Local Investing Clubs & Networks

This guide is about local investing clubs and networks, and it is the second part of the Local Investing Resource Center’s How to Invest Locally course.  For an introduction to local investing from an investor’s perspective, and to learn key concepts that are referenced in this guide, please read the first part of our course, Overview for Local Investors.

Table of Contents:
  1. Introduction
  2. Starting a Local Investing Group
  3. Your Local Investing Group is Up & Running. Now What?
  4. Special Considerations for Investment Clubs
  5. What’s Next?
  6. Resource List

 

Introduction

Local investing groups are grassroots, volunteer-run, and driven by a common inspiration to put money to work for the mutual benefit of investors, the local businesses and nonprofits they invest in, and the community as a whole.  To support this mission, groups organize community outreach events and form collaborative relationships with a wide variety of players in their local communities, including people in business, finance, economic development, nonprofits, government, media, higher education, and more.  Local investing groups can be organized as clubs or as networks; each structure has its benefits, as we’ll outline below.

“An effective local investing group can mobilize literally millions of dollars from bank and brokerage accounts into local small businesses and nonprofits…”

Local investing groups are important because, in any given community, they are the main advocates for, and practitioners of, citizen-led local investing.  They can be an important force driving local economic development; an effective local investing group can mobilize literally millions of dollars from bank and brokerage accounts into local small businesses and nonprofits, which in turn create jobs and purchase goods and services from other local businesses.  This “local multiplier effect” of dollars being invested locally, and then spent many times over, illustrates how local investing groups can help enliven a whole community and enhance its prosperity.  Local investing groups can consist of investors only, or can allow non-investors to participate and join as members as well, potentially expanding the scope of the group’s mission to include many different ways of supporting local businesses, in addition to local investing.

There are two main types of local investing groups.  Local investing clubs are groups of investors that pool their money and make collective investing decisions, while local investing networks are groups of people that do not pool their money and make their own independent investing decisions.  Since they pool their money in what is essentially an investment partnership, investment clubs are marginally more costly and complex to manage, because they must manage and account for the club’s money, file tax returns, and deal with partnership and investment legal issues.  Many local investing clubs have aspects of networks, with some members making their own separate local investments on the side, and these groups can be considered hybrids.  Among networks, there are two different approaches to membership: members-only networks, and open networks which have defined leaders, but not defined members (for example, an open network’s “membership” could be loosely comprised of everyone on an e-mail list that attends group events).  In this guide, and on this site, we refer to local investing groups to include all types: clubs, networks, and hybrids.  “Peer-to-peer local lending networks” and variants on that term are another name for local investing networks that focus on making loans rather than a variety of investment types.

Of course, there are many challenges involved with organizing local investing groups; this guide will address the primary ones, and our Investing Locally forum is the place to seek help with any others that may arise.  As with any group, a local investing group must be able to organize and govern itself, usually on a volunteer basis.  Its members often organize and host community outreach events and Local Business Showcases; both are educational networking events that are intended to grow the group’s membership and facilitate connections between local investors, business people, and other community members.  In order to be effective, groups and their members must maintain a good reputation and draw support and trust from many parts of the community.  Finally, to a reasonable extent, the group must be able to navigate federal and state securities laws and regulations for itself, its members, and indirectly, the local businesses that work with the group.

Local investment groups have become much more common in the last decade.  Slow Money, a nonprofit, has inspired the creation of local investing groups around the country that focus on food system investments.  Other pioneering groups like the Local Investing Opportunities Network (LION) of East Jefferson County, WA began with a more broad focus on all types of local investments.  Collectively, these groups have experimented with different models, including networks, clubs, and hybrids.  They have worked hard to improve conditions for local businesses, built quality relationships within their communities, navigated the legal issues, and recruited many new local investors to their cause.  As a whole, they have had considerable success at facilitating investments in local small businesses, many of which would not exist, or be thriving, without them.  This guide is intended to make the best of their accumulated wisdom available to you.

To hear what it's like to start and operate a local investing group, watch the following video interviews with leaders of two productive and accomplished local investing groups: Judith Culver of the Whatcom Investing Network (WIN) and Deborah Stinson of LION.  They share the stories of how their groups were started and grew, the challenges they overcame, and the benefits their groups have brought to their communities.

