The Most Revolutionary Act

Local Dollars, Local Sense

by Michael Shuman

(Post Carbon Institute, 2012)

Book Review  – Part II

Unconventional Funding Models for Small Local Businesses

Local Dollars, Local Sense is basically a compilation of interviews with US activists and small businesses who have set up successful funding models to attract small investors. It’s impossible to list all the models Shuman describes. Below are some he gives the most emphasis:

• Worker and/or consumer cooperatives – workers and/or workers and consumers pool their resources and share ownership in the local business they are starting or taking over from a prior owner.

• Pre-sales Contracts – companies generate start-up funding by lining up customers to pay in advance for their products.

• Local Investment Opportunities Networks (LIONS) – local networks deliberately cultivate relationships between business owners and potential investors (the SEC and state regulators often waive the requirement for a SCOR if the investor is a family member or “friend”).

• BIDCOs (Business Development Companies) – a type of investment club. BIDCOS aren’t required to register with the Security and Exchange Commission (SEC) but must provide managerial and technical assistance to beneficiaries as well as capitol. No Small Potatoes in Maine is an example of a BIDCO

• Low cost DPOs (Direct Public Offerings) – if the business is limited to operating within state or offers the investment opportunity without public advertising, it may qualify for exemption from registration requirements. The business owner will still need to fill out a SCOR, but a number of public interest attorneys are seeking to streamline the process by creating “fill-in-the-blank” software.

• Crowdfunding – a technique for pooling of large numbers of small contributions, usually via the Internet, for a specific project. If there is no expectation of return (except for a token gift or premium), there is no requirement to register with the SEC. Small business owners can register potential projects for crowdfunding at Kickstarter.

• Local/Regional stock exchanges – in 1985 there were approximately a dozen regional exchanges (for example the Pacific Stock Exchange and the Boston Stock Exchange). Most were bought out by either the NYSE the AMEX or the NASDEQ. However according to Shuman, Mission Markets in New York is the most promising model for what future regional exchanges will look like. Mission Markets calls itself a “private marketplace” because obtaining SEC approval to become an “exchange” (where shares are traded) would involve major bureaucratic hurdles and cost half a million dollars.

• Local Savings Pools – issues interest-free loans for a fixed period. According to Shuman, there is less risk of fraud as lenders and borrowers are more likely to know one another. Since there is no expectation of financial return, there is no requirement to register with the SEC or state regulators.

• P2P (person-to-person) lending – www.kiva.org, an international microlending (providing loans as small as $25 to third world entrepreneurs) website, is the best example. Inspired by the Grameen Bank founded in Bangladesh by Muhammad Yunis, Kiva has many imitators.

Make Revolution by Moving Your Money!

In addition to encouraging pension fund managers to take a serious look at opportunities to invest in local businesses, Shuman strongly encourages readers to check out the growing field of DIY retirement funds. As an example, he cites PENSCO, one of the largest providers of self-directed IRA in the US. There are only four types of assets a self-directed IRA’s can’t buy – collectibles, life insurance, the stock of subchapter S corporations and assets that personally benefit you or your family.

He also refers readers to the Slow Money, which features non-IRA related investment opportunities.

His concluding chapter, entitled “Investing in Yourself,” is probably the most important. He argues (based in part on tips from investment wizard Warren Buffet) that most Americans will get the optimum financial return from investing in themselves, in one or more of the following ways:

1. Paying down credit card and other debt.
2. Buying a home (but not during a real estate bubble). This will always produce a better return for your 20% deposit than a money market fund that pays 0.75% interest. If the economy crashes, you can always rent out rooms.
3. Investing in education to improve your earning potential.
4. Investing in grid-connect solar electricity generation. You will save roughly 10% of the purchase price per year in lower power bills. No bank account or stock will ever pay that rate of return.