You and your team should review these options with your attorney, and choose based upon how you answered the various questions in the section on Steps to Create a Community Investment Fund. But more important, share your decision and experiences with other communities experimenting with their own funds — and with us!

So, let’s say you want to be part of a local investing group. If there is a local investing group functioning in your community already, it would be best to join forces with them, since there is usually more to be gained by working together rather than separately. If you don’t have a working group nearby, or you decide to have a different focus or structure than an existing group, or you have issues with interpersonal dynamics in an existing group, then you should explore what it takes to start a local investing group from scratch.

In an ideal startup situation, you would have these five elements present among your potential members before launching your group:

1. A core group of committed volunteer organizers that can work well together, communicate effectively, have many quality ties in the community, and can stay organized. A few groups are led by just one extremely well-connected, charismatic individual who has a cast of helpers supporting them, but most groups have a small handful of core leaders that share responsibilities and change roles every so often to prevent burnout.

2. KEY: A critical mass of local investors with investable cash who are ready and committed to putting some of their money to work with local small businesses and nonprofits.

3. A shared set of values around investing locally. Members should be motivated to support the group’s cause, and they should be able to agree on how the group will (at least initially) define “local” and what types of investments the group will be focusing on.

4. Buy-in and support from respected members of the community that may or may not be members of the group, including financial, accounting, and legal professionals, business people and business leaders, key nonprofits, and members of local government, media, and educational institutions. At the early stages, if you cannot get widespread buy-in and support, at least try for openness to the concept. Widespread skepticism should be a warning that your community is not ready to embrace local investing.

5. For at least a few members, a willingness to learn and navigate federal and state securities laws and regulations, as they apply to the group and to businesses that come to the group.

How Do Securities Laws Apply?

Regarding securities laws, there are at least two aspects of the law that every group should be aware of. First, and most importantly, you must be sure that your group does not fall under federal and state laws and regulations that cover broker-dealers. If your group does, you should either change your group’s structure and function to avoid this categorization, or if you cannot, quit now (and please tell us about it). Broker-dealers are large and well-funded business organizations that are subject to an overwhelming amount of regulatory scrutiny that local investing groups cannot afford to be sucked into. Generally speaking, broker-dealers are engaged in the business of facilitating investment transactions. As long as your group does not accept compensation for any “services” it may provide to the community, it will most likely not be considered to be in the business of facilitating investments, and therefore not subject to broker-dealer regulation. You are strongly advised to check your state laws regarding broker-dealers to ensure that your group does not fall under their regulatory umbrella. We are planning to build a public online library of relevant state laws; if you learn the legal specifics of your state, please contact us so we can add your state to the library.

The second aspect of securities laws and regulations that local investing groups should know about is how they relate to the local businesses that come to your group with investing opportunities. Since the purpose of securities law is to protect investors, the brunt of compliance, along with the potential consequences of noncompliance, falls on these businesses. However, just because the businesses are on the hook, instead of your group, does not mean that you don’t need to know about how the law affects them. Very few local small business owners and managers know about securities laws or have the time or inclination to figure them out. Therefore, local investing groups have two roles to play here: 1) Creating a process, or a pathway, for local business people to connect with members of your group that will not cause them to violate securities laws as a matter of course, and 2) Educating local business people on how to conduct themselves in order to avoid violations, as well as which legal pathways they may want to take with their investment offerings. A great way to accomplish the second job is to refer local business people to our How to Raise Money Locally course (when published). This course is also recommended for leaders of local investing groups, as it will help them better understand what businesses experience from their side of the equation, and better support them.
We focus more on how to help local entrepreneurs connect with local investors in the next guide, Organizing Business Showcases. For now, the legal basics that you need to know are that, with a few exceptions, local small businesses are not allowed to make public offerings of their investment opportunities. This means that they cannot advertise their opportunities, cannot speak publicly about them, and cannot even speak privately about them with people they do not have a pre-existing relationship with. The interpretation of this principle varies by state; this is important because generally, state securities regulators, not the federal SEC, will take the lead on local investment matters that are brought to their attention. Therefore, it’s crucial to know how your state regulators interpret what constitutes a public offering and what doesn’t – it may be published on their website, and they might be happy to tell you if you call them – and it’s definitely advisable to structure your group’s process to accommodate them. (Again, please let us know what you learn about how your state regulators approach local investing so we can share that knowledge on this site.)

The basic recommended solution to the restriction against unregistered public offerings is for businesses to avoid discussing investment-related issues with people they do not have a pre-existing relationship with. In public, and in private with people they do not already know, business people can discuss almost anything—their personal and business history, their business’ mission and values, the opportunities and challenges they have, and any other non-financial matters—but not investment-related information, including terms, amounts, financial projections, and details of previous investments they have offered. Creating the frameworks that help both investors and entrepreneurs navigate these subtle boundaries is a key role of local investing groups. Local business people should be encouraged to network extensively, meet people that are interested in supporting their business, and build relationships with them over time. Then, in private, with people they have built pre-existing relationships with, they can engage in investment-related discussions and negotiations. Aside from the potential to mobilize investment, this kind of active networking can lead to a wide variety of benefits, such as business partnerships, mentoring relationships, civic initiatives, and community collaborations.