Local Investing Interview with Judith Culver of WIN

Judith Culver Interview Details & Transcript

Local Investing Interview with Deborah Stinson of LION

Deborah Stinson Interview Details & Transcript

By way of comparison, angel groups are another kind of local investing organization.  They are comprised exclusively of accredited, or high net worth, investors, and they typically focus on high risk, high growth venture capital investments.  Local investing groups, on the other hand, usually include nonaccredited members, and they tend to make more conservative local investments, such as loans.  Angel groups don’t always have a requirement to invest locally, though most prefer to do so.  Some angel groups will hire professional investment managers and outsource their research process, while local investing groups don’t.  It’s important to know that businesses that choose to raise money exclusively from angel groups and accredited investors generally have simpler and clearer (and therefore, less expensive) legal and regulatory requirements than businesses that choose to engage with regular, nonaccredited investors.  Because of this, and the simple fact that accredited investors have more investable money to begin with, angel groups are generally more attractive to businesses that fit the high growth business model that angels typically seek.  However, many profitable local small businesses do not fit this model, and many business owners do not want to raise money exclusively from wealthy investors, as they see a greater value in engaging with their broader community.  Local investing groups can play an important role in financing these kinds of local businesses, which is why this guide focuses on local investing groups that are not structured as accredited-only groups.  Accredited-only local investing groups may wish to consult some of the extensive online accredited-only resources, such as the Angel Capital Association website.


 

Starting a Local Investing Group

So, let’s say you want to be part of a local investing group.  If there is a local investing group functioning in your community already, it would be best to join forces with them, since there is usually more to be gained by working together rather than separately.  If you don’t have a working group nearby, you decide to have a different focus or structure than an existing group, or you have issues with interpersonal dynamics in an existing group, then you should explore what it takes to start a local investing group from scratch.

The Power of GroupsIn an ideal startup situation, you would have these five elements present among your potential members before launching your group:

  1. A core group of committed volunteer organizers that can work well together, communicate effectively, have many quality ties in the community, and can stay organized.  A few groups are led by just one extremely well-connected, charismatic individual who has a cast of helpers supporting them, but most groups have a small handful of core leaders that share responsibilities and change roles every so often to prevent burnout.

  2. KEY: A critical mass of local investors with investable cash who are ready and committed to putting some of their money to work with local small businesses and nonprofits.

  3. A shared set of values around investing locally.  Members should be motivated to support the group’s cause, and they should be able to agree on how the group will (at least initially) define “local” and what types of investments the group will be focusing on.

  4. Buy-in and support from respected members of the community that may or may not be members of the group, including financial, accounting, and legal professionals, business people and business leaders, key nonprofits, and members of local government, media, and educational institutions.  At the early stages, if you cannot get widespread buy-in and support, at least try for openness to the concept.  Widespread skepticism should be a warning that your community is not ready to embrace local investing.

  5. For at least a few members, a willingness to learn and navigate federal and state securities laws and regulations, as they apply to the group and to businesses that come to the group.

How Do Securities Laws Apply?

Regarding securities laws, there are at least two aspects of the law that every group should be aware of.  First, and most importantly, you must be sure that your group does not fall under federal and state laws and regulations that cover broker-dealers.  If your group does, you should either change your group’s structure and function to avoid this categorization, or if you cannot, quit now (and please tell us about it).  Broker-dealers are large and well-funded business organizations that are subject to an overwhelming amount of regulatory scrutiny that local investing groups cannot afford to be sucked into.  Generally speaking, broker-dealers are engaged in the business of facilitating investment transactions.  As long as your group does not accept compensation for any “services” it may provide to the community, it will most likely not be considered to be in the business of facilitating investments, and therefore not subject to broker-dealer regulation.  You are strongly advised to check your state laws regarding broker-dealers to ensure that your group does not fall under their regulatory umbrella.  We are planning to build a public online library of relevant state laws; if you learn the legal specifics of your state, please contact us so we can add your state to the library.

