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Peak Moment #201: Local investing made easy


pm201_200.jpgWe’re “keeping money flowing locally so we’re more prosperous as a community,” says James Frazier, co-founder of the Local Investment Opportunities Network (LION) in Port Townsend, Washington. LION is a clearinghouse between business owners like Matthew Day and potential investors like Kees Kolff. A business owner presents an investment opportunity to LION members. It’s all based on one-to-one personal relationships, so support can be more than monetary, says Kees — such as interest paid in locally-produced cheese and cider! [http://www.L2020.org/LION]

Please note: the audio file is currently not working. I am trying to get this resolved. -KS

Janaia Donaldson: Hi, welcome to Peak Moment. I'm Janaia Donaldson. I'm in Port Townsend, Washington, at a lovely establishment called the Mount Townsend Creamery. I'm here to talk to you about local investing with these guests: James Frazier, who's a financial advisor and co-founder LION, Local Investing Opportunities Network; and with Kees Kolff, who is an investor in this and other enterprises; and with Matthew Days, the co-owner of Mt. Townsend Creamery. Thank you for joining me, everybody. I want to know from you James, how LION got started, the idea behind it.

James Frazier: There is a long tradition of local investing in our county, in our town. We're a kind of an isolated rural area, not necessarily a place that Wall Street comes to visit. We learned, pretty early on, self-sufficiency in terms of funding and other areas of life. It was a natural, always has been natural, for us to support each other financially in creating our enterprises and our value. So there was an unorganized or loose network of people that had been doing that. Kees has been doing that for many, many years. A couple years ago there was a need to organize and to formalize, that grew out of a local sustainability movement [group] called Local 2020.

Janaia: What did you do to organize what was formerly ad hoc?

Kees Kolff: Under James' leadership, because he knows a lot about securities laws and things of that sort, we formed a network of potential investors and lenders who share with each other opportunities for investing. James can talk a little further about the mechanism, the way we do that. James: It's basically, at the core, just an email list. Simplest thing. We have virtually no budget — it's completely grass roots. We have a few forms that people fill out to (1) join as a member and potential investor, (2) for business people to submit investment opportunities, which we just email out to all our members for them to consider and then potentially talk further with the local business owners .

Janaia: So let me see if I understand this right. Basically, you've formalized the network of just communications. You're not doing like a bank would, to say this is a good investor or this is a good investment. You're just facilitating making the links.

Kees: We do not get advice. It's merely a clearinghouse of ideas and opportunities.

Janaia: So then it's left to you as an investor or you as a business person to present... [To Matthew] You as a business owner: how did you even know about this?

Matthew Day: Initially, we went mostly through personal relationships before LION was formed. Then, most recently, we refinanced some loans through the LION forum. What we did is we put together an overview of our business, what we were looking to do, what the refinance was about, what we were looking to achieve by that — a business case, if you will. We went and presented that to the group. From there, it segued into several conversations with interested investors, and one-on-one discussions with them about their concerns, more information they needed, and from there negotiations on what and how they were interested in participating.

Janaia: Your initial forms came through LION. You have some forms the business owner needs to address so you as an investor can get most of your questions answered. [To Kees, investor] Tell me how it was for you.

Kees: Typically when a business is looking for investors, they already have a business plan that has been reviewed by some local experts on how to set up businesses by a local accountant. So they develop a prospectus which includes the financial projects et al. And as a local investor, I look at that and I say, I know the people setting up this business, I know the accountant, I know the people who are involved. I trust them, I have faith in their expertise, and this looks like a good opportunity. Then it's entirely up to me as an individual to make that decision whether or not this is the right investment for me. Sometimes things come to the LION members and I think, I'm not particularly interested in that kind of an investment for any one of a dozen reasons. And there are other things that come and I say, Wow, that really speaks to me, I want to be involved. And the Creamery was one of them. I love cheese, I knew the people who were setting it up, and I said whoa! I want cheese. And I might add, it's a perfect example of where, not only do you know the people, but you also get this fresh produce, because the investors in the Creamery get their dividends in cheese! So I get a certain number of pounds of cheese a year as my dividend, and it's wonderful.

Janaia: Now that's a fabulous advantage for investing locally.

