Some of our clients have, in the last few years, asked us about local investment opportunities. Some are encouraged, by Woody Tasch and the Slow Money movement, to consider investing as much as “50% of our assets within 50 miles of where we live”. Others are encouraged, by Michael Shuman and the Local Dollars Local Sense movement, to move as much of their wealth as possible “from Wall Street to Main Street”.
But in the aftermath of the Great Depression the federal government created a regulatory structure for the investment industry, designed to protect the investing public from the wide variety of scams and con artists that had preyed on the less-experienced. Among these regulations is a series of rules regarding the registration of securities for sale to the general public, and rules limiting the sale of un-registered securities to “accredited investors” — according to current rules, people with either significant wealth or significant income, who are therefore assumed to be more sophisticated in their financial dealings.
Most of the projects that local investors want to support would be un-registered securities, and most of our clients are not “accredited investors”. As a result, we have not been able to put much of their money to work in small enterprises in their own communities. Some investors have, in an effort to work around these restrictions, moved toward working with “Local Investing Opportunity Networks” or “investment clubs”, since these organizations can invest in at least some sorts of un-registered securities. Unfortunately, these are not available in all areas, or of interest to every small investor.
A recent flurry of news, though, has begun to open up some new and exciting opportunities for people interested in local investing:
- In Colorado, Governor Hickenlooper has signed a new “equity crowdfunding” law, co-sponsored by state representative (and my friend) Pete Lee. The “Colorado Crowdfunding Act” will allow Colorado’s smallest companies to raise up to $1 million by selling shares to non-accredited investors, who can each invest up to $5,000. The state’s Securities Commission must now issue some rules to tell us exactly how this might work — but the Commissioner has already come out in favor of the law, which might mean that a draft is being prepared.
- Meanwhile, in New Mexico, the Securities Division has apparently been told that it doesn’t need to wait for enabling legislation — it already has the authority to issue rules to enable similar “equity crowdfunding”. According to articles on the draft rules, New Mexico’s businesses will be able to raise up to $2.5 million, from non-accredited investors who can each invest up to $10,000. Our friends at “InvestNewMexico.US” are building out the “portal” technology that the state will probably require.
- The SEC is also proposing some Federal-level rule changes for equity crowdfunding too, three years after the “JOBS Act” required them to do so. These new rules will allow slightly larger companies to raise as much as $50 million in any given year through “simplified Regulation A” offerings. And non-accredited investors will be able to invest up to 10% of their investable net worth. The SEC has not yet put these new rules in place; they are still gathering comments.
- At the same time the SEC is considering new rules regarding who qualifies as an accredited investors, too: The “Investor Advisory Committee” has proposed allowing people who don’t meet the current asset and income requirements but do meet some “investment sophistication” test (probably by earning and maintaining a professional designation, such as the Certified Financial Planner™ designation) — or whose advisor meets the test — to qualify as an accredited investor and invest. This change would create an opportunity for advisors to help their clients invest in small, local companies — but would impose the requirement that they undertake a significant new burden of due diligence research and reporting on those companies.
Each of these new bits of legislation and regulation may, if they move forward in the ways we expect, open new doors for our clients. We don’t have a clear timeline on when any of these proposals will be completed, unfortunately. And it’s not entirely clear that we will be able to provide this type of local investment opportunity within the portfolio structures we have established for our clients currently. These investments are not for everyone, and may represent more risk than would be appropriate for some of our clients. But we’re very excited by the opportunities they represent, and we’re following the developments, carefully and closely, to see what might be possible.