The second aspect of securities laws and regulations that local investing groups should know about is how they relate to the local businesses that come to your group with investing opportunities.  Since the purpose of securities law is to protect investors, the brunt of compliance, along with the potential consequences of noncompliance, falls on these businesses.  However, just because the businesses are on the hook, instead of your group, does not mean that you don’t need to know about how the law affects them.  Very few local small business owners and managers know about securities laws or have the time or inclination to figure them out.  Therefore, local investing groups have two roles to play here: 1) Creating a process, or a pathway, for local business people to connect with members of your group that will not cause them to violate securities laws as a matter of course, and 2) Educating local business people on how to conduct themselves in order to avoid violations, as well as which legal pathways they may want to take with their investment offerings.  A great way to accomplish the second job is to refer local business people to our How to Raise Money Locally course (when published).  This course is also recommended for leaders of local investing groups, as it will help them better understand what businesses experience from their side of the equation, and better support them.

We focus more on how to help local entrepreneurs connect with local investors in the next guide, Organizing Business Showcases.  For now, the legal basics that you need to know are that, with a few exceptions, local small businesses are not allowed to make public offerings of their investment opportunities.  This means that they cannot advertise their opportunities, cannot speak publicly about them, and cannot even speak privately about them with people they do not have a pre-existing relationship with.  The interpretation of this principle varies by state; this is important because generally, state securities regulators, not the federal SEC, will take the lead on local investment matters that are brought to their attention.  Therefore, it’s crucial to know how your state regulators interpret what constitutes a public offering and what doesn’t – it may be published on their website, and they might be happy to tell you if you call them – and it’s definitely advisable to structure your group’s process to accommodate them.  (Again, please let us know what you learn about how your state regulators approach local investing so we can share that knowledge on this site.)

It's Worth It!The basic recommended solution to the restriction against unregistered public offerings is for businesses to avoid discussing investment-related issues with people they do not have a pre-existing relationship with.  In public, and in private with people they do not already know, business people can discuss almost anything—their personal and business history, their business’ mission and values, the opportunities and challenges they have, and any other non-financial matters—but not investment-related information, including terms, amounts, financial projections, and details of previous investments they have offered.  Creating the frameworks that help both investors and entrepreneurs navigate these subtle boundaries is a key role of local investing groups.  Local business people should be encouraged to network extensively, meet people that are interested in supporting their business, and build relationships with them over time.  Then, in private, with people they have built pre-existing relationships with, they can engage in investment-related discussions and negotiations.  Aside from the potential to mobilize investment, this kind of active networking can lead to a wide variety of benefits, such as business partnerships, mentoring relationships, civic initiatives, and community collaborations.

Some securities regulators take the position that a business owner that gets to know a potential investor with the intention of eventually soliciting them for investment funds is actually making a public offering.  While it may be difficult for anyone to know the real intention of a business owner, if you are operating in a state where regulators take this position, there are a few things that local investing networks should consider doing to reduce the chances that a local business person will be viewed as making a public offering when they work with the group’s members.  For example, membership in your network could be open to more than just investors, more inclusive of all kinds of people that want to support your local economy, especially those that are part of your local economy ecosystem (more on that later).  Similarly, your network’s name and mission could reflect the values of supporting local businesses in a variety of ways (such as supporting “buy local” campaigns, or arranging local business mentoring sessions), rather than exclusively through investing.  This way, if your network sponsors community outreach events and/or business showcases, business people that participate by discussing their business and business opportunities publicly (or, on the side, privately with people they do not have a pre-existing relationship with) should be less likely to be interpreted as spreading the word and getting to know people with the intention of raising investment money.  Put another way, your local investing network can potentially create a safer environment for businesses to connect and network simply by having a name, mission, membership, and focus that is truly more expansive than local investing alone.  Investment clubs, on the other hand, are by their very nature dedicated to investing, and all their members are by definition investors, so the foregoing does not apply to them.  The extent to which business people could be perceived by securities regulators as making public offerings when they deal with investment clubs is mostly untested and unclear, as far as we know, and would vary state to state regardless.

