Changing the way real estate is financed is a key to reducing the auto-dependence of our cities. As I’ve discussed before, organizing local wealth for local benefit is critically important. Up until now, we’ve only really been able to marshal local wealth to fund development project’s debt. However, thanks to some long-awaited new rules regarding direct investment by non-accredited investors, we have a new opportunity to invest equity into development projects that improve our community.
In 2012, the Jumpstart Our Business Startups Act (JOBS Act) was signed into law, which provided for “crowd-sourced” financing of equity. The way it worked before, for an individual to buy a part of a company, that company would need to be publicly traded on a stock exchange (unless the person is fabulously wealthy, in which case they could invest their wealth in companies that are not publicly traded.) The JOBS Act was suppose to level that playing field a bit, and allows regular people to invest in non-publicly traded companies within some limits. Unfortunately, it has taken the Security and Exchange Commission more than three years to draft rules implementing this portion of the JOBS Act, but on October 30th they finally approved those rules.
This sets the stage for crowd funding for small businesses. There are already companies primed to take advantage of these new rules for funding real estate development projects, some even with a social mission. What we don’t see yet are community based companies focused on matching small business owners, including small developers, with investors right in their own community. If communities can establish their own crowd funding financial institutions, they will be able to retain and grow the community’s wealth, not just by loaning their savings to local businesses, but by buying a piece of those businesses and watching their investments grow.
For individual developers or small business owners, this also opens an opportunity to find groups of people within their community who can now invest in their projects or business. So now it will be possible to collect a few thousand dollars or less from a larger group of people to make a project happen. This has the added benefit of reducing the risk for any individual investor, because it’s much easier for ten investors to lose $10,000 each, than for one investor to lose $100,000.
Small businesses and developers should be reaching out to their patrons and friends now so they can take advantage of these new rules once they go into effect at the beginning of 2016.
This is a great opportunity for communities, or individual business owners, that take advantage of it. Combined with a community credit union, investing locally can transform the prosperity of communities. It simply takes a renewed focus on growing local wealth.