[P2P-F] Fwd: "Shared Financing of Community-Based Businesses"

Sun Jul 10 09:43:35 CEST 2011

---------- Forwarded message ----------
From: Dante-Gabryell Monson <dante.monson at gmail.com>
Date: Sun, Jul 10, 2011 at 6:56 AM
Subject: "Shared Financing of Community-Based Businesses"
To: econowmix at googlegroups.com, agile-vortex at googlegroups.com,
gssmi at googlegroups.com, sustainable_solidarity at yahoogroups.com,
hc_ecology at yahoogroups.com

http://www.shareable.net/blog/shared-financing-of-community-based-businesses
http://www.shareable.net/users/sustainable-economies-law-center

found via
http://www.facebook.com/crowdfunding.coop

ps: I imagine alternatives can be found, including one using a mutual credit
approach with credit limits guaranteed by initial investment.
See for example : http://regional-economic-communities.info/

Shared Financing of Community-Based Businesses
*
 By SELC <http://www.shareable.net/users/sustainable-economies-law-center>*
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A Kickstarter campaign to reopen the New Parkway Theater in Oakland exceeded
its goal. Photo by Fragmentary
Evidence<http://www.flickr.com/photos/fragmentaryevidence/3385066227/>
on
Flickr, used under a Creative Commons license.

 Why would someone buy $1000 worth of lattes from a coffee shop that doesn’t
exist? Either they care a lot about caffeine or they care a lot about
community. In this particular true story, it was probably both. Keep
reading, and you’ll find out how a group of coffee connoisseurs had a
financial hand in the nurturing one locally-owned alternative to
You-Know-Who-Bucks.

Businesses usually need financing to start up, operate, and grow. When small
local businesses can get this financing from community residents, everyone
wins – wealth stays local, community investors are committed to the
business’ success, and the business is more accountable to the community.

Are you ready to live in a world where community members can share in the
financing and ownership of local businesses? If so, here’s your first step:
learn a little about securities laws. And please don’t stop reading just
because I dared to utter something so arcane-sounding as “securities laws.”
Try saying it yourself a few times. Maybe even turn to a person near you and
declare: “Securities laws could not be more relevant to the creation of
awesome local economies! Why are you staring at me like that? It’s true!”

Now you are ready for Securities Law 101. You are about to learn about ways
to raise local capital within the law, ways that securities laws create
irritating barriers to community investing, and what some folks are doing to
change that.

*Money wall in Oatman, Arizona. Photo by
cobalt123<http://www.flickr.com/photos/cobalt/425231414/> on
Flickr*.

*What is a security and why does it matter?*

A security is basically any scheme in which a person invests money in an
enterprise with the expectation of receiving profits from the efforts of
others. The most well known type of security is stock in a corporation. But
lots of other things also fall within the definition, including unsecured
loans, interests in limited liability companies, agreements to pay a share
of the profits to an investor, etc. Under some states’ laws, even a
membership in a club when the member has no expectation of sharing in
profits may be considered a security.

If something falls within the definition of a security, it will be covered
by a complex set of state and federal laws and regulations that require
filings, fees, and disclosures often before even a single offering of a
security can be made.

The good news is that there are ways to raise money without falling within
the definition of a security. And, if that’s not possible, raising capital
within the securities laws can be done with a little planning and effort.

*Raising Money Without Securities*

*Donations*. A security creates an expectation that the investor will
receive a financial return. If someone gives money to a business with no
expectation of a return, securities regulations do not apply. Many
entrepreneurs (and others) are using so-called crowdfunding web sites such
as Kickstarter <http://www.kickstarter.com/>
andIndiegogo<http://www.indiegogo.com/> to
raise money for various causes. Entrepreneurs that solicit donations often
provide non-monetary rewards to donors. For example, a recent successful
raise on Kickstarter for the New Parkway Theater in Oakland (a formerly
popular theater raising money to reopen) offered the following:

Pledge $25 or more: Five free showings at the New Parkway Theater.

Pledge $50 or more: Two tickets to the theater, a pitcher of beer, a pizza,
and a RESERVED loveseat.

Pledge $100 or more: Ten free showings at the New Parkway Theater and a +1
pass to the Grand Reopening Party.

This campaign raised $56,832, exceeding their goal.

At what point might a reward be valuable enough that it could be seen as a
financial return on investment? This issue has yet to be tested, but it is
advisable to ensure that any rewards offered are valued at less than the
amount donated.

