As the sharing economy grows, participants look for creative and collaborative ways to finance their activities. Many of the things we do require that we aggregate large sums of dollars—much more than we have in our own bank accounts. Also, because many of the productive activities we undertake require an up-front investment of resources and only yield returns on that investment months or even years later, we need investment that is “patient”—able to wait for a return until the activity invested in yields fruit.
The traditional methods of financing are almost completely inadequate to meet the needs of the sharing economy. Bank loans and investments from wealthy individuals and investment funds are very hard to get—virtually impossible for a start-up social venture or cooperative enterprise. Start-up ventures usually have to turn to credit cards, second and third mortgages, or loans from family and friends. These options can lead to bankruptcy and strains on relationships. And even these are only available to the relatively privileged. It’s incredibly unfortunate that many ventures that could create huge community benefits end up not happening due to lack of financing options.
Ideally, the diverse sources of wealth in our communities could be harnessed to fund community-based enterprises. However, the options for community-based capital raising are quite limited by state and federal securities laws and other laws that regulate finance and investing. This chapter will summarize those laws, along with a handful of creative options allowing communities to share in the financing of local ventures.
Why Is It So Hard to Raise Capital?
Is the difficulty of getting financing caused by a shortage of capital? Not at all! If you were to add up all the money that residents of your county have in banks, retirement accounts, mutual funds, and other investments, you would be amazed at how much wealth there is in your community. For example, the Employee Benefit Research Institute estimates that even in a tiny county like Trinity in California, there is over $325 million invested in retirement accounts. The problem is that virtually all of this money is invested in institutions that suck money right out of your community. For example, if I have a checking account at Bank of America, the chances that Bank of America is investing my money in my community are slim to none. If I have a 401(k) retirement plan at work, all of that money is likely invested in stocks and bonds and never touches my community.
If I woke up one morning and said “I want to move five percent of my money into my local community,” how would I do it? It is amazing when you realize that in this age of highly complicated investment vehicles, there is virtually no investment vehicle that allows you to invest in your own community. This is largely due to securities laws that make it prohibitively expensive for a small business to offer securities to community residents and to create a local investment fund that is open to the general public. Right now, under current law, the only simple way to keep your investments local is to deposit them in a bank or credit union that focuses its lending in your community. If you walked into your favorite neighborhood bookstore tomorrow and said “I would like to invest in your business,” the owner would have to turn you down or risk civil and criminal liability under state and federal securities laws.
In the sharing economy, community assets will be owned by broad cross-sections of the community. Community residents will pool resources, including money, to start new ventures. Wealth generated in our communities will stay within our communities and recirculate to create more wealth and income. Local institutions will be locally owned to ensure greater accountability to the community. What is the biggest barrier to these things happening? Securities law!
Here are some examples of things that may be illegal under state and/or federal securities law (unless extensive filings are completed):
• A group of people wants to start a car-sharing club and solicits members who must pay $100 to join the club so that the club can buy its first car.
• A farmer solicits $10 investments from her customers, promising to pay them back $12 in six months.
• A nonprofit 501(c)(3) organization sends a letter to all of its members asking for $1,000 loans to be paid back over five years with interest.
Most people have no idea that these ways of raising money are illegal.