Some securities regulators take the position that a business owner that gets to know a potential investor with the intention of eventually soliciting them for investment funds is actually making a public offering. While it may be difficult for anyone to know the real intention of a business owner, if you are operating in a state where regulators take this position, there are a few things that local investing networks should consider doing to reduce the chances that a local business person will be viewed as making a public offering when they work with the group’s members. For example, membership in your network could be open to more than just investors, more inclusive of all kinds of people that want to support your local economy, especially those that are part of your local economy ecosystem (more on that later). Similarly, your network’s name and mission could reflect the values of supporting local businesses in a variety of ways (such as supporting “buy local” campaigns, or arranging local business mentoring sessions), rather than exclusively through investing. This way, if your network sponsors community outreach events and/or business showcases, business people that participate by discussing their business and business opportunities publicly (or, on the side, privately with people they do not have a pre-existing relationship with) should be less likely to be interpreted as making a public offering. Put another way, your local investing network can potentially create a safer environment for businesses to connect and network simply by having a name, mission, membership, and focus that is truly more expansive than local investing alone. Investment clubs, on the other hand, are by their very nature dedicated to investing, and all their members are by definition investors, so the foregoing does not apply to them. The extent to which business people could be perceived by securities regulators as making public offerings when they deal with investment clubs is mostly untested and unclear, as far as we know, and would vary state to state regardless.

Creating Your Agreements

Now that we have considered those crucial legal aspects, let’s get back to the process of starting your group. Once you have assembled enough of the five recommended elements among your prospective members (volunteer organizers, committed investors, shared values, community buy-in, and a reasonable handle on the legal issues), your group is ready to proceed. Your founding members will need to have a series of meetings in person to discuss, negotiate, and ultimately agree on these things:

1. The group’s name.

2. A mission statement: Relatively short and sweet. Ideally, it should include some civic ideals, such as building relationships and helping the community thrive economically.

3. Whether the group will be a network or an investment club. If the group is a network, will it be members-only or open membership?

4. If the group will be a registered legal entity, and if so, which entity. Clubs must be legal entities, typically LLCs or General Partnerships. There is no standard approach for networks. They can choose to register as nonprofits, which involves some costs and bureaucracy, or they can avoid registration entirely, effectively operating as informal networks rather than as formal entities. Some networks are adopted by nonprofit fiscal sponsors, which allow them to receive tax-deductible donations without being registered directly. Your network can always start unregistered and register later, as needs dictate.

5. How the group will specifically define “local,” in terms of geography, ownership, and other possible factors. Consider a business that employs people locally but is owned by someone outside the area; is it local?

6. What kinds of investments the group wants to focus on. Some groups focus on food investments only, or loans only. Others, like LION, allow anything but discourage real estate mortgages because they are so capital-intensive and are perceived to have a lower local multiplier effect.

7. How the group will govern itself, including defining and filling initial leadership/operational roles, such as Events Coordinator, Membership Coordinator, and Business Outreach Coordinator. For clubs, how will the members vote on investments, and how much do they need to contribute to become members? Even networks that are led by just one person instead of a group can benefit from the perspectives and feedback of other members, perhaps in the form of an advisory group or board.

8. Members-only networks and investment clubs should create a Membership Agreement (also known as a Partnership or Operating Agreement) which is a legal document that memorializes the group’s agreements. It should be written and agreed upon by all founders, and signed by subsequent new members. Open-membership networks do not require it, but can still benefit from a similar document that includes relevant points as a “statement of principles.” Membership Agreements should integrate all of the above items, plus the following:

a) The process of becoming a member, and who is eligible.
b) The process of leaving the group, voluntarily or not.
c) The process of gathering and sharing information about business or investing opportunities.
d) How expenses will be covered and accounted for.
e) How disputes will be resolved.
f) How the Membership Agreement can be amended, or changed.
g) What should be kept confidential, if anything.
h) Waivers of liability and any securities legalese needed (i.e., “This group’s activities shall not constitute an offer to sell, or the solicitation of an offer to buy, securities or any other type of investment or financing vehicle.”)
i) For networks, a commitment by all members that they will make their own investment decisions, not hold anyone else liable for the consequences of their own decisions, and consult their own advisors if needed.
j) Any other guiding principles all members wish to agree on. Remember, any legal agreement should be reviewed by an attorney that specializes in the issues that the agreement pertains to, although it can be challenging to find attorneys that are familiar enough with securities laws and regulations.

Once everything has been decided, your founding members or leaders have all agreed to the key terms and signed the group’s Membership Agreement (if there is one), and the legal entity (if any) has been registered, congratulations! You are ready to go. If you’re an investment network, it’s time to begin spreading the word throughout your community, recruiting new members, and reaching out to businesses that may want to offer local investing opportunities. (If you’re an investment club, you’re subject to somewhat different requirements, so please read more about our Introduction on Investment Clubs and Networks and Special Considerations for Investment Clubs pages. Generally, you cannot engage in general solicitation for new members of your club.)

You might also decide to set up a social media page, a website, and/or an e-mail list for informing your community about your group’s mission and how business people, potential investors, and other interested folks can work with you. Give the local newspaper a heads-up. Contact us to add your group to our Group Directory so others on our site can find you, and let the world know you have arrived!

Note: The following discussion describes a “business showcase” strategy that predates and is not intended to take advantage of the SEC’s new Rule 148. Rule 148 provides for a type of “demo days” event that will not constitute general solicitation under the securities laws and may be an attractive alternative to the “business showcase” described here.

 

Once you have educated and inspired local investors, you need to help them connect with business owners with high-quality investing opportunities. This can happen naturally through ecosystem-related networking. For example, entrepreneurs may hear about your local investing efforts through the local Chamber of Commerce where they are members and the Chamber leadership is a part of your ecosystem.

However, to really kick-start the networking process, consider organizing business showcases, which are a fun way to bring your community together to hear presentations from specific local small businesses and to generate support and connections for them.

Business showcases bring key members of the community together to connect with entrepreneurs and business owners, to learn about the challenges and opportunities that local businesses face, and to inspire everyone to work together to support their local businesses in a variety of creative ways.

Business showcases are community gatherings that highlight specific local small businesses and entrepreneurs in order to rally technical, promotional, and financial support for them. They are fun and engaging, featuring a handful of compelling business presentations, a question-and-answer session, optional speaker(s) on local economic and community topics, and plenty of time for networking before and afterward.