Creating Your Agreements

Now that we have considered those crucial legal aspects, let’s get back to the process of starting your group.   Once you have assembled enough of the five recommended elements among your prospective members (volunteer organizers, committed investors, shared values, community buy-in, and a reasonable handle on the legal issues), your group is ready to proceed.  Your founding members will need to have a series of meetings in person to discuss, negotiate, and ultimately agree on these things:

  1. The group’s name.

  2. A mission statement: Relatively short and sweet.  Ideally, it should include some civic ideals, such as building relationships and helping the community thrive economically.

  3. Whether the group will be a network or an investment club.  If the group is a network, will it be members-only or open membership?

  4. If the group will be a registered legal entity, and if so, which entity.  Clubs must be legal entities, typically LLCs or General Partnerships.  There is no standard approach for networks.  They can choose to register as nonprofits, which involves some costs and bureaucracy, or they can avoid registration entirely, effectively operating as informal networks rather than as formal entities.  Some networks are adopted by nonprofit fiscal sponsors, which allow them to receive tax-deductible donations without being registered directly.  Your network can always start unregistered and register later, as needs dictate.

  5. How the group will specifically define “local,” in terms of geography, ownership, and other possible factors.  Consider a business that employs people locally but is owned by someone outside the area; is it local?

  6. What kinds of investments the group wants to focus on.  Some groups focus on food investments only, or loans only.  Others, like LION, allow anything but discourage real estate mortgages because they are so capital-intensive and are perceived to have a lower local multiplier effect.

  7. How the group will govern itself, including defining and filling initial leadership/operational roles, such as Events Coordinator, Membership Coordinator, and Business Outreach Coordinator.  For clubs, how will the members vote on investments, and how much do they need to contribute to become members?  Even networks that are led by just one person instead of a group can benefit from the perspectives and feedback of other members, perhaps in the form of an advisory group or board.

  8. Members-only networks and investment clubs should create a Membership Agreement (also known as a Partnership or Operating Agreement) which is a legal document that memorializes the group’s agreements.  It should be written and agreed upon by all founders, and signed by subsequent new members.  Open-membership networks do not require it, but can still benefit from a similar document that includes relevant points as a “statement of principles.”  Membership Agreements should integrate all of the above items, plus the following:
    1. Working TogetherThe process of becoming a member, and who is eligible.
    2. The process of leaving the group, voluntarily or not.
    3. The process of gathering and sharing information about business or investing opportunities.
    4. How expenses will be covered and accounted for.
    5. How disputes will be resolved.
    6. How the Membership Agreement can be amended, or changed.
    7. What should be kept confidential, if anything.
    8. Waivers of liability and any securities legalese needed (i.e., “This group’s activities shall not constitute an offer to sell, or the solicitation of an offer to buy, securities or any other type of investment or financing vehicle.”)
    9. For networks, a commitment by all members that they will make their own investment decisions, not hold anyone else liable for the consequences of their own decisions, and consult their own advisors if needed.
    10. Any other guiding principles all members wish to agree on.

No Small Potatoes Investment Club of Slow Money Maine makes their documents available freely on their website in the “Documents for New Investment Clubs” area.  Although you can start with template documents such as these, keep in mind that your state laws may differ and may require different language, or even a completely different approach.  Ultimately, any legal agreement should be reviewed by an attorney that specializes in the issues that the agreement pertains to, although it can be challenging to find attorneys that are familiar enough with securities laws and regulations.

Once everything has been decided, your founding members or leaders have all agreed to the key terms and signed the group’s Membership Agreement (if there is one), and the legal entity (if any) has been registered, congratulations!  You are ready to go.  It’s time to begin the process of spreading the word throughout your community, recruiting new members, and reaching out to businesses that may want to offer local investing opportunities.  Set up a website, and optionally, an e-mail list for informing your community about your group’s mission and how business people, potential investors, and other interested folks can work with you.  Give the local newspaper a heads-up.  Create your group in our Group Directory so others on our site can find you.  Let the world know you have arrived!


 

Your Local Investing Group is Up & Running. Now What?

There are four core activities that high-functioning local investing groups need to be able to perform consistently.  Here is the quick list, and then we will dive into greater detail on each.

