Can I invest or can’t I invest in a local small business? There are many rules surrounding investment in private (not listed on a stock exchange) companies, so first, consider the basics.
We can all agree that investing in local businesses is vital to a community’s prosperity. Small businesses need capital to grow, expand operations and hire new employees. In many instances, however, they cannot simply go to the bank for a loan, especially since loan terms became more stringent after the 2008 financial meltdown.
We need local investors.
"We have an opportunity to step up and support our local small businesses in a way that banks cannot," says Carol Peppe Hewitt, the author of Financing our Foodshed: Growing Local Food with Slow Money and co-founder of Slow Money NC. “It simply isn't feasible for them to do a $5k loan at 2 percent and cover their costs."
Often, small-business owners turn to family and friends to get them by. These transactions are usually low-interest loans based on the relationship and not necessarily business fundamentals. What happens when the business owner needs more than family or friends can provide?
That’s when outside investors come into play, and that’s when the rules get tricky. Let’s start by defining one of the most important terms when it comes to private investing: an accredited investor — an individual making at least $200,000 per year, or a couple making $300,000 per year, or someone who has at least $1 million net worth, excluding a principal residence. A non-accredited investor simply is someone who doesn’t meet those guidelines.
Accredited investors are assumed by the SEC to be sophisticated investors and can invest in just about anything they choose.
In most cases, if you’re not an accredited investor, you are ineligible to invest in a private company. There are some exceptions, such as the current law that limits the number of non-accredited investors in any offering to 35 when they personally know the business owner. The others are just are too technical to get into in this article.
The JOBS Act passed last year by Congress does lay down some new opportunities for crowdfunding small businesses, but so far, the SEC has only published rules for accredited investors. Non-accredited investors are supposed to be eligible to participate in the future, but there is no timetable for them as of yet.
So what can you do now if you want to invest in a local business — and you’re not an accredited investor?
You can invest with business owners you already know and trust. Let them know that you are interested in being a part of their business and ask if there is any opportunity to invest. This is the easiest way to get started. “We all have a desire to make something happen every day, preferably something good. A loan to a person we personally know and a business we care about is a brilliant opportunity to do just that,” says Hewitt.
If you don’t know a business owner who needs an investment, you can do small loans through a Slow Money group or join a LIONs (local investment opportunity network) group. These are available in Western North Carolina.
“I believe we would do much more of this type of lending if the mechanism was available and easy. My goal with Slow Money NC is to make that happen," says Hewitt. “In North Carolina, Slow Money ran the 4-minute mile in community lending. We're doing it now, and we've facilitated over 80 loans to 39 local farmers and food businesses worth over $700,000. … I believe we're just getting started.”
Another alternative might be to invest with Mountain BizWorks, a local community development financial institution that lends money to small businesses and helps nurture business owners through training, mentoring and education. In a previous interview, Tom Elmore of Thatchmore Farm said, “Access to capital is critical to growing farm businesses. We believe investing a portion of our savings through Mountain BizWorks helps support the next generation of local farmers.”
Self-Help Credit Union also has a Go Local CD that keeps your investment in your community. “We are thrilled to be able to offer this type of investment vehicle to our customers, since it gives them a fully insured way to make sure that the money they deposit with us will have local impact. It closes the gap,” says Self-Help’s Jane Hatley.
But before you invest with anybody, make sure to do extensive due diligence. Remember: It’s your money you’re putting at risk. Ask lots of questions and look at the books. If something doesn’t look right or if you don’t understand, ask! It is your responsibility to protect yourself and your hard-earned money.
And, so you know, this article is for information purposes only and not a recommendation for any particular investment.
— Peter Krull is president and founder of Krull & Company, an Asheville-based investment management firm specializing in socially and environmentally responsible investing. He can be reached at firstname.lastname@example.org.