Additionally, business showcases bring key members of the community together to connect with the presenters, learn about the challenges and opportunities that local businesses face, and inspire everyone to work together to support their local businesses in a variety of creative ways. After the event, private follow-up meetings can be arranged where presenters and interested attendees can continue to build relationships, and if/when appropriate, discuss investing opportunities.

Although raising investment money is a goal for many presenters, local business showcases are not “pitch competitions” where the presenters compete with each other to entice the audience to invest with them. However, in a significant policy change in November 2020, the SEC now allows business owners and entrepreneurs to speak publicly about the basics of their securities offerings at “demo days,” irrespective of attendees’ accredited statuses or preexisting relationships. (Read here for more information about demo day regulations.)

Business showcases are ideally held periodically, as a series, so that different businesses can present over time, keeping the events fresh and maintaining momentum. The events can be promoted publicly and made open to all, or they can be invitation-only events for members of local investing groups.

Organizing business showcases requires a highly functional team of volunteers to:

• tackle the logistics of recruiting, vetting, and educating potential presenters
• book a venue and arrange for food, drinks, and event infrastructure
• invite attendees and promote the event
• staff and facilitate the event itself
• help to set up the crucial follow-up meetings after the event is over

Local business showcases are organized by many local investing and local economic development groups around the country. They are also called entrepreneur showcases and “pitchfests,” they come in a variety of formats and are adapted for the needs of the local communities they take place in.  Slow Money chapters around the country have used this model extensively, but in different ways. Slow Money Northern California organizes events, including festivals and mixers which are open to the public for the cost of a ticket, to showcase a wide variety of local food-related businesses such as farms, food retailers, and value-added food producers. Slow Money Northwest hosts smaller food business showcases that are open to accredited investors only; their more conservative model is similar to accredited-only “angel pitchfests” that have been a feature of technology startup circles for many years.  Slow Money Maine convenes relatively frequent but low-key, inexpensive gatherings every couple months that are open to the public but primarily promoted to their 900+ strong e-mail list. The Local Investing Opportunities Network (LION) of East Jefferson County, WA, holds private showcases for members and their guests that have featured a wide variety of retail, construction, food, education, and entertainment businesses.

One of the best aspects of showcases is that any kind of group can organize them; even groups comprised of local businesses, like Chambers of Commerce, can do it.  Seacoast Local is a great example of a “Local First” nonprofit economic development group – as opposed to an investor group – hosting a series of entrepreneur showcases in Southeast New Hampshire that have featured local home and furniture builders, technology companies, and, of course, food businesses. Food businesses are perennial crowd favorites at showcases, without a doubt.

Getting Ready for a Business Showcase

First, assemble your organizing team and begin with a visioning session. Get on the same page about the big picture aspects of your event, starting with its intended purpose and name. Avoid investment-related themes; instead, focus on creative ways of rallying your community behind your local small businesses, with event names like “Local Small Business Rally,” “Local Business Booster Night,” or “Meet the People That Make It Happen.” Then, keeping the intended purpose of the event in mind, discuss how the event should “feel”: what kind of businesses should present, what related educational topics should be presented (if any), who should be invited/promoted to, how many people are likely to attend, what types of local venues might be appropriate, when it should take place, what costs might be involved, and how to pay for them. All of those aspects can be refined over time, but it’s essential to talk them over early in the process.

When considering promotion and attendance, your focus should be on ensuring that you get as many key people in the room together as you need to create the outcomes you desire. Desired outcomes can include community/relationship building, non-investment support for local businesses such as promotion, mentoring, and facilitating connections to helpful resources, and investments being made in local small businesses.  The people that can help make those outcomes happen are typically members of what we call your local economy ecosystem, a network of people and organizations that share your goal of supporting local small businesses and nonprofits.  They can include investors, economic development leaders, financial professionals, business people and groups, like-minded nonprofits, community organizers, and members of local government, media, and educational institutions.  With this in mind, create a list of people and groups that you would like to invite and/or promote to more broadly.  Will the event be invitation-only, or open to the public?

“…the venue selection can be a great opportunity to highlight something special and inspiring about your community… This sets the tone and the theme of people coming together to make great things happen.”

Choosing a great venue will be a big part of your event’s success.  Two primary considerations for a venue are cost and capacity.  On the cost side, it’s often possible to get a donated or a reduced rate space for nonprofit or community activities; in any case, your venue choice will depend on your group’s budget.  Regarding capacity, it’s essential to have enough space for 1) attendees to mingle comfortably and sit to watch the presentations, 2) a “stage” or presentation space for the presenter(s), MC (Master of Ceremonies; the event’s public facilitator), and projection screen (if you offer one), and 3) a space for food, drink, and any educational or promotional materials that may be offered.  Plan to have a little more space than you need, but not far too much, or the event will seem under-attended.  Beyond cost and capacity, the venue selection can be a great opportunity to highlight something special and inspiring about your community.  Examples of this could include a new or remodeled building that the community rallied to fund, or a restaurant, farm, or other business that was invested in locally and expanded, bringing in fresh energy.  This sets the tone and the theme of people coming together to make great things happen.

Next, determine a rough budget that includes an estimate of income as well as various categories of expenses.  For income, your group can sell tickets, solicit donations from sponsors (approach your ecosystem allies first), pay for the event directly, or share the expenses among your members.  On the expense side, consider the venue, food and drink, supplies such as name tags and equipment rental (Public Address [PA] microphone and speakers, optional projector for PowerPoint presentations, tables, chairs, etc.), and promotional expenses including graphic design, printing, and advertising.  One time-tested strategy is to minimize expenses by securing a free venue, donated food and drink, borrowed equipment, and volunteer staff.  Another strategy is to go for a bigger budget including a great venue, food, etc; however, you may need to consider the timing of your funding, since some expenses will have to be paid before income rolls in.  It is not recommended to charge the business presenters because the whole point is to support them, but they may wish to donate product samples and/or otherwise contribute to the event to further highlight their presence. Decide up front how your group will handle any profits or losses in the likely event that income does not precisely equal expenses.