  1. Self-organize by holding periodic business meetings
  2. Build the local economy ecosystem through community outreach
  3. Expand the capital base by recruiting new members & orienting them properly
  4. Connect investors and businesses by organizing business showcases & follow-up meetings

First, your group must stay in sync and make collective decisions.  E-mail lists are good for keeping in touch about issues as they come up, but they are not a substitute for meeting regularly in person.  New groups should meet in person more often, perhaps once a month, while established groups may meet a few times a year.  Meetings are necessary for a variety of reasons: Members (or just the leaders) can evaluate the group’s effectiveness (especially after holding events), plan for future events, refine their processes and agreements, and rotate volunteer roles periodically.  It can be helpful to have someone take notes and e-mail them out to the whole group, to keep everyone on the same page.

Building Your Local Economy Ecosystem

“Well-developed local economy ecosystems are important because local investing does not occur in a vacuum; it thrives on active networking, referrals, and mutually beneficial relationships within a community.”

Second, local investing groups should put effort towards being key players in building a healthy “local economy ecosystem.”  This is a term we use to describe a network of well-connected individuals and organizations that are interested in seeing local small businesses and nonprofits succeed in their community, and are motivated to help make that happen.  Well-developed ecosystems are important because local investing does not occur in a vacuum; it thrives on active networking, referrals, and mutually beneficial relationships within a community.  Ecosystem allies will spread the word about your local investing group and your mission to people that need to know, such as businesses and other investors, and will refer investing and networking opportunities back to your group.  In addition to your group’s members, ecosystems can include members and leaders of the following locally-based groups as well as representatives of locally-focused chapters of larger regional or statewide groups:

  1. Business organizations, such as Chambers of Commerce, AMIBA and BALLE networks, and local industry groups in sectors that your group may be focused on.
  2. Economic development groups such as Economic Development Councils (EDCs), Small Business Development Centers (SBDCs), and business incubators.
  3. Financial institutions and independent financial professionals such as bankers, financial advisors, and accountants.
  4. Educational institutions, especially those that teach entrepreneurship and business-related classes in sectors that your group may be focused on.
  5. Attorneys, especially those that specialize in business and securities law.
  6. Government, including executives, councilmembers, legislators, and their staff.
  7. Journalists and media that can help report on local investing developments.
  8. Nonprofits that are active in local investing, such as community loan funds.
  9. Sustainability groups, such as Transition Networks, that want to increase local financial self-reliance.

Note: SBDCs, incubators, and similar small business technical assistance programs, entrepreneurship courses (and those that teach them), private business consultants, and helpful financial professionals are extremely important for your ecosystem because they can help businesses that want to raise money locally with their business plans and entrepreneurship skills, leading to a greater chance of business success and, in turn, better investment outcomes and more positive community impacts.

To begin actively developing your local economy ecosystem, your group should make a list of who might be valuable parts of the ecosystem, and decide which member or members are best connected to those groups or individuals, and best placed for reaching out to them.  When reaching out, the member(s) should tell the potential ecosystem participant about the group, its mission (reflecting how the group intends to help the community), prominent group members that they might know or have heard of, how the group works, and what the potential participant can do to support the group.  The member(s) should answer any questions as best they can and offer themselves and other group members for follow-up, if needed.  If it seems appropriate, offer to add them to your group’s e-mail list and/or invite them to your next Business Showcase.  Some of these people may join your group and become valuable members, as well.  Over time, your local investing group will likely find this kind of networking to be very rewarding, and a key ingredient of success.

Recruiting New Investors

Third, your group should recruit new investors and grow its membership.  This is important to help build the amount of investing capital that’s available to help finance local small businesses and nonprofits in your community.  A growing group has a dynamic energy that is exciting and fun, and will attract even more potential members.  It is crucial to know that just signing up new members is not enough; they must be given an orientation by more experienced members of the group (ideally, members that have made local investments already), and the opportunity to ask lots of questions and observe the members in action at group meetings, business showcases, and follow-up meetings with entrepreneurs after showcases.  New members will typically only make investments if they feel well supported, comfortable, and get to experience the benefits of local investing for themselves.  Feel free to refer them to the guides on this site to help them learn the ropes.

