A growing number of people—citizens like you—are forming local investment groups to invest in local businesses. The groups tend fall into two types: Investment Clubs and LIONs.
Local Investing Opportunities Networks (aka LIONs)
A local investing network is a type of community-based investment group: think angel investors or microlenders with a hyper-local focus. The concept 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). In recent years, other communities have adopted the LION concept and name, and today there LIONs can be found in places including Seattle, Portland, eastern Oregon, Madison, WI, and New York.
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 (for that reason, they work particularly well in small towns!).
LION members don’t invest as a group. Each members makes his or her own decisions and negotiates terms.
Local companies looking for funding submit an application that is screened by the group. If accepted, the company provides further financial documentation and presents before the group.
Investment Clubs are another form of local investing group, but rather than acting independently, members invest collectively as a group. The clubs are similar to 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, local investment clubs put the money into area businesses.
One example is 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 consensual process can get unwieldy with large groups, so most investment clubs limit the number of members.
- The level of familiarity and knowledge that comes with a local investment can provide investors with greater insight into the business
- You can share the process of vetting and due diligence
- In addition to financial returns, dividends and repayment may take the form of in-kind payment–for example, cheese from a creamery or beer from a brewery.
- That special feeling of being an owner or investor in something you love.
- Do your homework. Private investments can be risky—even the most beloved businesses sometime fail for unforeseen reasons
- The investment could potentially be lost if the business fails.
- Equity investments are likely to be illiquid and long-term in nature, with no easy way to cash out.
For detailed information on how to start a local investing group (from the horse’s mouth!) go here.
No Small Potatoes offers sample investment club documents at the bottom of their homepage.
For information on investment clubs and securities law, see http://www.sec.gov/investor/pubs/invclub.htm
Bottom line: For patient investors who are comfortable vetting investments and taking some risk