*Pre-selling*. Two entrepreneurs wanted to open a high quality,
environmentally responsible café in downtown Oakland. They got the word out
to the community about their idea. Then they sold Café Creator cards – gift
certificates for the yet-to-open café. Arguably, because the entrepreneurs
were selling gift certificates for coffee and pastries and not an investment
with a financial return, the Café Creator cards were not securities. Awaken
Café <http://www.awakencafe.com/>launched and has been a huge hit in
Oakland.

*Latte art at Awaken Café in Oakland. Photo by
shanan<http://www.flickr.com/photos/shanan/3370714571/> on
Flickr.*

*Return of principal only*. If a company promises to return nothing more
than the original investment amount without any additional dividend,
interest, or appreciation in value, the instrument being offered is probably
not a security. This is how Kiva, the popular microfinance web site, avoids
having to comply with securities laws.

*Product discounts*. Companies like Costco sell memberships in exchange for
product discounts received at the time of purchase. Another interesting
model is REI. REI is a consumer cooperative that sells memberships to its
customers. At the end of the year, REI members receive a “dividend” based on
the amount spent at REI during the year. REI takes the position that its
memberships are not securities because what members are really buying is the
right to receive discounts on the items they purchase – not at the time of
purchase like at Costco, but at the end of the year in the form of a rebate
check.

*Other Strategies Within the Securities Laws*

It can be hard to find people to invest in a business without offering any
kind of financial return. If you want to offer a financial return of any
kind, you will probably have to deal with securities laws. A detailed
description of the options is beyond the scope of this article, but it is
possible to do the following without extensive legal compliance work:

   - A private offering (no advertising) to a limited number of people
   (depending on the state, you can often have as many as 35 non-wealthy
   investors and an unlimited number of wealthy investors (at least $100
   million in net worth or $200,000 annual income)
   - An offering of cooperative memberships (this is only available in some
   states)
   - A public offering of up to $1 million to up to 500 investors (with no
   wealth requirement) after receiving approval from the state of a detailed
   disclosure document.

*Grassroots Efforts to Promote Shared Community Investing*

A group of community residents in Port Townsend, Washington, started an
organization called LION (Local Investing Opportunity
Network)<http://www.l2020.org/index.php?page=investing-opportunities>.
Taking advantage of the law in Washington which says private offerings to a
limited number of non-wealthy people are okay, LION brings together
community residents looking to invest locally with local entrepreneurs. LION
doesn’t vet the businesses or provide any of the legal documents needed to
make an investment; it simply brings the parties together in a way that is
legal under Washington securities laws. This model is spreading to other
states.Wisconsin recently set up a LION <http://lioninvesting.com/>.

*Port Townsend, WA. Photo by Kris
Taeleman<http://www.flickr.com/photos/97943624@N00> on
Flickr*.

Under California law, LION-like groups are not allowed. Under California’s
private offering rules, no offering of securities can be made without “a
relationship consisting of personal or business contacts of a nature and
duration such as would enable a reasonably prudent purchaser to be aware of
the character, business acumen, and general business and financial
circumstances of the person with whom such relationship exists.” In other
words, unlike in Washington, there must be a substantial pre-existing
relationship before any investment opportunity can be discussed.

Some local nonprofits in the Oakland, California area have created a
Community Capital Working Group – a forum where residents of the area can
strategize about how to encourage more local investing within the law.

Finally, Sustainable Economies Law Center <http://www.theselc.org/>, a
nonprofit that I co-direct with Janelle Orsi, is working on changing the
state and federal law to exempt very small investments from the securities
laws. You can read about our efforts at crowdfundinglaw.com and read our
petition here <http://www.sec.gov/rules/petitions/2010/petn4-605.pdf.>
 [PDF].

*Final Words*

It’s important to be aware of securities laws, but don't be intimidated by
them. The movement to make it easier for small businesses to raise capital
from their communities is growing. A new book called *Locavesting* was just
published and congressional hearings on the issue have been held. Get
involved and help keep community wealth local!

*This article was written by Jenny Kassan; the Intro was written by Janelle
Orsi. Jenny and Janelle are Co-Directors of the Sustainable Economies Law
Center <http://www.theselc.org/>.*
 TAGS: CROWDFUNDING <http://www.shareable.net/tag/crowdfunding>,
INDIEGOGO<http://www.shareable.net/tag/indiegogo>
, KICKSTARTER <http://www.shareable.net/tag/kickstarter>, LOCAL
BUSINESS<http://www.shareable.net/tag/local-business>
,LOCAL ECONOMY <http://www.shareable.net/tag/local-economy>,
SECURITIES<http://www.shareable.net/tag/securities>

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