If possible, begin your outreach efforts with reputable, well-connected investors who already share your values about supporting local small businesses and who may be more open to investing some of their money locally, even with the extra work it entails.  Investors tend to know one another, so once you have a few well-respected investors on board, they can more easily recruit others to the cause.  Often, the people that are most open to, and comfortable with, investing in local small businesses were successful entrepreneurs themselves.  They already understand the small business environment, how to read financial statements and projections, how to evaluate management, and best of all, they may be open to mentoring the business people they invest in.  These kinds of investors are also great because they can help inspire confidence in novice local investors that may not have entrepreneurial backgrounds.  Reach out to local citizens that fit this profile to see if they might be willing to join your group or support your efforts.

Growing Local CommunityWhile local investing groups can grow organically through peer-to-peer networking and referrals over time, they can grow more quickly if the group organizes effective community outreach events.  These open events, which could happen annually, are intended to educate interested members of the community about the local investing group, and typically lead to a burst of new member applications and investing opportunities.  The event organizers should invite potential investor members, local business people, members of the local economy ecosystem, and of course, all members of the group itself.  Arrange for a member of the group to speak about the group, its mission, who its members are (have them stand up), what it has accomplished, and how people can help support the cause.  This can be done with the help of a slideshow (PowerPoint or similar) presentation.  Arrange for a reputable local business person that has been a recipient of a member’s local investment to stand up and speak about their experience working with local investors and what that has done for their business.  Brief Q&A sessions should follow the speakers, and all of the speaking should be done within an hour at the most, so that networking and mingling can take place while the attendees have good energy.

For clubs and members-only networks, your group’s website should explain your new member process.  Offer a form that potential members can fill out, sharing their contact information and other relevant information, such as who they know in the group.  Most applicants will be known to at least someone in the group, since people most often join after receiving a personal recommendation to do so.  Ideally, your group will have a Membership Coordinator that receives the applications and coordinates the new member process, which could include forwarding the application to a membership committee or the whole group, possibly getting a decision back, and notifying the applicant of the status of their application.  Applicants that are accepted into the group will need to sign the Membership Agreement and be oriented with useful information about the group and how it works, ideally in person so they can make personal connections with the members.  Group orientation sessions can be held if the group has a large number of applicants at the same time, such as may happen after a community outreach event.

Connecting Investors and Businesses

Fourth, and perhaps most importantly, the group must connect investors and businesses.  A great way to create the relationships that lead to local investments is to organize periodic gatherings to showcase local businesses and nonprofits that want to connect with the community and potentially raise investment money.  These events are similar to community outreach events, but the whole point is to support the presenters, who represent local small businesses and nonprofits.  The events can be open to the public, private for group members only, or private for group members and others, such as potential group members, ecosystem members, and other interested guests.  As we mentioned earlier, most businesses should not speak publicly, or even privately among people they do not know, about their current, future, or past investment opportunities.  Therefore, the focus of a local business showcase is not on financial information, including projections, investment terms, past investment results, or amounts people want to raise, but instead, it is on the businesses themselves and the people behind them: who they are, the values that matter to them, their history in the community and elsewhere, the impact they have on the local economy, and the opportunities and challenges they face in the local economy.  These events are also called pitchfests, but that term can be misleading, since the point is not to “pitch” investment ideas to the audience, à la “Shark Tank,” so much as it is to educate the community about the issues and opportunities that specific local small businesses face, and rally support and connections for them.  The next guide in our How to Invest Locally series is Organizing Business Showcases, which will delve deeply into the process of creating these events.

The most crucial part of the local investing process happens after a business showcase, when follow-up meetings are arranged between business people and interested group members/potential investors.  These meetings can lead to relationships being built, and if things go well, additional meetings can be arranged to discuss and negotiate investment terms, and ultimately, investments can be made.  Therefore, it’s extremely important for local investing groups to support and facilitate this follow-up process, which is what leads to successful outcomes for the group.  Organizers should provide sign-up sheets for each entrepreneur at the showcase where people can write down their name, e-mail address, and phone number if they want to participate in a follow-up meeting.  After the showcase, a meeting can be scheduled at a time that works for the greatest number of people using a website such as Doodle.com, or the old-fashioned way of consulting everybody involved for a time that works for everyone.  At this point, local investing networks should stand back and let the individual parties take it from here.  Networks should not be involved in the investment research, negotiation, or decision-making process.  Clubs, on the other hand, might hold private showcases, form a due diligence committee for each entrepreneur the members are interested in, and have the committee schedule a follow-up meeting with the entrepreneur.  For more information on the due diligence process, please read our guide on Evaluating Local Investments.

