Legalize Localization: Post-Meltdown Thoughts (Part I)
Posted on November 11, 2008
As the global financial system destroys decades' worth of Americans' savings, the relative calm and stability surrounding community-based financial institutions is striking. Locally owned banks and credit unions, which rarely got involved with predatory loans or resold their loans on global markets, are faring remarkably well. The founders of e3bank, a new ecological bank in Philadelphia, believe that they now will have an easier time raising necessary capital. The Rudolph Steiner Foundation's business loan funds, underwritten by their anthroposophy-minded investors, expect most of their client businesses – all carefully selected for their strong social and community character – to fare reasonably well.
In my last blog posting I suggested the importance of expanding the Community Reinvestment Act (CRA) from banks to all kinds of financial institutions, including bond issuers, mortgage and consumer credit companies, insurers, and mutual, pension, venture, and hedge funds. All these institutions should be required to disclose where their investments are going (to reveal how much, if any, of their capital stays local) and be incentivized to invest more locally (the CRA conditions mergers or expansion on good community performance).
Several weeks of further deterioration of my own pension funds have convinced me that CRA expansion is, ultimately, less important than a total reinvention of the U.S. financial systems. The CRA is about altering the behavior of financial institutions that are not typically locally owned – about pushing, guilt-tripping, even extorting them into slightly better behavior. What we really need is to replace these players altogether.
Microbusiness Securities
Roughly half of the U.S. economy resides in small, local businesses, and yet it's almost impossible to find an American who places any retirement or pension monies into them. Everyone, including locavores like you and me, are overinvesting in Fortune 500 companies we distrust and under-investing in local businesses we know are essential for our well being. The reason is not that small businesses are less profitable – to the contrary, sole proprietorships (the legal structure chosen by most firsts stage small businesses) are seven times more profitable than C-corporations (the structure of choice for global businesses).
What really stands in the way of local investment, frankly, are securities laws enacted during the early Jurassic period. Small investors who are "unaccredited" – a category that, according to the Securities and Exchange Commission (SEC) definitions, includes all but the richest two percent of Americans – are prohibited from placing even tiny amounts of money in small businesses. That is, unless these small businesses spend $50-100,000 on lawyers to prepare private placement memoranda or public offerings, thick documents with microscopic ALL CAPS print that no human being in the wild has ever actually been observed reading. An overhaul is long overdue.
I'd like to propose that SEC carve a new exemption to its securities registration requirements to allow unaccredited investors to make low-risk investments in locally owned microbusinesses. By local ownership, I mean that stock shares can only be bought, held, and sold by residents within a state. By low risk, I mean that no person can hold more than $100 worth of any one stock—basically a risk equivalent to the price of a nice dinner for two. By micro-businesses, I mean any business with a total stock valuation upon issuance of under $250,000.
Sure, some light regulation might make sense to prevent outright fraud, but that can be left to each state for creative experimentation. (Why should the SEC meddle in strictly in-state matters?) A microbusiness could fill in some simple forms that provided basic information about its mission, products, plans, people, and budget – nothing more complicated than the components of a business plan. The CEO and board signs off and is held liable for any misrepresentations. No expensive audits. No absurd legal filings. No restrictions on in-state sales.
Additional Legal Reforms
To this microbusiness exemption let me add a few other suggested reforms:
- Micro-Investment Funds – Let's allow small investors to pool their money (again, up to $100 per person) to invest in funds that, in turn, invest in local stock micro-businesses. (Only the rich can invest in such funds now.)
- Co-op Investment Funds – Let's allow cooperatives to set up investment funds for their members as well. (Currently, co-ops can only invest member capital in businesses they own and operate for the benefit of the cooperative itself.)
- Local Stock Exchanges – Let's allow private companies to facilitate the buying and selling of microbusiness stock electronically, like Prosper.com and Kiva.org do for microloans. (The SEC currently bans small, electronic exchanges like these from dealing with equities.)
- Pension Fund Participation – Let's allow any pension fund that places as much as five percent in local securities, either directly or through microbusiness investment funds, to meet legal standards of "fiduciary responsibility." (ERISA and other pension laws define the term now in a way that virtually demands that investments go to global companies.)
