Local Dollars, Local Sense
by Michael Shuman
(Post Carbon Institute, 2012)
Book Review
There is growing consensus among economists and anti-corporate and sustainability activists about the importance of relocalization as the centerpiece part of genuine economic and political reform. It reflects a widely held belief that any realistic solution to the economic, energy and environmental crises mankind faces will repudiate corporate globalization in favor of bioregional networks that enable people to source the majority of their food, energy and other basic needs within a 100 mile radius of their home. Thousands of cities and towns across the planet are working together in Transition Towns, Via Compesina and similar sustainability networks to op out of corporate agriculture and energy production in favor of local food and energy production schemes. The biggest obstacle they face is finding sustainable funding to support their work.
Michael Shuman’s latest book, Local Dollars, Local Sense is valuable for three different groups of readers: sustainability activists seeking to seeking financial support for small locally owned businesses; local business owners seeking start-up and expansion capital; and investors – both “accredited” and “unaccredited” (see below) – seeking to move their IRA accounts and other Wall Street holdings to safer, more profitable and more socially responsible and environmentally friendly investments.
A Dearth of Funding Options for Local Business
At present options for small businesses seeking start-up funding for organic farms, solar installation companies and similar “green” enterprises are extremely limited. A business owner has two basic choices in financing a new business. They can take out a time-limited loan at interest or they can sell shares, in essence allowing other people to become part owners and share in the profits (or losses). Even prior to the 2008 economic crisis, it was virtually impossible for small business people to find conventional bank loans. Nearly all the neighborhood banks we grew up with have been bought out by global investment banks, which have no incentive to make loans to small local businesses. The recent move by millions of Americans to move their accounts out of global banks to local banks and credit unions – which do lend to local businesses – has been a move in the right direction. Yet as Michael Shuman points out in Local Dollars, Local Sense, this is merely a drop in the bucket compared to the $30 trillion Americans have invested – most through IRAs and pension plans – in Wall Street Fortune 500 companies. Shuman makes a compelling case for moving half – $15 trillion – of that money out of Wall Street and investing it in local businesses. He also outlines a number of intriguing strategies for accomplishing this.
Shuman, member of the Post Carbon Institute, partner at Cutting Edge Capital (a firm specializing in raising capital from non-traditional funding sources) and long time relocalization advocate, presents strong evidence that local businesses provide a higher and more reliable return than the Wall Street casino, as well as providing a host of benefits for society and the environment. At the same time, unlike multinational corporations, they are accountable to the local residents who patronize them, which results in a strong incentive to be environmentally responsible, to treat workers fairly and to contribute positively to the community.
Small Business Makes Up Half of the US Economy
Although small local business makes up 50% of the American GDP, as well as providing 50% of US jobs, less than 1% of Americans’ combined savings and investments help to finance locally owned business. Most Americans still keep their short term savings (if they have any) in large multinational banks. In most cases, their only long term savings are tied up in IRA plans and pension funds. With the exception of municipal bonds, nearly all of this is invested in Fortune 500 multinational corporations – which, as most activists are aware, have no loyalty whatsoever to any community, state or country.
Legal Obstacles to Selling Shares in Local Business
As Shuman outlines in his first chapter, the main reason Americans don’t invest in local business relates to major legal obstacles to doing so. Outdated securities laws passed during the Great Depression make it extremely difficult for “unaccredited” investors – approximately 98% of Americans – to invest even small amounts in small businesses. “Accredited investor” is a term defined by the securities laws of various countries, which delineate which investors are permitted to invest in certain high risk investments, including, but not limited to seed money, limited partnerships, hedge funds, private placements, and “angel” investments. In the US, an accredited investor must have an income of $200,000 (for three years) and a net wealth of at least $1 million (excluding their residence).
A new business seeking funding from “unaccredited” investors is required to register with the SEC and state regulators. This, in turn, requires the creation of a disclosure and other legal documents at a cost of $25,000-150,000 in attorney fees. The U-7 or SCOR (Small Company Offering Registration) form alone is 39 pages, and each form must be accompanied by 14 disclosure documents (see http://www.nasaa.org/industry-resources/corporation-finance/scor-overview/)
While stressing the need to reform these archaic laws, as well as resurrecting regional stock exchanges that helped finance local business prior to the Great Depression, Shuman reports on a number of exciting investment models being tried across the US that conform to existing securities law.
Unconventional Funding Models for Small Local Businesses
Local Dollars, Local Sense is basically a compilation of interviews with US activists and small businesses which 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 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 and the stock of subchapter S corporations) and assets that personally benefit you or your family.
He also refers readers to 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:
- Paying down credit card and other debt.
- 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.
- Investing in education to improve your earning potential.
- 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.
