Has your nonprofit considered raising money through crowdfunding? No, not through donation sites like Kickstarter and Indiegogo, where three quarters of the successful raises are under $10,000. But through investment crowdfunding.
In 2012, then-President Barack Obama signed the JOBS (Jumpstart Our Business Startups) Act, which permits any entity to raise up to $1 million, and any American to invest up to $2,200 per year, independent of income. (People making more than $100,000 can invest higher amounts.)
The federal Securities and Exchanges Commission (SEC) finalized all the regulations to implement the JOBS Act in 2016. In the four years since, according to a report by Crowdfund Capital Advisors and the Small Busines & Entrepreneurship Council, nearly 3,100 companies have raised over half a million dollars. Roughly 700,000 Americans have invested more than $700 per offering. The average successful raise has been $342,000. And since COVID-19 hit, the volume of monthly crowdfunding activity has risen dramatically.
A study by Investibule of these crowdfunding raises found that a third of the successful raises were by companies led by women, and a quarter by companies led by people of color. Moreover, women and people of color had a higher probability of raising capital successfully than their white, male counterparts. (An estimated 77 percent of women and 75 percent of people of color met their capital raise targets, versus 66 percent overall.) Myles Powell, for example, an African American manufacturer of gourmet foods, recently raised his $30,000 ask on Honeycomb Credit to expand his sales and marketing efforts.
“But wait a second,” you’re thinking. “These are for-profit companies. What does this have to do with nonprofits?” In fact, some of the offerings on crowdfunding sites are from nonprofits, and many more could be. Nonprofits cannot issue stock, but they can borrow money. For programs. For projects. Even for buildings.
Bellwether Housing, a nonprofit based in Seattle, recently placed a crowdfunding offering on WeFunder to help its campaign to build 750 new affordable apartments in a region known for skyrocketing property values and growing numbers of homeless people. Its WeFunder listing says: “These 750 homes will support an estimated 2,400 residents: preschool teachers, students, retirees, bartenders, small business owners, musicians, orderlies, and young children. Every home will be near public transit, with access to jobs, schools and community resources. It’s better for families, our community, and the environment when people can afford to live near where they work.”
A nonprofit seeking capital from its members, its fans, or other members of the public needs to follow securities laws, which effectively means choosing the right “exemption” to a securities registration and then doing all the necessary legal paperwork. Some states historically have made it relatively easy for nonprofits to issue securities through intrastate offerings (that is, where all the investors live in the same state as the nonprofit). But right now, the cheapest and easiest path for a nonprofit to raise capital is through the more than 50 federally licensed crowdfunding portals.
One surprise from the short history of legalized federal crowdfunding is that a growing number of investors are shifting their investments from businesses to land, buildings, and housing. This reflects, perhaps, a preference for investing not in an entrepreneur’s dream, but in something tangible like a house, an apartment building, or a shopping center. It also reflects a perception about risk; while many businesses, especially startups, can go completely out of business and lose all of their investors’ capital, few real estate ventures will lose all of their value because of the existence of physical collateral. Many real estate projects also combine a diverse assortment of properties and units, and this diversification can further reduce risk.
Some of the federally licensed crowdfunding portals specialize in community-specific real estate deals. SmallChange, for example, is currently offering grassroots investors the opportunity to get involved with a food market in Washington, redevelopment of a warehouse in Philadelphia, affordable housing on the South Side of Chicago, and a farm in the Hudson Valley in New York.
If you’re interested in providing immediate relief to your local small businesses, you might look to pre-purchasing, which in most cases does not trigger securities laws. For example, when COVID-19 hit, my partner and I decided to “adopt” our favorite local business, Busboys and Poets. We estimated that over the course of a year, we spend $1,000 there. We wrote a check to the proprietor, Andy Shallal, and asked him to use our prepayment to help with his cash flow. He was so pleased that he gave us $1,200 in gift cards—a 20-percent return on our investment. Local Futures, a product of a company called Protegra, allows cities to set up websites so that our act could be multiplied by a thousandfold.
As Bachman-Turner Overdrive once sang, “You ain’t seen nothing yet.” In the first week of November, while America was transfixed on its presidential election, the SEC approved a bunch of new rules for regulation crowdfunding. Most significantly, the ceiling for an offering was increased from $1 million to $5 million. While $1 million could only buy a building for the smallest of nonprofits, $5 million opens opportunities for buildings that could fit 50 or more staff.
