Summing up where I think we are on doing local investing in the northwest, and adding one new idea.
Challenges:
A) Corporate advisors (like lawyers) don’t like to do SCOR because they perceive it as lots of effort for small dollars, everyone says it’s easier to just fundraise from accrediteds.
- However I also think that pushes them into raising larger dollars and seeking faster growth which can be bad for companies…
B) There’s not a network of brokers to sell local stock offerings, so it’s hard to sell
- Farm power curtailed selling their first offering because building that base was such a slow process that other funding alternatives moved to the fore.
- Drew Field (wrote the book on Direct Public Offerings) says the best candidate is a catalog company with a base of customers & their contact info
- I spoke to a lawyer at DFI last summer who said the most successful offerings have been groups of people that got together to fund something (like a brewery) and used SCOR as the tool to do it – so the buyers were already lined up essentially
- The small volume of stock offerings make it not cost-effective for brokerages to do the analysis, so they don’t bother with the stuff.
C) As a non-accredited investor, there aren’t opportunities to buy local stock
- Not many companies do SCOR offerings or take their possible 35 non-accredited investors (see A)
- Difficult for unsophisticated buyers to buy what offerings there are because they don’t hear about them because of (B)
- What offerings do come out are not necessarily good investments because nobody is holding a quality bar (see (B))
- There’s no secondary market liquidity
It’s Chicken-and-Egg: Product-and-Market
Pieces of the solution:
1) Securities. For local companies, the SCOR cap of 1 million shouldn’t be a problem. Companies could do SCOR offerings if they wanted to.
2) Advertising/selling: seems like a few advisors/brokers would be interested in carrying the stuff if someone could do the analysis for cheap/free. Having periodic group reviews of what’s out there could be a fun investment-club type activity.
3) Post-purchase liquidity: lots of you working on this one. Farm Power will do their own trading and legally can, so maybe we come up with an easily replicable system that every company who offers through our network can set up, and then a central site points people to each company’s trading platform.
4) Secondary market valuation: if the market doesn’t support a market of analysts, we need simple metrics for stock valuation based on company fundamentals. I think if we require companies to pay dividends that’s a clear value, and then have some format of audited financials and easy method for deciding a valuation.
My recent new thinking:
Start a traditional LLC pooled investment fund, most likely with accredited investors so we can a couple million. Invest in local companies just like an angel pooled fund or the Patient Capital Collaborative is doing (so 100-200K initial investment with room for follow-on), but ONLY invest in companies who have done SCOR offerings. So basically be the lead that makes it tempting/worthwhile for companies to do a SCOR (maybe do the due diligence first, and then get the company to do SCOR for the investment?) and then the non-accredited investors can follow. So the fund will also do analysis that other folks can draft on. Perhaps organize the fund GP as a nonprofit? Doing SCOR stock analysis as a public service?
We’d need to do some market research and build up that network of potential follow-on investors and get a sense of the size of that market: if there are 10 folks out there with 5 K each so after 50K we’ll have tapped the market, then not worth it. how big would that potential pool need to be? Don’t forget many folks will come in on the secondary market, so maybe we could support one or two offerings a year?
There are some companies already that have local stock, what if we started by collecting them all together, getting them each managing their own trading and testing out some valuation formulas?
That’s what I’m thinking today.
Shaulablog 
I like your idea of pooling investments Shaula. SCOR presents a couple of other challenges.
A) The registration is very loosely governed and allows business owners to construct risky and unattractive deals. The partners would want to help shape the offering while it was still in the registration phase to insure fair representation of their interests.
B) Liquidity is an issue for [at least] two reasons:
i) The market is nascent and I suspect that it would be difficult to find investors who want to purchase 2nd hand units. That said, Lincolnway Energy (https://www.lincolnwayenergy.com/) set up an online exchange and started offering dividends this year. Also, Mission Markets, is close to releasing its online exchange platform @ http://missionmarkets.com/platform/Private-Capital-Marketplace/
ii) Venture Capitalists are wary of deals that have too many non-accredited investors which could limit exit strategies.
On the other hand, SCOR is flexible. It can be structured in many ways, including debt.
Your point about the lack of options for non-accredited investors is the crux for me. We need to start thinking of ways to democratize finance; we must find ways for community members to invest in their local businesses on a DAILY basis.
Stanley Florek and Jenny Kassan are exploring a model based on Equal Exchange’s CD investment for non-accredited investors. Crowdfunding is another option. My hope and dream is for a technology and legal framework that allows us to make tiny investments in the things we buy. Perhaps this is the time for America to reclaim (and figure out how to legitimize) penny stocks as an instrument for good.
Local citizens need to be physically closer to their pensions.
Small businesses, the economic engine of America, need better options for accessing capital. And we need to continually shorten the distance between our money and main street!
Thanks for the continued columns. I truly enjoy them.
Alex
The way I see it, the IRA/401k structure has really sunk its talons into the middle class, focusing them on tax advantages rather than the actual investments. Letting investors do self-directed IRAs for local investments could make them more accessible….or better yet just invest directly without using a tax shelter, pay the taxes on the profits, and own a piece of a tangible local asset rather than a financial instrument.
Hi, I am totally into this…let’s get started.