New kinds of capital

• Author: Janelle Orsi
• Profession: Is the Director of the national nonprofit Sustainable Economies Law Center, and she is a 'sharing lawyer' in private law practice in Oakland, CA
• Pages: 299-366

299

CHAPTER SIX

NEW KINDS

OF CAPITAL

By Jenny Kassan*

PART 1: COMMUNITY CAPITAL IN THE SHARING ECONOMY

Introduction

As the shari ng economy grows, participants look for creative and collabora-

tive ways to finance their activities. Many of the things we do require that

we aggregate large sums of dollars—much more than we have in our own

bank accounts. Also, because many of the productive act ivities we under-

take require an up-front investment of resources and only yield returns

on that investment months or even years later, we need investment that is

“patient”—able to wait for a return unt il the activity invested i n yields fruit.

The traditional methods of f inancing are al most completely inad-

equate to meet the needs of the sharing economy. Bank loans and i nvest-

ments from wealthy individuals and investment fu nds are very hard to

get—virtually impossible for a start-up social venture or cooperative

ente rpris e. Sta rt-up v entu res us uall y have t o tur n to cr edit c ards, second

and third mortgages, or loans from family and friends. These options

can lead to bankr uptcy and strains on relationships. And even these a re

only available to the relatively privileged. It’s incredibly unfortunate

that many ventures that could create huge community benefits end up

not happening due to lack of financi ng options.

* Jenny Kassan’s biography appea rs on page 151.

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Ideally, the diverse sources of wealth in our commun ities could be

harnessed to fu nd community-based enterprises. However, the options

for community-based capital ra ising are quite limited by state and fed-

eral securities laws and other laws that regulate fina nce and investing.

This chapter will su mmarize t hose laws, along with a handful of cre-

ative options allowing com munities to share in t he financing of loca l

ventures.

Why Is It So Hard to Raise Capital?

Is the diff iculty of getting financing caused by a shortage of capital?

Not at all! If you were to add up all the money that residents of your

county have in banks, retirement accounts, mutual funds, and other

investments, you would be amazed at how much wealth there is in your

community. For example, the Employee Benefit Research Inst itute esti-

mates that even in a tiny county like Trinity in Ca lifornia, there is over

$325 million invested in retirement accounts. The problem is that v irtu-

ally all of this money is invested in institutions that suck money right

out of your community. For example, if I have a checking account at

Bank of America, t he chances that Bank of A merica is investing my

money in my community are slim to none. If I have a 401(k) retirement

plan at work, all of that money is likely invested in sto cks and bonds and

never touches my community.

If I woke up one morning and said “I want to move five percent of

my money into my local community,” how would I do it? It is amazing

when you realize that in t his age of highly complicated investment vehi-

cles, there is virtually no investment vehicle that allows you to invest in

your own community. This is largely due to securities laws that make it

prohibitively expensive for a small business to offer securities to com-

munity residents and to create a local investment fund that is open to

the general public. Right now, under current law, the only simple way

to keep your investments local is to deposit them in a bank or credit

union that focuse s its lending in your commun ity. If you walked into

your favorite neighborhood bookstore tomorrow and said “I would like

to invest in your business,” the owner would have to turn you down or

risk civil and cr iminal liabil ity under state and federal secur ities laws.

In the sharing economy, community assets will be owned by broad

cross-sections of the community. Community residents will pool

resources, including money, to start new ventures. Wealth generated in

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New Kinds of Ca pital | 301

our communities w ill stay with in our communities and recirculate to

create more wealth and income. Local inst itutions will be locally owned

to ensure greater accountability to the community. What is the biggest

barrier to these things happening? Securities law!

Here are some examples of things t hat may be illegal under state

and/or federal securities law (unless extensive f ilings are completed):

• A group of people wants to star t a car-sharing club and solicits

members who must pay $100 to join the club so that the club can

buy its first car.

• A far mer solicits $10 investments from her customers, promising

to pay them back $12 in six months.

• A nonprofit 501(c)(3) organization sends a letter to all of its mem-

bers asking for $1,000 loans to be paid back over five years with

interest.

Most people have no idea that these ways of raising money are ille-

gal. I like to tell people that it was not until 11 years after I passed the

bar that I learned that there was such a t hing as securities law that lim its

how money can be raised. The only reason I lear ned about it then was

because I went to work for a law firm that specialized i n securities law

(I’m eternally gratef ul that John Katovich of Katovich Law Group hired

me even though I knew so little!).

What This Chapter Covers

Most of this chapter is a primer on basic secur ities law, with a focus on

the aspects of securities law that apply when a broad cross-section of a

community is investing in a venture. The law governing investing by

wealthy, sophisticated investors is not a focus, since information about

that kind of invest ing can be easily found in any legal guide for working

with start-up ventures.

This chapter addresses the followi ng questions:

• W hat is the definition of a security—when does securities law

apply?

• W hat has to be done before a security ca n be offered?

• W hat are the consequences of failing to comply with the securities

laws?

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