Can’t these businesses get investment capital in other ways?
Most businesses need access to capital for start-up and growth. Access to capital has always been a challenge for new businesses and smaller businesses. Most small businesses have minimal assets for collateral and they may already have put those assets into the business. Newer businesses don’t have the financial history to demonstrate viability for traditional loans.
Even for those businesses with strong financials, traditional banks might not be willing to make the smaller loans they may need, due to the transactions costs of these loans. If they do make these smaller loans, they are more likely to charge higher fees and interest rate for these smaller loans.
Even businesses which can get bank loans, may need a mix of capital to access those loans, including private investments.
Why is this process so complicated?
Current Security Laws favor large national and multi-national corporations and make it nearly impossible to invest in the local community. Securities Law, originally designed to protect investors, have created structures that allow large corporations to access your investments and make it nearly impossible for you to invest in local companies.
Any investment – whether a loan or an equity investment – in a local business is considered a security if the business will be paying back the money with interest. So, for example, you can donate $100 to your local coffee shop, or you can give the shop $100 and they can give you $100 back in a year, and it is not a security. But if they pay interest ($105 in a year), then it is a security and they must register with the SEC. For local companies to access your investment, they would need to pay tens of thousands of dollars in lawyer’s fees to conduct this registration, thus defeating the purpose.
OTBA has developed this Takoma Notes model, which allows you to lend the money to OTBA and OTBA lends the money to the local business. This way, the business does not need to register the loan as a security. This is why there are a few more steps in this process, than you might find when you invest in large multi-national corporations.
Is this it?
No. This is just the beginning.
Many individuals have at least some long term savings – in retirement funds, mutual funds, CD’s, stocks, bonds, etc. These funds are all invested in major Wall Street firms. So while local businesses struggle for capital, your investments are generally stuck in large corporations, with profits going somewhere other than your community.
OTBA will be issuing other Takoma Notes, and we hope this model is replicated throughout other communities. The Maryland $100 exemption is another way that businesses can borrow from local residents. Other models are being developed in communities across this country. One day we hope there will be many models that allow for residents to put a significant amount of their investments into the local economy. This can be supported by local stock exchanges and state banks. This will require many major structural and legal changes. The revolution can start today with a small shift in your investments from Wall Street to Carroll Ave.
How can I find out more about the local investment movement?
You can watch a panel discussion on the topic here:
http://www.takomaparkmd.gov/citytv/watch
Click on “Local Investing”, dated Aug 4, 2014
Check out these books:
Local Dollars, Local Sense by Michael Shuman
Locavesting by Amy Cortese
Check out these websites:
http://tpsslocalvesting.org/