At this point, your organizing group should be developing a good sense of what it will take to pull this off. Each person should self-select for one of the following roles, and perhaps with a bit of shuffling, your group will collectively cover all the primary areas of responsibility:

• 1. Event Logistics: Selecting & booking a venue, lining up, setting up, and managing food, drinks, supplies, equipment, tracking expenses, and generally setting up, managing, and cleaning up all aspects of the event.
• 2. Presentations: Setting criteria for presenters, recruiting, selecting & prepping the business/nonprofit presenters, lining up an MC and (optionally) other topic speakers, keeping the agenda and schedule on track during the event, and coordinating follow-up meetings with presenters afterwards. Ideally, place some people with entrepreneurship experience in this role, since they can often better support the presenters. See below for more details.
• 3. Promotion: Preparing promotional materials and distributing them over time through a variety of channels, such as an event website, email lists, social media, flyers, personal invitations, and requests for other like-minded groups and individuals (think: ecosystem) to help spread the word; selling tickets and/or soliciting donations (depending on how you are funding your showcase), and gathering RSVPs if you want to get a sense of potential attendance.

Choose a range of times and dates for the event that are at least six weeks out, or more if your group is new to the process. Be aware of holidays and other potential conflicts that might affect your audience. The organizer(s) that research and ultimately reserve the venue will need to know which dates are possible, which work best, which venues are acceptable, and a venue budget. Once the venue is booked and your date is set, promotion begins in earnest. If it is publicly advertised, create a web and social media presence for your event, and see if local newspaper(s) are interested in covering it. Get the word out and have fun doing it! One simple yet reliable way to ensure the best attendance possible: Send out one final e-mail and social media reminder to all invitees two or three days before the event, hyping it up and getting people excited to come.

 

Selecting & Preparing the Presenters

The main feature of every showcase is the local small business presenters, so it’s well worth giving plenty of time and energy to selecting, and then preparing, your presenters to give outstanding talks at your event. The first step is to write down the criteria for your presenters, which can be done by the Presentation team, or by the larger organizing team. Your criteria may include the following according to how they fit with the intention of your event:

• 1. Are the presenters local? If your group hasn’t already, decide how you want to define local, in terms of geography, ownership, and operations. Is a business local that employs many local people but is owned by someone outside of the area?
• 2. Are the presenters collectively diverse? They should represent a variety of industries, to minimize competition between presenters and keep the audience engaged. For events that focus on one sector (like Slow Money groups focus on food), line up presenters that work in a variety of areas within that sector, such as production, processing, and distribution. Your presenters could also reflect different ages, cultures, ethnicities, and backgrounds, which will help make your event more interesting.
• 3. Do the presenters reflect the values and purpose espoused by your event?
• 4. Do they have a viable business or business model? You may wish to specify that presenters should be in business for at least three years, or that entrepreneurs starting new businesses have prior business experience. You could keep one spot per showcase open for a startup with no experience, for example, but keep the other spots for more established businesses that are likely to stick around. Don’t make it your mission to save a business that’s in financial trouble unless there is a compelling community case for doing so. Avoid conducting investment research or due diligence, such as gathering and evaluating financial statements or projections. That job should be done by any potential investors for themselves.
• 5. Do they have a compelling and current business opportunity? Opportunities carry risk and uncertainty, which makes for a more exciting story. In an ideal showcase, each presenter would be in an interesting and dynamic local industry and have an opportunity to start, buy, or expand a business. Examples could include opening a new location, launching a new product, and hiring people and/or buying new equipment to scale up operations. Even if a business owner just wants to refinance their credit card debt (which is a great thing to support), they should pair that goal with some other initiative that people can rally behind, and focus on that in the presentation. Some businesses may be running a crowdfunding campaign, which could create additional excitement and possibility for their presentation. There’s also value in presenting businesses that can share significant recent accomplishments with the audience. Although they may not have new opportunities, their stories can be compelling and they can often use the community support.
• 6. Are they exciting presenters? If you put boring presenters without any personality on your showcase stage, even if the business is exciting, your event will fall flat. Be discriminating, but do try to include a variety of personality types and styles (see item #2 above).
• 7. Are they representing a nonprofit? Local nonprofits that simply want to solicit donations are not as compelling as entrepreneurs that are facing immediate risks and opportunities. Yet, some nonprofits may have exciting opportunities to share at the showcase. Certain nonprofits, such as community loan funds, may be offering investment opportunities that they can discuss publicly and which are aligned with your event’s mission. Organizers should decide if they want to feature nonprofits, and if so, establish criteria for them.
• 8. How many presenters do you want in all? You can generally feature between three and 12 presenters, which can range between five and ten minutes each. Be sure that all presentations together don’t last much longer than one hour, in order to hold the audience’s attention and leave some good energy for afterwards. Question & Answer sessions can follow each presentation (which can add significantly to each presenter’s time) or Q & A can be saved for after the final presentation.

 

The Recruiting Process

Once your criteria are established, your presentations team should begin the recruiting process. Create a flyer touting the event and its benefits for local small businesses and the community, combined with a short application form for gathering general contact information plus the additional information that’s needed to evaluate a business according to your criteria. Set a deadline of approximately four weeks before the event to stop accepting applications, and three weeks before the event to finalize your presenter lineup. This gives you time to help the presenters, who are all busy people, prepare their presentations.

