Shared Financing of Community-Based Businesses

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(applies to the U.S.A.)

Jenny Kassan of SELC:

"if something falls within the definition of a security, it will be covered by a complex set of state and federal laws and regulations that require filings, fees, and disclosures often before even a single offering of a security can be made.

The good news is that there are ways to raise money without falling within the definition of a security. And, if that’s not possible, raising capital within the securities laws can be done with a little planning and effort.

Raising Money Without Securities


Jenny Kassan of SELC:

"A security creates an expectation that the investor will receive a financial return. If someone gives money to a business with no expectation of a return, securities regulations do not apply. Many entrepreneurs (and others) are using so-called crowdfunding web sites such as Kickstarter and Indiegogo to raise money for various causes. Entrepreneurs that solicit donations often provide non-monetary rewards to donors. For example, a recent successful raise on Kickstarter for the New Parkway Theater in Oakland (a formerly popular theater raising money to reopen) offered the following:

Pledge $25 or more: Five free showings at the New Parkway Theater.

Pledge $50 or more: Two tickets to the theater, a pitcher of beer, a pizza, and a RESERVED loveseat.

Pledge $100 or more: Ten free showings at the New Parkway Theater and a +1 pass to the Grand Reopening Party.

This campaign raised $56,832, exceeding their goal.

At what point might a reward be valuable enough that it could be seen as a financial return on investment? This issue has yet to be tested, but it is advisable to ensure that any rewards offered are valued at less than the amount donated." (


Jenny Kassan of SELC:

"Two entrepreneurs wanted to open a high quality, environmentally responsible café in downtown Oakland. They got the word out to the community about their idea. Then they sold Café Creator cards – gift certificates for the yet-to-open café. Arguably, because the entrepreneurs were selling gift certificates for coffee and pastries and not an investment with a financial return, the Café Creator cards were not securities. Awaken Café launched and has been a huge hit in Oakland." ( link title

Return of Principal Only

Jenny Kassan of SELC:

"If a company promises to return nothing more than the original investment amount without any additional dividend, interest, or appreciation in value, the instrument being offered is probably not a security. This is how Kiva, the popular microfinance web site, avoids having to comply with securities laws. (

Product Discounts


"Companies like Costco sell memberships in exchange for product discounts received at the time of purchase. Another interesting model is REI. REI is a consumer cooperative that sells memberships to its customers. At the end of the year, REI members receive a “dividend” based on the amount spent at REI during the year. REI takes the position that its memberships are not securities because what members are really buying is the right to receive discounts on the items they purchase – not at the time of purchase like at Costco, but at the end of the year in the form of a rebate check." (

Other Strategies Within the Securities Laws

"It can be hard to find people to invest in a business without offering any kind of financial return. If you want to offer a financial return of any kind, you will probably have to deal with securities laws.

A detailed description of the options is beyond the scope of this article, but it is possible to do the following without extensive legal compliance work:

  • A private offering (no advertising) to a limited number of people (depending on the state, you can often have as many as 35 non-wealthy investors and an unlimited number of wealthy investors (at least $100 million in net worth or $200,000 annual income)
  • An offering of cooperative memberships (this is only available in some states)
  • A public offering of up to $1 million to up to 500 investors (with no wealth requirement) after receiving approval from the state of a detailed disclosure document."


Grassroots Efforts to Promote Shared Community Investing

A group of community residents in Port Townsend, Washington, started an organization called LION (Local Investing Opportunity Network). Taking advantage of the law in Washington which says private offerings to a limited number of non-wealthy people are okay, LION brings together community residents looking to invest locally with local entrepreneurs. LION doesn’t vet the businesses or provide any of the legal documents needed to make an investment; it simply brings the parties together in a way that is legal under Washington securities laws. This model is spreading to other states. Wisconsin recently set up a LION.

Under California law, LION-like groups are not allowed. Under California’s private offering rules, no offering of securities can be made without “a relationship consisting of personal or business contacts of a nature and duration such as would enable a reasonably prudent purchaser to be aware of the character, business acumen, and general business and financial circumstances of the person with whom such relationship exists.” In other words, unlike in Washington, there must be a substantial pre-existing relationship before any investment opportunity can be discussed.

Some local nonprofits in the Oakland, California area have created a Community Capital Working Group – a forum where residents of the area can strategize about how to encourage more local investing within the law.

Finally, Sustainable Economies Law Center, a nonprofit that I co-direct with Janelle Orsi, is working on changing the state and federal law to exempt very small investments from the securities laws. You can read about our efforts at ...

It’s important to be aware of securities laws, but don't be intimidated by them. The movement to make it easier for small businesses to raise capital from their communities is growing. A new book called Locavesting was just published and congressional hearings on the issue have been held." (