There are other models for connecting investors with businesses that can be used in addition to, or instead of, business showcases.  Some networks have a “master connector” who leads the local investing network (typically an open membership network) and personally introduces investors and business people.  Much like a “matchmaking” arrangement would work, the connector arranges meetings between the parties, similar to Business Showcase follow-up meetings, which serve to introduce everyone and pave the way for relationship building and business/investment discussions.  Another model, used by LION, invites businesspeople to fill out and submit an online or paper “Business Opportunity” form to the group which shares similar information to what would typically be presented at a Business Showcase (i.e., personal and business history, the business opportunity, but no investment or financial information), plus their contact information, references, etc.  These forms are e-mailed to all members, who, if they are interested in meeting with the business person, respond either directly to that person or to the group’s volunteer business opportunity coordinator, indicating their interest and availability.  From there, follow-up meetings can be arranged, mirroring those that occur after a Business Showcase.  Essentially, this model replaces the showcase with online “introductions,” and while it is not as entertaining and community-building as a showcase, some groups may find it to be a more efficient way to connect people than the relatively work-intensive showcases.

Finally, networks are encouraged to track the local investment activity of their members.  An annual confidential survey can gather all sorts of useful information about what local investing looks like in your community, including investment size, average interest rates for loans, percent of showcase presenters that ultimately get funded, and much more.  Please share any statistics you generate with us so we can track how local investing works around the country.

A Profile of LION Members’ Local Investments (Survey as of 12/31/12):

 

  • Since 2006, LION members have invested over $2.7 million locally.
  • The average deal size, including all investors, was $64,000.
  • 81% of deals were loans and 21% were for equity. (One deal was both.)
  • 86% were small business investments and 14% were real estate loans.
  • 47% were done by single investors and 53% were done by multiple investors.
  • 45% of the opportunities submitted to the group were funded.
  • For loans, the average interest rate was 5.3% and average duration was 4.6 years.
  • 37% of loans (64% of total amount loaned) were backed by collateral.
  • 3% of loans defaulted, and another 5% were restructured.
  • 17% of all loans, as of the survey, had already been repaid in full.


 

Special Considerations for Investment Clubs

Investment clubs have a long history in the United States as a way for people to gather socially, pool their money, evaluate potential investments together, and make collective investment decisions.  The vast majority of investment clubs focus on the stock market.  To our knowledge, no one had created an investment club dedicated to making investments in local small businesses until a chapter of Slow Money in Maine formed the No Small Potatoes Investment Club.  They shared their documents freely, encouraged other communities to replicate their model, and made themselves available to support others following in their footsteps; thanks to their commitment to educate others, we are able to present the issues around local investing clubs here in this guide.

The most striking difference between investment clubs and networks is that investment clubs pool their members’ money and make collective investment decisions, and networks do not pool their money, and their members make their own independent investment decisions.  The fact that clubs pool money gives rise to a number of benefits and challenges for clubs:

  1. Easier access to a diversified portfolio.  As long as the club’s investments are diversified (and they should be), a stake in the club will be a lower risk, diversified local investment.  Club members should agree on diversification rules (such as the maximum percentage that can be placed in any one investment, and in any one industry) before launching, and write them into the club’s membership agreement.

  2. Member meetings are well attended and tend to be more engaging because club investment decisions need to be made, and everyone has actual money at stake.  Members get to know each other better because they are working together more regularly.

  3. The club must have a bookkeeper or accountant to track the coming and going of funds, a tax preparer to file the club’s tax returns, and a lawyer to review its legal documents.  While some clubs may be lucky enough to have these services provided by members, others must share costs among the members, which ultimately has the effect of reducing net investment returns.

  4. Tax returns for the members may be slightly more complex, and yet there are no major tax benefits to investing through a club.