Kees: I can give you a couple of other examples. I'm also involved with two — one bicycle build and repair shop, and a high-end bicycle shop. Again, free care for my bicycles. I'm also involved (when I say "I", I mean my wife and I) we also support a local organic farm just outside of town called Finn River Farm. They're an absolutely fabulous farm that has a you-pick blueberries and apple orchards, and all kinds of produce, and now have a cidery. So again, part of my dividend is I get all the free blueberries that I can possibly eat. So it's a wonderful win-win all around.

Janaia: I think what's lovely about this story is the reminder is that money is just one of the forms of exchange. And as the economy tightens, as it is doing, companies like yours that have real tangible products — we can do exchanges in cheese and blueberries and other things. Going back for a second, because I have a feeling we may have skipped over some of the logistical, operational, practical things. What have we missed here, if somebody wanted to follow your footsteps?

James: One of the key things to be aware of is there's securities laws that cover investments. That happens at the federal level, and also happens in each state. Each state has its own unique laws and regulations. Generally what we do is use a non-public exemption. The key is that all of our transactions are private. What that means to use is we need to have pre-existing relationships between the business owner and the potential investors. In a small community like ours, they're usually already in place. When they're not, when we get a new member, we have an orientation, we have occasional social events, we have quarterly meetings. So a key component of LION is getting together and actually creating community on a one-to-one basis between the investors and the business owners, and in the community-at-large so they know what our mission is and what we're doing.

Janaia: So your orientation — let me make sure I understand — is for investors and potential investors, to know one another and to know about LION — is that what happens?

James: Right, so they can have the relationships that allow us to do what we're doing without having to create really onerous, long securities registration statements, and audits — it gets really crazy.

Kees: And I might say, it's open to anyone, but you have to be sponsored by someone who's a member. Again, it forces that personal connection, which is part of the requirement, you know, is that we know the people who are in this "Investment Network." Anyone can go to the website, the Local2020 website. It's L2020.org [www.L2020.org/LION] and they can look under Economic Localization and click on that. It describes LION, and it's got all the forms right there, if you want to join the network, or if you want to put a proposal and have it sent to the network.

Janaia: And if you're in a faraway community, to download those as models, maybe get guidelines from you for how you set this up, and how you organize your community. Because some communities, I can imagine, may want to adapt that, and may not have the closeness of the small community that you are here in Port Townsend. But what I hear is that you've got relationships of trust that you're building here. It may be that you [Kees] already had a relationship with Matt and the Creamery, but some new investor who's just moved to town doesn't yet, but your neighbor next door has just moved to town and you know that — it's like you're having to build that trust on what exists and what has yet to come. Other practical logistics? Go ahead.

James: We're building community, and that's the main focus here. We're using money, and our goal is to keep that money flowing locally so we're more prosperous as a community, instead of having our investors send their money out into the global financial markets for who-knows-what?

Janaia: [To Kees] You have Michael Shuman's book there, The Small-Mart Revolution. And when we spoke to Michael, he pointed out that for most retirees, for example, the largest bulk of their IRA money is going back into Wall Street instead of being local. You are working to keep it local. Can it work with IRA money, which has special conditions around it?

James: Yes. You have to do what's called a self-directed IRA. There are special custodians that can set it up. Tends to be a little more expensive than your normal IRA. But it's possible. And you can do all sorts of things with a self-directed IRA. Usually it makes sense for slightly larger investments. But that IRA money is definitely usable for local investments.

Janaia: That's good to know. What kinds of, how many different kinds of investment situations has LION facilitated, and in what time period?

James: LION has been around for a couple of years, since we formally organized. In that time we've gotten many, I would say 25 or so, investing opportunities. Maybe half been funded. Some just come and go — no one has interest, and that's just a natural kind of thing. Of the ones that have been funded, I think there's been probably about half a million dollars invested through LION. Before LION came along, we have records of another $1.1 million that people had invested. So the local investment amount that we know about is up about $1.5 million . A lot of that has already been paid back and recycled back into more local businesses.

Janaia: That's a lot of cheese [laughter]. So you're keeping that money circulating. Which is what you want in your community - to your local accountants, and schools, dentists, whatever. What kind of challenges, what kinds of hurdles, would other communities need to know about, that you've run into and can help them ease their way.