A multi-pronged approach to recruiting presenters is usually best; here are some possibilities:

• 1. Create a list of ideal business presenters, and approach them in person to explain the event and encourage them to apply. Seek referrals from members of your local economy ecosystem.
• 2. Work with your promotions team, asking people to both attend the event and refer potential presenters to your group.
• 3. On your event’s website, add an invitation for presenters to apply, along with your presenter criteria and application form. Then post a link to that page on your social media channels, and encourage your whole organizing team to share and spread that link.
• 4. You can feel out potential presenters before you commit to holding the event.

As candidates come in, evaluate them on their own merits, and also consider how they fit in your whole lineup. You may wish to accept one extra presenter as a backup in case another cannot appear. Rather than “rejecting” applicants that don’t fit into your upcoming event, you could let them know they will be considered for a subsequent showcase. Instead of running your application process for just one event, it could be framed as an ongoing process in which your team is always taking applications for future events, not just the next one up.

 

Preparing the Presenters

Once you finalize your presenter lineup, you’re ready to begin helping the presenters for the event. Many groups create informational packets that convey everything that a presenter needs to know. At a minimum, you need to give each presenter the following information:

• 1. Time, date, location, schedule of the event, and when to arrive.
• 2. The format of the presentations: How long they should be, whether Q & A will follow each presentation or take place afterwards, whether a projector will be available or required for use, whether presenters are welcome or required to provide handouts for the audience, etc.
• 3. Speaking guidelines: What topics are good to speak on, and how to speak carefully about investing and financial information (see below for more details).
• 4. Ask them to be prepared to schedule a follow-up meeting with interested attendees after the event, but to not expect to make investment deals right away, and possibly not at all. Getting to know people comes first, discussing potential investments comes later, and many people do not get funded. Those that do get funded are usually very good at following up with potentially interested investors, which takes time, energy, and persistence. Feel free to refer your presenters to our Overview of Raising Money Locally guide (when published) for more information about how to navigate this process. It’s very important to set their expectations properly to avoid disappointments which can work against your showcases in the long run.

You may also wish to include additional information, such as:

• 1. Booth or table space will be available for them to interact with people and offer flyers, samples, etc.
• 2. Time and date of one or two required “dry run” practice sessions between three and ten days before the event. These sessions can be in person or by conference call. Ask presenters to be ready to give their full presentation at the session(s).
• 3. Tips or requirements for slide show presentations (e.g. PowerPoint). Good basic recommendations are to feature plenty of imagery and not too much text, and avoid reading from the presentation to the audience.

This webpage can also be a helpful resource to help them get familiar with the process. Ask them to check it out, watch the video of the Seacoast Local showcase above, etc.

It’s extremely important to educate your presenters about restrictions on speaking publicly about investing opportunities. As a general rule, businesses cannot speak publicly about any of their past, present, or future investing opportunities. Even privately, they can only discuss investment opportunities with people who self-identify as an accredited investor or someone with whom they have a significant, pre-existing relationship. Even speaking generally about their financial situation, needs, or goals, including projections of how they expect to perform in the future, could be considered a public offering of their securities unless they fall under one of a few exceptions:

• 1. An investment offering that has been registered with, and approved by, securities regulators, such as a Direct Public Offering (DPO). If a presenter has a registered DPO, complete with prospectus, you may allow them to present any information that securities regulators allow them to, which will still not include financial projections or any statements about future performance.
• 2. A relatively new exemption from registration called Rule 506(c) that allows “general solicitation,” but only verified accredited investors may invest. Unless your audience consists of accredited investors only, businesses using this exemption should be held to the same speaking guidelines as other businesses.
• 3. Advance sales (“pre-sales”) of products or services, offering nonfinancial rewards or “perks” in exchange for donations (such as in a crowdfunding campaign), or asking for donations only, is usually not considered an offering of securities, though this may vary state to state. You may allow businesses in this category to talk about their campaigns, including how they will use the money they raise, but only if they will assure you, the organizer, that they will not raise investment money for at least six months after the presentation.

If preferable, you may allow those specific exceptions if they come up. Let the presenters know that if they are asked point-blank by an audience member, or someone they do not know, about financial or investment information, they should simply say that they cannot speak publicly about it, and offer to meet privately for further discussions. All of your presenters should be educated on these guidelines, and all of them should make the same commitment to avoid speaking publicly about investment or financial information unless you have granted them a specific exception.

However, don’t just tell them what they can’t talk about! They should be encouraged to introduce themselves and their business to the audience (what their business does, who they serve, what needs they meet, what kinds of impacts they have on the community, etc.), speak about their personal history and business experience, values, ties to the community, the opportunities and challenges they face, and what kind of nonfinancial support or resources they are seeking (such as mentoring or introductions to certain people or resources).

The last step in preparing your presenters is to hold one or two practice sessions or “dry runs.” This is not required, but highly recommended to catch and fix any mistakes (presentation is too long, too short, has financial information, etc.), answer any questions the presenters may have, and generally help everyone involved to be more ready to pull off a professional, polished event. Ask presenters to be ready to give their full presentation, and if they have any slide show presentations or other visuals, ask them to submit those in advance. After the practice session, follow up with any presenters that need refinement to make sure they are on track. Gather final versions of all slide shows and compile them on one computer for projecting at the event.

In addition to selecting and preparing the business presenters, the presentation team is also responsible for selecting an emcee and, optionally, educational presenters for the event. The emcee should be someone that’s generally well-respected, comfortable interacting with crowds, and understands and supports the event’s mission and guidelines. Educational presenters, if you wish to feature them, can provide some diversity in the topics of the evening, warming up the crowd and informing people about groups, events, or opportunities they may not have heard of, including highlighting the work of your own group or the “local” movement in general. They can be given anywhere between a few minutes to 10 minutes each. Leaders of local nonprofits that your group wishes to support are great candidates for this role.