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Crowdfunding gives nonprofits professionals in the development department a new angle to attract donors. And it’s important to underscore that crowdfunding is not just for deep pockets. A smart fundraising office might let potential supporters know that there are tools through which they can support your nonprofit through tax-deferred pension savings.
Even though Americans have tens of trillions of dollars in pension and mutual funds, their investment options are largely limited to global corporations. But for as little as $250 per year, any American can set up a self-directed individual retirement account (IRA) and then direct his or her custodial to invest in any available local options—including local nonprofits. Alternatively, anyone with self-employment income can set up a solo 401k with a one-time payment of $300, and then you can run your own mini pension fund out of your own bank account. Once you resign or retire from your day job, you can roll over your workplace 401k into one of these do-it-yourself accounts.
There are important rules governing these accounts, which I detail in a book I wrote titled Put Your Money Where Your Life Is. You can’t invest in your kids, your parents, or yourself. You can’t invest in your own business (though your self-directed IRA can own your business). You can’t invest in S-Corps and collectibles (like coins) that are hard to value. But once you learn these rules and stay far away from the grey zones, you can safely invest your pension savings in local businesses and nonprofits you love.
Most people, of course, do not have the time and energy to find, vet, and manage their own investment portfolios. For them, perhaps the best options are to put their money into a small but growing number of community investment funds. These funds are largely investing in for-profit businesses, although the mission-orientation of the funds mimics nonprofits. And nothing prevents these funds from also lending to nonprofits.
Some examples: The Community Loan Fund in New Hampshire allows grassroots investors to help residents of mobile home parks buy the land in their community and stabilize their housing. The East Bay Permanent Real Estate Cooperative invites investors to put money into affordable housing in Oakland, California. The Ujima Fund in Boston allows investors to support small businesses led by Black entrepreneurs. Investments in these funds and their missions could come from your self-directed IRA and solo 401k.
For the moment, these funds cannot use crowdfunding to capitalize themselves. They must wend their way through a different body of securities law called the Investment Company Act. Unfortunately, all the legal reforms in recent years have been around the issuance of securities, not the pooling of securities. But several efforts are under way to nudge the SEC to allow more leeway with community funds. Brian Beckon of Cutting Edge Capital has placed before the SEC recommendations that would loosen some of federal restrictions on small, intrastate funds focused on community development.
As Americans consider new models of community finance, they also might look to Canada for inspiration. While Canadian securities law is similar to ours, it allows the provinces more room for experimentation when it comes to funds. For example, the provinces of Alberta and British Columbia allow cooperatives to be formed explicitly to facilitate local investment. US cooperatives, in contrast, typically must be organized on behalf of consumers, producers, or workers—not investors. In these two Canadian provinces, all kinds of local businesses can be acquired, started, run, and financed through a low-cost cooperative structure.
In 1998, the province of Nova Scotia enacted the Community Economic Development Investment Funds (CEDIF) Act, which laid out a simple process by which unaccredited investors can pool money and provide loans to local businesses. The funds must be for-profit and must have at least six directors elected from the community. Residents of Nova Scotia can place their tax-deferred retirement savings to these funds, provided they keep them there for at least five years, and then qualify for a handsome tax credit.
Since the start, Nova Scotia, with a million people, has witnessed the birth of nearly 60 funds, which have raised more than $63 million from 6,000 investors. All of the funds support some form of local economic development, and several focus on helping farmers and local food businesses. If the US had as many funds per capita, our country would have more than 20,000 such community funds operating nationwide.
Next door to Nova Scotia is the small province of New Brunswick. Leaders there recently became so convinced of the value of local investing that they enacted a 50-percent provincial tax credit. Every dollar over $1,000 invested in a qualified local business removes 50 cents from an investor’s provincial tax bill. This law recently inspired a Michigan state legislator to introduce a similar bill in the name of post-COVID relief.
I believe that in the not-too-distant future, different metropolitan regions in the United States will all have their own investment funds, crowdfunding sites, and tax incentives, which will move trillions of new dollars from Wall Street into local for-profits and nonprofits. There might be a Los Angeles Housing Fund, Houston Food Fund, and a Bozeman Renewable Energy Fund. For investors seeking to hedge risk with geographic diversity, there might be the Capital Nonprofit Building Fund, pooling efforts around the country to enable nonprofits to buy their own buildings.
This quiet revolution in grassroots finance is welcome news to the nonprofit community. COVID-19 has crushed communities across the country and placed huge responsibilities on nonprofits at a time when their own soft-money resources have been throttled. These new financial tools give nonprofits new ways to greatly expand their work, at just the moment when they most need them.