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“Superficially, we are given many choices…. But in the end, all these investment choices are more limited than we think. There are real alternatives…. You can invest in everything else that matters to you. You can put your money into that neighborhood grocery store you love, your little sister’s first house, or your nephew who needs to pay off high-interest student loans. If you’re smart about local investing, you can do this in a way that increases your financial returns compared to Wall Street and lowers your risk. Plus, these commonsense local investments wind up strengthening your community, your neighborhoods, and your schools.” ~ Michael H. Shuman
By Carolyn Betts, Esq.
This week, I interview Michael Shuman, author of Put Your Money Where Your Life Is and a number of other books on the subject of local investing. Michael has years of experience as a consultant to communities seeking advice about ways to stimulate and support local commerce and local solutions.
Last October, I attended a webinar led by Michael titled “Local Investing in Montana,” sponsored by the Center for Community Ownership. Michael led participants in four one-hour sessions, complete with homework assignments, designed to share local investment experiences and explore personal and theoretical opportunities and hurdles in the development of local investing solutions. The interactions between participants—potential investors and small businesses from all over the country—demonstrated that there is a great hunger for what Michael has to teach us.
Put Your Money Where Your Life Is is Michael’s most recent book and highlights a little-known source of investment funding available to many interested in local investing: “DIY Accounts” that use existing 401(k)s and IRAs. A self-directed IRA allows the owner, through a custodian, to designate his or her investments in non-listed securities, precious metals, and other investments not available in a traditional IRA. Michael also reveals that it is possible for anyone with even a minor amount of self-employment income to start what is called a “solo 401(k)” at a relatively low administrative cost and higher annual investing limit. The holder of a solo 401(k) can use the funds directly to make local, non-exchange-listed investments.
Consistent with Catherine’s advice that local investing should start at home, Michael advises that we first look at opportunities to reduce personal debt, for example, paying off our mortgages and credit cards or refinancing the debts of family members. Investing in energy-producing or energy-efficient heating systems, back-up generators, sources of clean water, and home or community gardens are other examples of this type of “first things first” investment.
To the extent that we then wish to invest in local businesses—whether through patronage, loans, prepaid goods and services, or equity investments—we can strengthen our local communities and economies. Based on figures derived from Internal Revenue Service reports on the self-employed and small businesses, it is clear that, contrary to popular belief, small businesses in the U.S. are quite profitable. Start-up businesses do have high failure rates, but as a general matter, small businesses account for more jobs and more profits than do exchange-listed and other large corporations. In fact, a Canadian study suggests that the most profitable businesses are those with two to ten employees. Too, investing in local businesses offers many advantages not available from the stock and bond markets, particularly since locally owned and operated businesses tend to recirculate their profits in the local economy instead of exporting them to distant merchants and service providers.
The main thing currently missing from the local investing scene are local markets for the trading of local securities. Local business investments generally are quite illiquid. With sufficient interest in local securities trading opportunities—aided by the creation of local currencies, state sovereign banks, and other facilitating mechanisms—we can hope that such platforms may develop in the future to fill the vacuum.
A first step in stimulating initial investment in small businesses by “non-accredited” investors (i.e., under current law, those with two-year gross annual incomes of at least $200K singly or $300K with a spouse) is the phenomenon known as “crowdfunding,” which the 2012 Jumpstart Our Business Startups (JOBS) Act was intended to facilitate. Under the JOBS Act, small business securities issuers can sell their securities on qualified securities sales “platforms” without the otherwise too-onerous and expensive process of offering securities to investors of relatively modest means under federal securities law exemptions or public registrations. However, crowdfunding offerings—while an improvement over most other options—are not without their own costs and hassles. Some states permit in-state securities offerings for in-state businesses and in-state investors, thereby avoiding federal securities law requirements.
Forming an investment club or Solari Circle with other potential local investors is advisable. Doing so is a good way to identify local investment opportunities, increase the amount of available capital, and share the analytical and networking tasks required for astute investment decision-making.
The outline that Michael provides for Solari subscribers highlights benefits and risks of local investing. We strongly encourage those who would like to learn more about local investing to follow Michael Shuman’s work and review his books and the links below.
Money & Markets
In Money & Markets this week, John Titus and I will cover the latest events and discuss the financial and geopolitical trends Solari is tracking in 2023—and the growing pushback against corruption. Post questions at the Money & Markets commentary here.
Related Solari Reports:
Special Solari Report: In-State Equity Crowdfunding Offerings as an Alternative to Federal Jobs Act (Note: May be outdated but useful in researching current state laws)
Links Recommended by Michael Shuman: