Even in good economic times it can be challenging to scrape together financing for much-needed community development projects. These days, cuts in grants and tax credits combined with cheeseparing lenders has resulted in a huge drop in funding for community development and revitalization projects, such as low-income housing projects and eldercare innovations like the wildly successful Green House Project created by Dr. Bill Thomas.
Last week I attended a conference at the Federal Reserve Bank of Richmond’s Baltimore office that brought together community development financial institutions (CDFI’s) and other stakeholders to discuss innovative ways to raise capital. I was invited by one of the speakers, Terry Simonette, president and CEO of NCB Capital Impact in Arlington, Va., the organization that provides financial backing and support to replicate The Green House Project, an initiative we’ve been proud to be a part of for several years.
“We’re really trying to figure out how to stack the capital in different ways to get the job done,” said Simonette in a quote in the Baltimore Sun story on the funding crisis for community development.
One of the highlights of the conference was discussion of a potentially revolutionary new tool that CDFI’s may be able to add to their community development arsenal — securities crowdfunding.
Crowdfunding describes the social networking phenomenon of many individuals chipping-in money to support a project or initiative. Major crowdfunders include Kiva.org, which awards micro-loans in developing nations funded by individual donations, and Kickstarter.com, which has become a major disruptive force in the startup world generating over a million lenders and providing more funding for arts projects last year than the National Endowment of the Arts.
Crowdfunding raised $1.5 billion in 2011 and is expected to raise $3 billion this year, according City First Enterprises Executive Director David Wilkinson, who spoke at the Fed Bank conference. But up until recently, securities regulations have prohibited the use of crowdfunding to raise equity funds for large business or development projects.
That’s about to change, thanks largely to a couple of dudes who launched a crowdfunding campaign in 2009 that nearly raised $300 million to buy Pabst Blue Ribbon. When PBR went up for sale that year, Hollywood, Calif.-based Forza Migliozzi and The Ad Store created the website BuyaBeerCompany.com on a lark. They promised investors “a crowdsourced certificate of ownership as well as enough beer to match their pledge.” It took only seven months to raise $200 million, which prompted the Securities and Exchange Commission (SEC) to shut down the site as illegal.
Which it was. There are very strict regulations that are intended to protect large equities investors, such as requiring tax returns and social security numbers as proof that the investor can afford the investment (anyone for another global financial meltdown? Anyone?). Unfortunately, these kinds of regulations are not practical for startup crowdfunding projects which generally attract donations under $100.
But thanks in part to Migliozzi’s antics, these regulations may soon be loosened. The Jobs Act of 2012 passed by Congress and signed by Obama last April included a new securities crowdfunding provision and ordered the SEC to create new rules by early 2013 that would allow for wider pools of investors with fewer restrictions.
Securities crowdfunding could be a powerful asset for CDFI’s, who are uniquely positioned to seek out creative new sources of financing, Wilkinson said. But if they want to fully take advantage of this social networking phenomenon, they need to speak out now.
Besides the need to lower barriers for small investors, Wilkinson said the SEC also needs to remove limits on marketing securities crowdfunding projects. Currently, the SEC prohibits marketing of equity funds, which would greatly limit the ability to effectively use social networking and crowdfunding to raise equity.
Some bloggers have noted the Jobs Act crowdfunding language has already been watered down and further rulemaking by the SEC could muddle things even more. Maybe somebody should start a Kickstarter campaign to put pressure on the SEC?