 

Pulling off a Great Event

The big day has arrived! Your logistics, presentations, and promotions teams have everything lined up. Volunteers are setting up chairs, tables, refreshments, PA system, projector, video camera for recording the event, and anything else that’s wanted or needed. Some business presenters may be setting up tables with samples, flyers, and other materials. A table is at the door where attendees can be greeted and signed in, leaving their email addresses for joining your group’s email list. People are arriving, mingling, introducing themselves, checking out the business setups, and enjoying the refreshments.

When the time comes to start, the emcee asks for everyone to be seated. He or she welcomes and thanks everyone for attending, introduces the organizing team, and previews the event itself, sharing its purpose and mission, how the schedule will unfold, and any housekeeping tips for the audience (“Where’s the bathroom?”). Then the emcee can introduce any educational speakers and pass the mic to them.

When the time comes for business presentations, the emcee informs the audience that the main part of the event has arrived, but first they need to know the ground rules:

• 1. Withhold any questions until the end of each business presentation, or the end of all the presentations, depending on what the organizers decided.
• 2. Presenters cannot speak publicly about financial or investment-related information, so please do not ask for this type of information.
• 3. Everyone is encouraged to stay after the presenters are done, mingle, introduce themselves to the presenters, and enjoy themselves.

Follow-up meetings are a very important part of the event, because they are where more substantial conversations can take place about how to support these local small businesses. Follow-up meetings will be scheduled between the presenters and anyone that would like to get to know them better and find out more about their businesses and their opportunities. Point out the sign-up sheets for each presenter, and/or let them know that they can sign up for follow-up meetings after the event via email.

Next, the emcee introduces the first presenter, and the event flows from there. You should have someone timing each presenter, someone operating the projector if there is one, and optionally, someone recording the event. Everyone else should sit back and enjoy. Soak in what you have created!

The emcee should facilitate the question-and-answer session or sessions. At times, irrelevant questions can be asked, and long-winded answers can be given. The emcee should feel free to interrupt if things get off track, and be sure to thank the audience for their questions when time is up.

When the presenters and Q & A sessions are complete, the emcee should thank everybody involved one last time and reiterate the earlier points about signing up for follow-up sessions and staying afterwards for mingling. If you have music, entertainment, or a fresh round of food and drink, this is the time to bring them out. Be sure to have your whole organizing team stay and enjoy this part. Thank your presenters personally if you get the opportunity.

Afterwards, the all-important follow-up meetings are crucial to build on the momentum your showcase created. It’s common for the organizing team to experience a drop in energy after the event, so the people in charge of organizing follow-up meetings need to save some energy for that process, which should start the day after the event. Ideally, the sign-up sheet for each entrepreneur received a number of people interested in meeting with them. Even if not, the best way to maximize participation in follow-up meetings is to give people many opportunities to sign up for them.

Slow Money Northern California (SMNC) printed postcards with each entrepreneur listed on them, and handed one out to each attendee so they could mark who they wanted to follow up with. Then, after the event, the organizers emailed a survey to all the attendees (which was simple; because they had sold tickets to the showcase through Eventbrite, an online ticket sales service, they had everyone’s email address ready to go) and asked everyone who they wanted to follow up with. SMNC also pioneered a special organizing team role they call the “Champion.” Prior to the event, each presenter would be paired with a Champion, who was a member of SMNC that had a particular interest in promoting and supporting that specific presenter. The Champions take the lead in recruiting people to join the follow-up meetings, scheduling them, and facilitating productive meetings with their presenters. Between sign-up sheets, postcards, e-mail surveys, and Champions, SMNC has been able to create great follow-up meetings and consistently positive outcomes for their presenting entrepreneurs, but that only happens because they place an extremely high priority on maximizing participation in the follow-up meetings.

The follow-up meetings can be scheduled the old-fashioned way, by proposing a list of dates and times and seeing what works for most people, or by using an Internet-based service like Doodle.com that makes that process far more efficient. The content of the meetings themselves is up to the participants, but it is a good idea to suggest that they continue where the event left off, building relationships, discussing the presenter’s business and business opportunities in greater detail, and seeing where that leads. The same restrictions against public offerings still apply when speaking publicly, or privately with unknown people; however, businesses can generally discuss financial and investment information in private with accredited investors and people with whom they have significant pre-existing relationships. Therefore, the goal of follow-up meetings is to create an environment where substantial relationships can be formed prior to investment discussions taking place. For businesses, the process of following up with interested potential investors can take a great deal of patience and persistence, and the most successful ones are usually the best at this part. Meanwhile, investors should be evaluating potential local investments using the guidelines in the section on Evaluating Local Investments.

Finally, the event organizers should solicit feedback from everyone involved: presenters, the audience, and the organizing team itself. Online surveys are highly recommended, especially for the audience. Your audience survey can also ask attendees which presenters they are interested in following up with. Organizers should work together to determine what questions they want to ask the various participants. The best questions are open-ended, inviting thoughtful, descriptive answers, rather than yes/no answers. For example, ask “What can we do to improve our showcases?” rather than “Would you attend another showcase?” Ask your most important questions first and keep the survey short, ideally so it can be completed within 3-5 minutes.

The organizing team should have one final meeting to review the survey responses, take notes on how they can improve the next showcase, and then… start planning the next one!

A Quick Review of What to Do
Here’s a review of Business Showcase Do’s and Don’ts:

 

• 1. Do NOT set your event’s title, promotion, or primary purpose to be the facilitation of local investments unless your audience will consist of accredited investors only.
• 2. Do NOT solicit businesses for payments in return for presenting at your showcase. Fund the event from donors, attendees, and/or your own group’s budget.
• 3. DO give the presenters guidelines on what they should and should not speak about.
• 4. DO set fundraising expectations appropriately for presenters, so they do not feel disappointed if they do not raise money. Highlight other benefits that are in it for them.
• 5. DO broadcast exciting email and social media reminders about the event 2-3 beforehand to maximize attendance.
• 6. DO save sufficient energy for after the showcase, when the follow-up meetings need to be scheduled and facilitated, and interested people invited to attend.