  5. Investment research (due diligence) usually follows a defined process and is shared openly with, and reviewed by, the whole group, ideally resulting in higher quality investment decisions.

  6. Clubs can encounter challenges around the issue of how much money each member has contributed to the club.  Technically speaking, members each own a share of the club itself, and people with more money at risk in the club may want more control.  To help with this issue, the club should designate minimum and maximum amounts that can be contributed by each member, as well as how votes are counted: by the member’s percentage ownership of the club’s capital, or “one person, one vote.”

If all members are required to contribute similar amounts of money, then the minimum amount chosen will have to be low enough to be affordable for all of the club members.  As a result, the club itself may have a fairly limited total amount of capital to invest, and a correspondingly limited economic impact.  It may not be able to support larger investments, because the club itself will need to diversify its investments, placing no more than, for example, 15% of its total capital in any one deal.

One common solution is to create hybrid club/network groups which allow for, and even encourage, members with more money to invest to make side deals with investees outside the club, which has the effect of raising the group’s collective potential impact.

The bottom line for investment clubs is that there are many benefits, but there is also more overhead and potentially less economic impact.  The legal, accounting, and tax costs are generally the same for a club with lots of money or little money.  The due diligence process consumes the same amount of the members’ time and energy whether investments are large or small.  Before committing to a club model, ensure that your club’s economic impact (as measured by how much your properly diversified club can invest in any single deal, as well as its total capital) will be worth the time and money that the members will have to spend on it.

From a legal perspective, any time investors pool their money, they have essentially created a fund, and therefore, the laws that cover mutual funds kick in.  Investment clubs have a special exemption from this law, however, as long as they adhere to the requirement that every member of the club must vote and participate actively in investment making decisions.  No passive members are allowed.  Also, state securities laws and regulations vary, and may affect investment clubs in different ways from state to state, so it is advisable to check with your attorney, state securities regulators, and/or other investment clubs in your state about state-specific legal issues relating to investment clubs.


 

What’s Next?

To recap, here is a helpful reminder of important Do’s and Don’ts:

  1. DO ensure your group has connected with respected members of the community and shared its mission with them.  Community outreach events are great for building this kind of support.

  2. Do NOT accept compensation for facilitating investments or any related activities!

  3. Networks themselves do NOT request or gather financial information from local businesses.

  4. Individual members of networks DO share due diligence research and opinions about potential investments if they want to, but do NOT give personalized recommendations on investments to one another.  Everyone needs to make their own independent decisions.

And here is a quick recap of the steps for starting a local investing group:

  1. Check that there isn’t a functional existing group nearby that you could join forces with.

  2. Recruit your initial core group of organizers and investors, focusing on having sufficient money to make a difference by investing locally, shared values, and community connections.

  3. Ensure that at least a few members familiarize themselves with federal and state securities laws and regulations that could affect your group and/or the businesses that interact with your group.

  4. Collectively decide on all the important aspects of your group, culminating in a Membership Agreement that all the founders sign (Open membership groups don’t require an Agreement).  Launch your group’s website, and tell your community and the local press.

  5. Start building your local economy ecosystem by reaching out to important people in your community that can support your efforts.

  6. Organize an educational outreach event to recruit new members and let the community and local businesses know what your group is doing.  Properly orient any new members afterwards.

  7. Organize your first business showcase, being sure to facilitate the scheduling of follow-up meetings, and track what happens as a result.

  8. Hold members-only business meetings to discuss and evaluate the results of your efforts, refine your processes, and improve your effectiveness.

  9. Repeat steps 5 through 8.  Have fun!


 

Resource List

Modules in our How to Invest Locally course:

Local investing directories:

Local investing group startup & operations guides:

Local investing group legal document templates:

Relevant securities laws & regulations:


 

Credits & Terms of Use

Created and curated by James Frazier of the Local Investing Resource Center.  Additional contributions by Linzee Weld of Slow Money Maine’s No Small Potatoes Investment Club.

This material is subject to our site’s Terms of Use and Standard Content License. Please consult these documents and/or contact us if you wish to redistribute this material.

We welcome your constructive feedback, including helpful insights, clarifications, and corrections of errors and omissions.

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