Locavesting: Is Local the Future of Investing?

Author Amy Cortese coined the term locavesting in her book Locavesting: The Revolution in Local Investing and How to Profit from It. Just as locavores focus on foods grown close to home, a locavestor aims to only invest in businesses within 50 miles of his or her doorstep.

The emergence of locally focused investing is potentially good news for small businesses that are struggling for the capital needed to grow their businesses. As noted in our discussion of crowdfunding platforms like Kickstarter, the total number of loans backed by the Small Business Administration (SBA) has been dropping and the SBA has proposed new rules that could allow big businesses into the program.
 

What is Locavesting?

Could your money be put to better use by investing in a locally owned business?

First of all, let’s focus on what locavesting isn’t. Locavesting shouldn’t be confused with Kickstarter or similar crowdfunding platforms. That $25 you give to kick start a local musician’s recording project may help a new album see the light of day, but it isn’t an actual investment in that project in the traditional sense. You won’t be getting a return on your investment as an owner of that recording project.

Locavesting generally refers to actual equity investment in a business. The money that is given by a locavestor is exchanged for an ownership stake in the company receiving the money; the same way the stock exchange works. As the company grows, the investor hopes to make a return on that initial investment. For businesses that can’t attract the attention of venture capital and angel investment funds, the potential for accessing small, local investors to fund their business start-up and growth is huge.
 

Raising Capital from Individual Investors

Does being a locavestor interest you? How much of your income would you invest directly in local businesses?

It may not be widely used but any company can already raise money by exchanging ownership shares for cash. Rule 506 of Regulation D of the Federal Securities Act (the 506 D exemption) currently allows companies to sell security offerings (e.g., shares of a company) directly to individuals. This is why the shares issued via 506 D exemptions are often referred to as direct public offerings (DPOs); they are being sold directly to investors and not through a stock exchange.

So why aren’t there already tons of opportunities for people to invest locally? Fair question. In theory, a DPO should be an ideal alternative to an initial public offering (IPO). In practice, a DPO is a tricky and expensive process.
 

Direct Public Offering Hurdles

Managing a DPO under current regulations is not cheap or easy. However, there is good news on the horizon: the JOBS Act.

Managing a DPO under current regulations is expensive. It requires registration at the state and federal level, and every state has different regulations complicating the process. The DPO is then marketed via a licensed broker. That’s not cheap or easy.

Beyond the regulatory hurdle, marketing a DPO is a challenge. Your company cannot market directly to investors and, for the most part, only accredited investors are even allowed to give you money.

What makes an investor accredited? If you earn more than $200,000 a year or have a net worth over $1 million, congratulations, you’re an accredited investor! Although that’s not quite the famous 1 percent, accredited investors are still a small slice of your fellow citizens.

The bottom line is that the ability for small businesses to secure investments from individuals is extremely limited. However, there is good news on the horizon: the JOBS Act.
 

How the JOBS Act May Grow Locavesting

Imagine what a difference investing locally could make in your community.

The Jumpstart Our Business Startups (JOBS) Act was passed by Congress in April. When it is fully in place next year, businesses may be able to directly connect with potential unaccredited investors and perhaps avoid the IPO and DPO process all together.

The JOBS Act is expanding the potential for locavesting through two different avenues. The first is a loosening of the requirements for Rule 506 D offerings. The other is the creation of new, equity crowdfunded investment offerings. A tome could be written on the potential for each of these changes (and many will be), but both of these changes will enhance locavesting opportunities in two general ways.

Under the JOBS Act, more unaccredited investors will be able to take part in direct investment of companies. Companies using Rule 506 D for investments will be able to have more unaccredited investors in their investment pool. And unaccredited investors will be able to buy shares of private companies via managed, online equity crowdfunding portals to be developed under JOBS Act provisions.

Unaccredited investors will be easier to reach. As noted, under existing requirements for Rule 506 D investments, companies can't actually advertise to find investors. The SEC has recently proposed rules under the JOBS Act that will allow businesses to market and advertise their Rule 506 D offerings. As for the investment opportunities managed via equity crowdfunding portals, the requirements are to be determined but clearly these portals will create a new market for unaccredited investors merely by existing—just as traditional stock exchanges do.

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