James: I think getting the word out is something that's key. Having a core group of organizers that are basically willing to volunteer their time and effort to organizing and getting the word out.

Kees: And if I could add, having somebody who's willing to take the leadership of that network. Somebody who's got some expertise and interest in this. Because James also serves as the screener. If someone sends in an application, James will look through it briefly and see — has this been taken to the level of quality and detail that is worth sending to the group? So he handles that first screening: not about Is this a good idea or a bad idea, but is there enough information here for the potential investors to be making a knowledgeable decisions?

James: The key is that I'm not providing any kind of advice. I'm not screening ideas for good or bad. Sometimes, honestly, some less-than-quality investment opportunities come through, and it's really up to our investors to make their own decision on that. So that's why we recommend that people that aren't comfortable making their own investment decisions (a) work with other local investors and talk, discuss, the merits or lack of merits of various investments. And (b) also to use their own professional advisors. Talk to your accountant, talk to your lawyer if needed. When these deals get done ultimately there should be a legal document behind it, whether it's a really simple promissory note form that you can easily download off the internet. Or if it's more complicated, because you're buying a share of the business, it's really a good idea to have the right kind of people looking over the process — tax or legal or whatnot, just to make sure it's done correctly and that there's no fall-out from the process. But you know, a lot of times we find the loan amounts are relatively small.

Janaia: Like what? Can you give me the average amount of loans?

James: The smallest we've seen go through is $10,000. Maybe we'd see $5000. But I'd say the average amount is more like $30,000 or $40,000. I've seen it get much bigger, the low hundred thousands.

Janaia: What kind of interest rate is the range at this point?

James: There's been anywhere from zero to maybe [Kees: "8.5%"] with most being between say 5-8%. It's a rate that's better for the investor, who's getting really low single digits, and it's also better for business owners who'd be paying over 10% at a bank.

Janaia: [To Matthew] I was going to ask that. If I understand right, you were refinancing some of your other loans. Tell us.

Matthew: That would have been, from our perspective, refinancing through a bank (1) would've been a lot more involved a process. But also, (2) from a loan perspective, or an interest rate perspective, we're looking at something that's probably a lot closer to 10, 11, 12% interest. We're well below that. That helps our business survive in a way that we might not be able to afford loans at those rates.

Janaia: When you sent out your application, you had a certain amount of money you probably had in mind that you hoped to attract investors for. And purposes. Did you have changes in your business plan of what you wanted to do, or just hang in here in a tough economy, your indebtedness reduced?

Matthew: When we initially started about five years ago, we raised about 65% of the funds we needed to start the business, outside of our own personal funds. That was split roughly in half between equity investment and a loan. The agreement we had with that initial lender was a term of three years. After that expired, we weren't prepared to pay the note off in full. So we needed basically to refinance that amount with other local investors. So we were able to do that plus raise a little bit more money for some infrastructure investments that we wanted to make here at the Creamery.

Kees: And I might add that there's a great working relationship between the local business and the investors. Matt and I talked, and I said, "Look, as an initial investor in the Creamery, it's in my best interest that the business succeeds. So I worked with Matt to pull together the investor group and a few new people who were part of LION, and worked with Matt to sell some more shares and to set up this loan opportunity, so it wasn't all on Matt. Because I want Matt to be making cheese. And I want my investment to be good. So there's this win-win.

Janaia: Yes, this mutual support where everybody is winning out of this.

Matthew: It's really fantastic to have ... one of the huge benefits to a business in terms of having local investors is having that kind of support from people like Kees, who are amazing proponents of local investing. And also promoting the community that goes with that, in terms of building relationships between investors and companies he's working with. Having that level of support within a community is really important for local businesses.

