By Marta Maretich @maximpactdotcom
Many of my dinner companions — who are usually intelligent, well-informed people — have never heard of impact (still!) though most are aware of the buzz around responsible or sustainable investing. Yet, when I describe how the approach works, producing financial returns as well as measurable social and environmental benefit, almost invariably the response is: “What a good idea! How can I invest in impact?”
The problem is, up until recently, I haven’t had a good answer for them. Now, thanks to the explosion of innovative online investment platforms, I do: equity crowdfunding.
Engaging the small impact investor
From the beginning, impact investing has been the realm of the large private investor, mainly foundations, high-net-worth individuals and family offices.
The main reason for this was cost: due diligence and other deal costs only pay off if the overall investment is large enough — Tim Freundlich of ImpactAssets put the figure at around the $20 million mark. This has meant that making impact deals was expensive and small, individual investors, known in the trade as “retail investors”, had almost no opportunity to get involved.
Sector leaders have been trying to find ways to solve this problem. A year ago, we reported on ImpactAssets’ launch of Seed Ventures, a platform within their donor-advised fund, the Giving Fund, designed to aggregate smaller amounts of capital in a cost-effective way. Calvert Foundation offers Vested, an online investment platform, along with a brokerage account facility that aims to connect small investor capital with community investment schemes. Even internet giant EBay has made forays in this area, acquiring MicroPlace, a crowdfunding site for microlending, in 2006 — then, sadly, shutting it down early this year.
Despite the failure of MicroPlace, the crowdfunding model has been successful in other contexts. Platforms like Solar Mosaic and Crowdfunder have tapped into the public enthusiasm for supporting beneficial projects and, to a lesser extent, social businesses. Their popularity gives some indication of the potential of this method to raise capital in small increments. It’s my experience that crowdfunding is the first thing most people think of when they hear the term “socially beneficial investing”.
However, crowdfunding as we’ve known it so far had been limited — and the fate of MicroPlace reminds us that it isn’t a foolproof approach. Most models haven’t offered true impact investments — ones that produce both profit and benefit. Commonly, they offer rewards, such as products or services, instead of financial returns. Or they use crowdfunded capital to finance microlending schemes such as that managed by Kiva.
However, things are changing very fast in the world of crowdfunding, and these changes will profoundly affect the availability of impact investing opportunities for individuals.
The rise of equity crowdfunding
Development in the technology and regulation mean that now crowdfunding platforms can offer a range of types of investments for small investors including equity as well as debt.
Equity crowdfunding is taking off in the UK and Europe where sympathetic regulators are giving the green light to new investment approaches. Now would-be impact investors can log on to sites like Crowdcube, the Funding Tree and Seedrs, and invest as much capital as they want to — or as little, with £5 being enough to buy an equity stake in some businesses. The best of the sites offer a sophisticated range of investor services. Seedrs for example conducts due diligence on companies, handles payments, manages shareholder agreements and takes care of legal paperwork, all for a reasonable percentage-based fee.
All this is good for small investors and for businesses, but what has really transformed this market has been the proactive stance of UK regulators: all the sites mentioned are now regulated and authorized by the Financial Conduct Authority (FCA). This transforms the quality of investments made through them and opens the field for even more innovation and a greater role for the small investor.
In the US, things aren’t moving as quickly. Congress and the SEC (Securities Exchange Commission) have been reluctant to pass the legislation that would allow equity crowdfunding to blossom. Despite playing host to the some of the biggest crowdfunding platforms, the US may now be in danger of lagging behind other parts of the world in the crowdfunding stakes. Yet public enthusiasm for the practice remains high, and this is pushing individual states to permit equity crowdfunding within their borders. US sites like Circleup and Equitynet are open for business and new sites are cropping up almost daily.
Let them all in
And what does all this crowd funding ferment have to do with impact investing? The boom in equity crowdfunding has the potential to strengthen the impact sector in important ways.
First, it could finally solve the problem of small investor access, providing a cost-effective way for ordinary people to invest modest amounts in companies at the seed and early stages of growth. This means that, for the first time, even small investors will now be able to engage directly in impact investing.
This new accessibility has benefits for the whole sector. It could mean that impact investments will become a familiar part of the investment portfolios of individuals. If this happens, more people will understand how impact works and its approach will become more widely accepted. Socially-minded investors will have the satisfaction of backing businesses they believe in. Meanwhile, more impact businesses will receive the finance they need.
In this way, equity crowdfunding may provide the missing link that connects impact investing to an untapped groundswell of public support — as well as a huge pool of capital held in private hands.
Democratizing the sector
This sends me back to those conversations over dinner.
What constantly surprises me is how few of the people I meet have even heard of impact investing. To someone like me who eats, sleeps and breathes impact, it seems incredible, but impact investing still lacks the public profile of approaches like microlending or reward-based crowdfunding.
Part of the reason must be that individual investors have so far been excluded from the world of impact. As a direct result (I think) some socially-conscious people view impact with suspicion, assuming it’s a ploy to siphon money away from philanthropic programs and channel it back into the pockets of rich capitalists.
When I hear this kind of talk, it sets alarm bells ringing in my head. In order to create the kind of impact markets we envision — and to build a more sustainable, prosperous future for the planet — we’re going to need grassroots public support on a global basis. The key to this will be finding ways to involve more people in impact and to do a better job of getting our message across.
As for my financially-minded dinner companions, I notice that impact makes gut sense to them; they immediately see it as a force for changing the world and they want to be part of it.
Now, with the advent of equity crowdfunding, that may finally be possible. Now, at last, I have one answer to the question, “How can I invest in impact?” All I need are a few more.
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