Were these reforms enacted nationally, literally trillions of investment dollars could begin to move into the local business economy. Entrepreneurs hungry for new capital – in part because of the post-meltdown unavailability of commercial credit – will restructure themselves to receive microcapital. Investors terrified about continuing to bet all their money in the global casino will be eager to invest in local businesses that they know and trust, run by local entrepreneurs with whom they can visit and at whom they can fire tough questions.
The real result will be a nation of stronger local economies, with American investors increasingly placing their money into backyard businesses rather than in the untrustworthy hands of distant speculators.
And here are two remarkable features about these ideas. First, the cost is zero. And second, most can be undertaken at the state level. Surely a country that was prepared to spend $700 billion of taxpayers' to prop up dubious nonlocal financial institutions ought to be willing to create an alternative, safer system – for free?
How a state might enact just one modest policy and unleash all these changes will be the subject of my next blog entry.
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Re: Legalize Localization: Post-Meltdown Thoughts (Part I)
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Re: Legalize Localization: Post-Meltdown Thoughts (Part I)
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Re: Legalize Localization: Post-Meltdown Thoughts (Part I)
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Re: Legalize Localization: Post-Meltdown Thoughts (Part I)
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Re: Legalize Localization: Post-Meltdown Thoughts (Part I)
Hi Michael : Our friend stephanie Mills put us back in touch. I would love to link our sites !
Re: Legalize Localization: Post-Meltdown Thoughts (Part I)
Michael: How do I get permission to re-print this article in my local newspaper? RSVP. Thanks so much! Jonathan
Re: Legalize Localization: Post-Meltdown Thoughts (Part I)
There will no no REAL change until the Fed's debt money system and fractional reserve lending rules are abolished. A system based on debt is doomed to fail as there is never enough money to pay off the interest. It's a Ponzi scheme legalized by the Federal Reserve Act of 1913. See "Money as Debt" on Google Video
http://video.google.com/videoplay?docid=-9050474362583451279
Re: Legalize Localization: Post-Meltdown Thoughts (Part I)
Great piece of writing, Michael. We've been working on a similar track, from within the financial services industry, and have created 100-Mile Investing™ as a framework to address the critical issues you've raised.
Many clients come to us frustrated with the traditional wealth building approach of institutional firms and are looking to be more engaged in the investment process. Through 100-Mile Investing™, we enable our clients to “get active” by creating tailored offerings and diversified portfolios that address risk and return as well as environmental, social and governance concerns close to home.
We start by examining public companies in the region for growth potential and good stories, for long term viability and management stability. We want to know the businesses we recommend are having a significant impact on the local economy, support charities, and invest in their communities. Where many of our clients utilize stocks and bonds in their portfolio construction, accredited investors are offered additional opportunities for social venture capital, microfinance & private debt, preferred equity, and “green” real estate partnerships. Once we establish a solid base of local investments, clients work with us to enhance these strategies through mutual funds, structured products, and commodities with a global, responsible approach.
As a place-based initiative, 100-Mile Investing™ is also designed to encourage ongoing, active participation in corporate and shareholder actions, proxy voting, support of regional economic activity, even letter writing campaigns – all with an eye toward creating strong, sustainable local economies as well as bottom-line results.
Re: Legalize Localization: Post-Meltdown Thoughts (Part I)
Michael-
Kobo Wealth has partnered with a leading independent fiduciary to create the first 401k platform that allows any employee (whose company adopts our 401k plan) to invest a prudent amount of their savings back into the local economy (the plan is only available in Hawaii at the moment). We have officially launched the plan and have signed on some local companies. The objective is to allow for greater savings and to reallocate several million dollars back into Hawaii businesses that are focused on making Hawaii self sufficient in energy and agriculture.
Re: Legalize Localization: Post-Meltdown Thoughts (Part I)
How can I get permission to submit this for publication in our local newspaper?
Re: Legalize Localization: Post-Meltdown Thoughts (Part I)
Hi Steve,
Thanks for your interest! Anyone may request permission for reprinting our blog commentaries via our Contact page or by emailing us directly at small-mart@tdc-usa.org.
Alissa Barron
Managing Editor, Small-Mart.org
Re: Legalize Localization: Post-Meltdown Thoughts (Part I)
You got it Michael!
This is the kind of "manifesto" that us micro-entrepreneurs (in this case, local food) need to rally around.
Let's make Vermont first.
I am forwarding this to our attorney who is today finishing the legal work on our LLC, the "Central Vermont Food and Farm Investors Circle".
More, more /
Onward ho!