Introduction

Introduction

Local investing groups are driven by a common inspiration to put money to work for the mutual benefit of investors, the local businesses they invest in, and the community as a whole. They can be an important force in driving local economic development, effectively mobilizing millions of dollars out of traditional “Wall Street” investments and into local small businesses. The 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.

The most effective groups form collaborative relationships with a wide variety of players in their local communities, including people in business, banking, economic development, nonprofits, government, media, higher education, and more. The easiest way to form a local investing group is to organize as a club or network. For those who are ready to take local investing to the next level, Community Investment Funds are an emerging structure to aggregate larger amounts of community capital for bigger and more long-lasting impact, and they often include some form of professional or formal management. Each structure has its benefits, as we’ll outline below.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 email 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 other names 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, build quality relationships within their communities, navigate the legal issues, and recruit 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.

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 unaccredited 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, unaccredited 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.