Investing in local businesses, rather than in publicly traded corporations, is an idea generating interest globally. But until recently, that was hard to do in the U.S., thanks to federal and state laws that have impeded such investments by average citizens.
The JOBS Act, passed in 2012 and fully implemented last May, has lowered many legal obstacles to local investing through the use of crowdfunding. But, as with any brand new way of doing things, investment crowdfunding is off to a modest start. In the meantime, we might look to one innovative Canadian province for an example of policy that actively encourages local investment.
In eastern Canada, New Brunswick’s Small Business Investor Tax Credit Act (SBITC) harnesses local wealth and encourages community-rooted economic development by giving generous tax credits to residents and companies that invest in their own communities.
Under the 13-year old law, individuals receive a whopping 50% personal income tax credit for investments in approved local businesses, up to $125,000 per year (about $95,000 USD) for a $250,000 investment. (The original tax credit was set at 35%, but it was recently bumped up to 50%).
Corporations and trusts may also participate as investors, with a 15% income tax credit of up to $75,000 per year for a $500,000 investment. The tax credit can be carried forward seven years or back three years.
In 2015, the New Brunswick regulators approved 153 applications from companies and 601 investors to use the credit. The companies raised $31.2 million from eligible investors, who received a total of $15.7 million of tax credits, according to officials, who are prohibited from specifying companies or investors that have used the program.
Beyond the financial incentives, the SBITC program creates a trusted platform, lowering the psychological barrier for novice investors to move into unfamiliar territory. While the government cannot prevent the possibility of failed investments, it does assure investors their contributions are going to legitimate, local businesses and provides protection from fraud. (Indeed, one business that made use of the tax credit to raise $270,000 from 181 investors to open a second store location, Real Food Connections, recently closed down).
Tax Incentives in the US?
In the U.S., states including New Jersey, Kentucky and Michigan offer tax credits for local investments, but they only apply to angels and accredited investors. And the programs tend to target high-growth tech or life sciences companies.
“No state has yet done anything close to what New Brunswick has accomplished—incentivizing everyone to invest in all kinds of local business,” says author and local economist Michael Shuman, who advocates for the creation of similar programs in the U.S. “If nothing else, this kind of law means that investment advisers will now counsel their clients to find every promising local business opportunity they can—which amounts to a bonanza for local economic development,” he says.
In addition to providing an opportunity for citizens to invest their savings in a way that reflects their values and helps their local economy, such community investment can fill a persistent gap in funding for smaller entrepreneurs. In the latest annual survey of more than 3,000 independent business owners by the Institute for Local Self-Reliance, 30% of respondents who sought loans reported being unable to obtain one.
Building on the success of the SBITC, New Brunswick last spring authorized a new tax credit for Community Economic Development Corporations that allows pools of funds to be raised from citizens with the purpose of investing locally.
SBITC Eligibility Requirements for Businesses
New Brunswick small businesses and cooperatives from any business sector may submit an application to participate in the program, assuming they meet eligibility requirements. Some key requirements:
Registered or incorporated as a New Brunswick business. A majority of the entity’s assets are used to generate business income in the province.
Pays at least 75% of wages to New Brunswick residents. If the entity exports over 50% of goods/services, it pays at least 50% of its wages to provincial residents.
Raises a minimum of $10,000 and does so through at least three different investors
Investor Eligibility Requirements
Individual investors must be adult residents of New Brunswick and are required to invest a minimum of $1,000. Corporation or trust investors must have a permanent establishment in New Brunswick and are required to invest a minimum of $50,000. Click here for a complete list of eligibility requirements.
Do you know of similar programs that encourage local investing in small business development? If so, we’d love to hear from you!
Chelsea Eddy is the Engagement Coordinator at the American Independent Business Alliance (AMIBA), a non-profit dedicated to helping communities be more self-supporting and resilient through fostering a culture that values and supports independent businesses and local entrepreneurs.