Kees: You asked, what are some of the hurdles, or potential problems. As Joe Dominguez and Vicki Robin say in their book Your Money or Your Life, we in America are more reluctant or more nervous about sharing money information with each other than we are about talking about sex. That's such a private thing. If you have a small community, and you are lending to people you know, it changes that whole dynamic over money. It becomes like, well he knows that I'm lending money, and/or I know that his business is having financial problems, or these kinds of these that we're typically a little nervous about. It becomes more of a community-shared knowledge, and you sort of begin to loosen up a little bit about the money issue. And I might add that in the roughly 20 investments I've been involved in since I've been in Port Townsend, I have written off one for $300 and that's all I've lost. Now, some of the investments have been delayed in paying back. Some have come and said, "Oh gee can I really borrow that money another money, even though that wasn't the initial deal?" So that initially brings up this little bit of discomfort because we're friends. But in the long run, you get used to that. You say, hey that's just part of life and sometimes things go better or go worse. So it's okay.

Janaia: But because you have those relationships, in a way I feel like it's not the kind of risks, or ... and not anonymity of Wall Street or the stock market or those things you have no control over, you have no relationship, no connection. It starts — not to be formed, perhaps, as a community-supported business, but you are a community-supported business even if it's not a cooperative, say, or structured in that way. You're still a private business.

Matthew: When you talk about accountability at that level — it's a whole other level of responsibility to the people who have helped you. We see Kees all the time, as well as other people that have invested. You can't really hide what you're doing. You don't want to. And that's a level of commitment that kind of elevates the dynamics.

Janaia: You don't want to let them down. We're at our last four minutes here. I'm going to ask Kees to pop the cork on the Finn River cider. Are there other details, advice you'd give to other communities, what haven't I remembered to ask? The elements that others who want to walk in your footsteps need to know.

James: Right. I'm currently working on a project to expand our LION website [www.L2020.org/LION]. 23:34 We have a bit of a toolkit [Local Investing Kit at http://shop.confiso.com] for other communities to take what we've done and adapt it to what their unique circumstances are. Because every community is different. LION might not necessarily work on a city scale like we do it. Instead, maybe it would work on a neighborhood scale, or just within a group of people that are peers. We're hopefully going to be getting that going soon. That is on our website.

As well, I'm starting to work with people around the country with an interest in creating these groups elsewhere. Some of these groups are coming forward and starting to help as well. There is a website created, I think it is LIONinvesting.com [http://lioninvesting.com], and that website is like a forum for LION groups to speak with each other. We're just starting to build that out. I think that it might eventually go towards a national network of groups that are doing this, and we can share ideas and information about how to do it right.

Janaia: If I understand it right, you have not had to create a formal structure for LION: you're a loose group, an association of people. Secondly, how important do you feel it is — it made me a little nervous when you said that every state has its own security laws, and it made me think about what we do in California. If people in LION investing network have already worked that out, there's one in California, then they're who I'd go to. They've done the homework for the rest of us. Do you feel it's important to have someone who's in the financial world to take the leadership you mentioned, Kees, for the local LION group?

James: I would say that it's not necessary to be in the financial world, but certainly somebody that's comfortable with money and investing in general. That really helps. But even if that isn't the case, even if you just have people that are passionate, passion and the desire to learn will go a long way. I've made myself available to help other groups, and as they get going too, I expect to be learning from them. We're working on building something that is really scalable.

Janaia: What you're creating is one of the elements for the new economy that takes out of the economy that's not working for Main Street, for the local businesses. Last word from anyone?

Kees: Well, I would add that, as you suggested, it really takes a change in our mindset about money. Where do we invest? How do we invest? Do we do it locally or on Wall Street? It just takes a little shift but it's not that huge a shift. It seems like a big shift, but I guess my message to other people is that once you get into it, it's wonderful. And it just seems like the right way to go.

Matthew: And there are opportunities everywhere. Every town has them.

Janaia: Sure. And I could see that, I would be looking at: what are the businesses I want to make sure are here for the long term, like you've done. Those that supply our food, and those that supply crucial services and so on. I want to make sure they're here for everybody for a long time. Gentlemen, thank you. This has been fabulous. I am really excited for what you are doing. I will say to our viewers, let's toast to that. Create your LION group like these guys have, and keep your community locally-reliant, and locally-resilient. You're watching Peak Moment and I'm in Port Townsend with James Frazier, Kees Kolff, and Matt Day. Join us next time.
Editorial Notes: Ed. note: I am having difficulties getting the Peak Moment audio file to work. I am hoping to resolve that soon. -KS

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