What’s investment crowdfunding? Investment crowdfunding allows grassroots residents of a community to invest directly in local businesses, a process that used to be difficult and expensive. Recent changes in federal securities law now allow every adult to invest up to $2,000 per company per year. Local businesses can raise up to $1 million annually through more than 30 federally licensed online portals. A company with thousands of local fans might be able raise this money quickly. Since 2016, when crowdfunding was legalized, more than 1,800 companies nationally have raised a quarter of a billion dollars this way.
Is this the same thing as Kickstarter or Kiva? No. Kickstarter in one of many online sites that allow users to make donations to exciting causes or projects. Kiva encourages users to make no-interest loans. Investment crowdfunding gives investors a real rate of return through interest, dividends, or stock appreciation.
Why is investment crowdfunding needed? Can’t worthwhile companies find capital from banks, angel investors, and venture capitalist? We wish. But traditional investors shun local businesses. Even though local businesses represent about 60-80% of the economy, most commercial bank loans and other long-term capital investments (through pension funds, for example) go to large, often global companies. This capital market failure particularly affects businesses run by women and people of color. A 2017 study from Johns Hopkins concluded: “Baltimore has the potential to be a city that is truly hospitable to small business growth, with all the economic benefits of jobs and tax revenue such growth would bring. But for new and established small businesses to thrive, the city needs a financing system with capacity to meet their needs.”
How does crowdfunding help? If people in a neighborhood shift savings and investments from Wall Street to Main Street, struggling local businesses can begin to thrive and expand, which will create more local income, wealth, and jobs. And with a stronger tax base, the neighborhood can begin to undertake all kinds of development initiatives—say for new rec centers and green spaces.
If crowdfunding is so useful, why aren’t more neighborhoods using it? It’s new. It’s different. And there are, as always, risks for investors. But perhaps the biggest reason is a lack of awareness. That’s where the Maryland Neighborhood Exchange, fits in.