Here’s a recap of the steps to organize your own Business Showcase:

• 1. Assemble your organizing team.
• 2. Discuss and decide on the big picture aspects of the event, such as name, stated purpose, type and number of attendees, potential venues and dates, rough budget, and how the event will be paid for.
• 3. Assign event logistics, presentations, and promotions roles. Everybody gets down to work.
• 4. Event logistics researches and books the venue, lines up refreshments and equipment such as projectors and PA systems, tracks expenses, and manages the setup and cleanup of the event.
• 5. Presentations sets criteria for presenters (possibly in conjunction with the whole organizing team), creates, solicits, and evaluates applications from presenters, constructs the final lineup of presenters (including the emcee and optional educational speakers), helps the business presenters prepare by giving them guidelines, offering support, and holding one or two dry run sessions before the event, and helps arrange follow-up meetings after the event.
• 6. Promotions develops both online and traditional marketing materials such as flyers, promotes the event strategically over time, leads the charge on getting the word out person-to-person, sells event tickets and/or solicits donations, and optionally gathers RSVPs.
• 7. Enjoy your well-produced event!
• 8. Gather feedback from all participants afterwards, and repeat the process for your next showcase.

There are four core activities that high-functioning local investing groups need to be able to perform consistently. Here is the quick list, and then we will dive into greater detail on each.

1. Self-organize by holding periodic business meetings

2. Build the local economy ecosystem through community outreach

3. Expand the capital base by recruiting new members & orienting them properly

4. Connect investors and businesses by organizing business showcases & follow-up meetings

First, your group must stay in sync and make collective decisions. Email lists are good for keeping in touch about issues as they come up, but they are not a substitute for meeting regularly in person. New groups should meet in person more often, perhaps once a month, while established groups may meet a few times a year. Meetings are necessary for a variety of reasons: Members (or just the leaders) can evaluate the group’s effectiveness (especially after holding events), plan for future events, refine their processes and agreements, and rotate volunteer roles periodically. It can be helpful to have someone take notes and email them out to the whole group, to keep everyone on the same page.

Building Your Local Economy Ecosystem

Well-developed local economy ecosystems are important because local investing does not occur in a vacuum; it thrives on active networking, referrals, and mutually beneficial relationships within a community.

Second, local investing groups should put effort towards being key players in building a healthy “local economy ecosystem.” This is a term we use to describe a network of well-connected individuals and organizations that are interested in seeing local small businesses and nonprofits succeed in their community, and are motivated to help make that happen. Well-developed ecosystems are important because local investing does not occur in a vacuum; it thrives on active networking, referrals, and mutually beneficial relationships within a community. Ecosystem allies will spread the word about your local investing group and your mission to people that need to know, such as businesses and other investors, and will refer investing and networking opportunities back to your group. In addition to your group’s members, ecosystems can include members and leaders of the following locally-based groups as well as representatives of locally-focused chapters of larger regional or statewide groups:

(1) Business organizations, such as Chambers of Commerce, AMIBA, and local industry groups in sectors that your group may be focused on.
(2) Economic development groups such as Economic Development Councils (EDCs), Small Business Development Centers (SBDCs), and business incubators.
(3) Financial institutions and independent financial professionals such as bankers, financial advisors, and accountants.
(4) Educational institutions, especially those that teach entrepreneurship and business-related classes in sectors that your group may be focused on.
(5) Attorneys, especially those that specialize in business and securities law.
(6) Government, including executives, councilmembers, legislators, and their staff.
(7) Journalists and media that can help report on local investing developments.
(8) Nonprofits that are active in local investing, such as community loan funds.
(9) Sustainability groups, such as Transition Networks, that want to increase local financial self-reliance.

Note  SBDCs, incubators, and similar small business technical assistance programs, entrepreneurship courses (and those that teach them), private business consultants, and helpful financial professionals are extremely important for your ecosystem because they can help businesses that want to raise money locally with their business plans and entrepreneurship skills, leading to a greater chance of business success and, in turn, better investment outcomes and more positive community impacts.

To begin actively developing your local economy ecosystem, your group should make a list of who might be valuable parts of the ecosystem, and decide which member or members are best connected to those groups or individuals, and best placed for reaching out to them. When reaching out, the member(s) should tell the potential ecosystem participant about the group, its mission (reflecting how the group intends to help the community), prominent group members that they might know or have heard of, how the group works, and what the potential participant can do to support the group. The member(s) should answer any questions as best they can and offer themselves and other group members for follow-up, if needed. If it seems appropriate, offer to add them to your group’s email list and/or invite them to your next Business Showcase. Some of these people may join your group and become valuable members, as well. Over time, your local investing group will likely find this kind of networking to be very rewarding, and a key ingredient of success.

Recruiting New Investors

Third, your group should recruit new investors and grow its membership. This is important to help build the amount of investing capital that’s available to help finance local small businesses and nonprofits in your community. A growing group has a dynamic energy that is exciting and fun, and will attract even more potential members.

It is crucial to know that just signing up new members is not enough; they must be given an orientation by more experienced members of the group (ideally, members that have made local investments already), and the opportunity to ask lots of questions and observe the members in action at group meetings, business showcases, and follow-up meetings with entrepreneurs after showcases. New members will typically only make investments if they feel well supported, comfortable, and get to experience the benefits of local investing for themselves. Feel free to refer them to the guides on this site to help them learn the ropes.

