Local Investment Groups and LIONs

A growing number of people are forming investment groups to invest in local businesses: think angel investors or microlenders with a hyper-local focus. The groups tend fall into two types: Investment Clubs and LIONs.

LIONs

The LION model was pioneered in Port Townsend, Washington in 2008, when a group of residents formalized what had been ad hoc lending to locally-owned businesses in East Jefferson County.

They called their group the Local Investing Opportunities Network, or LION for short. Since 2008, the Port Townsend LION has grown to more than 60 members, who have made more than $3 million in investments (mostly low-interest loans, but some equity as well). Today, there are now LIONs in dozens of towns and cities across the country, including Seattle, Portland, Northeast Oregon, Madison, WI, and New York.

Some defining characteristics of LIONs:

– Most LIONs are open to unaccredited investors, and rely on strong pre-existing relationships between investors and business owners to avoid triggering federal securities laws

– Local companies looking for funding typically submit an application that is screened by the group. If accepted, the company provides detailed financial documentation and presents before the group.

– LION members don’t invest as a group. Each members makes his or her own decision and negotiates terms

Fund Milwaukee, a group of “average Milwaukeeans, from all walks of life, every age group, and many different professions,” as their site explains, use a similar model, although they don’t call it a LION. Their goal is to promote “a strong, sustainable and resilient Milwaukee” through their investments.

Investment Clubs

Investment Clubs are another form of local investing group, but they invest collectively as a group. In many ways, they resemble stock market investment clubs (remember the Beardstown Ladies?) that pool money and collectively invest it. But instead of sinking that money into the stock market, this new crop of investment clubs is putting money into local businesses. Some examples include No Small Potatoes in Maine, which was established as an LLC in 2011 by residents inspired by the Slow Money movement. Members of the group make an initial contribution and chip in a smaller amount on a monthly basis.  The pooled funds are used to make small, unsecured loans to local businesses, with members sharing in the profit or loss. The collective process can get unwieldy with large groups, so most investment clubs limit the number of members.

Pros:

  • Aligned capital from your community
  • Rates and terms are likely to be more attractive than a bank loan or other capital source
  • Your investors become customers and evangelists

Cons:

  • If an investment goes awry, relationships may be at stake

Resources:

For more about local investment groups and securities law, see http://www.sec.gov/investor/pubs/invclub.htm