If possible, begin your outreach efforts with reputable, well-connected investors who already share your values about supporting local small businesses and who may be more open to investing some of their money locally, even with the extra work it entails. Investors tend to know one another, so once you have a few well-respected investors on board, they can more easily recruit others to the cause. Often, the people that are most open to, and comfortable with, investing in local small businesses were successful entrepreneurs themselves. They already understand the small business environment, how to read financial statements and projections, how to evaluate management, and best of all, they may be open to mentoring the business people they invest in. These kinds of investors are also great because they can help inspire confidence in novice local investors that may not have entrepreneurial backgrounds. Reach out to local citizens that fit this profile to see if they might be willing to join your group or support your efforts.

While local investing groups can grow organically through peer-to-peer networking and referrals over time, they can grow more quickly if the group organizes effective community outreach events. However, for an investment club, doing any public recruiting of members (or recruiting potential members with whom there isn’t a substantive preexisting relationship) will violate the Investment Company Act of 1940. Therefore, the following information only applies to investor networks. These open events, which could happen annually, are intended to educate interested members of the community about the local investing group, and typically lead to a burst of new member applications and investing opportunities. The event organizers should invite potential investor members, local business people, members of the local economy ecosystem, and of course, all members of the group itself. Arrange for a member of the group to speak about the group, its mission, who its members are (have them stand up), what it has accomplished, and how people can help support the cause. This can be done with the help of a slideshow (PowerPoint or similar) presentation. Arrange for a reputable local business person that has been a recipient of a member’s local investment to stand up and speak about their experience working with local investors and what that has done for their business. Brief Q&A sessions should follow the speakers, and all of the speaking should be done within an hour at the most, so that networking and mingling can take place while the attendees have good energy.

For clubs and members-only networks, your group’s website should explain your new member process. Offer a form that potential members can fill out, sharing their contact information and other relevant information, such as who they know in the group. Most applicants will be known to at least someone in the group, since people most often join after receiving a personal recommendation to do so. Ideally, your group will have a Membership Coordinator that receives the applications and coordinates the new member process, which could include forwarding the application to a membership committee or the whole group, possibly getting a decision back, and notifying the applicant of the status of their application. Applicants that are accepted into the group will need to sign the Membership Agreement and be oriented with useful information about the group and how it works, ideally in person so they can make personal connections with the members. Group orientation sessions can be held if the group has a large number of applicants at the same time, such as may happen after a community outreach event.

Connecting Investors and Businesses

Fourth, and perhaps most importantly, the group must connect investors and businesses. A great way to create the relationships that lead to local investments is to organize periodic gatherings to showcase local businesses and nonprofits that want to connect with the community and potentially raise investment money. These events are similar to community outreach events, but the whole point is to support the presenters, who represent local small businesses and nonprofits.

The events can be open to the public; private for group members only; or private for group members and others, such as potential group members, ecosystem members, and other interested guests. However, businesses should speak carefully about their current, future, and/or past investment opportunities. Thus, the focus of a local business showcase should not necessarily be on financial information but on the businesses themselves and the people behind them: who they are, the values that matter to them, their history in the community and elsewhere, the impact they have on the local economy, and the opportunities and challenges they face within the local economy.

These events are also called “pitchfests,” but that term can be misleading, since the point is not to “pitch” investment ideas to the audience—à la Shark Tank—so much as it is to educate the community about the issues and opportunities that specific local small businesses face, and rally support and connections for them. Take a look at Organizing Business Showcases, which delves deeply into the process of creating these events.

The most crucial part of the local investing process happens after a business showcase, when follow-up meetings are arranged between business people and interested group members/potential investors. These meetings can lead to relationships being built, and if things go well, additional meetings can be arranged to discuss and negotiate investment terms, and ultimately, investments can be made. Therefore, it’s extremely important for local investing groups to support and facilitate this follow-up process, which is what leads to successful outcomes for the group. Organizers should provide sign-up sheets for each entrepreneur at the showcase where people can write down their name, e-mail address, and phone number if they want to participate in a follow-up meeting. After the showcase, a meeting can be scheduled at a time that works for the greatest number of people using a website such as Doodle.com, or the old-fashioned way of consulting everybody involved for a time that works for everyone. At this point, local investing networks should stand back and let the individual parties take it from here. Networks should not be involved in the investment research, negotiation, or decision-making process. Clubs, on the other hand, might hold private showcases, form a due diligence committee for each entrepreneur the members are interested in, and have the committee schedule a follow-up meeting with the entrepreneur. For more information on the due diligence process, please read our guide on Evaluating Local Investments.

There are other models for connecting investors with businesses that can be used in addition to, or instead of, business showcases. Some networks have a “master connector” who leads the local investing network (typically an open membership network) and personally introduces investors and business people. Much like a “matchmaking” arrangement would work, the connector arranges meetings between the parties, similar to Business Showcase follow-up meetings, which serve to introduce everyone and pave the way for relationship building and business/investment discussions. Another model, used by LION, invites business people to fill out and submit an online or paper “Business Opportunity” form to the group which shares similar information to what would typically be presented at a Business Showcase (i.e., personal and business history, the business opportunity, but no investment or financial information), plus their contact information, references, etc. These forms are e-mailed to all members, who, if they are interested in meeting with the business person, respond either directly to that person or to the group’s volunteer business opportunity coordinator, indicating their interest and availability. From there, follow-up meetings can be arranged, mirroring those that occur after a Business Showcase. Essentially, this model replaces the showcase with online “introductions,” and while it is not as entertaining and community-building as a showcase, some groups may find it to be a more efficient way to connect people than the relatively work-intensive showcases.

Finally, networks are encouraged to track the local investment activity of their members. An annual confidential survey can gather all sorts of useful information about what local investing looks like in your community, including investment size, average interest rates for loans, percent of showcase presenters that ultimately get funded, and much more. Please share any statistics you generate with us so we can track how local investing works around the country.