Local Investment Funds: What Are They?

Local investment funds are a way to put money to work for the mutual benefit of investors, local small businesses, and the community as a whole. Local small businesses are an essential part of our communities and neighbourhoods, bringing colour, culture, and uniqueness to our lives. They are owned, managed, and staffed by people in our community, and the money we spend and invest with them is more likely to be re-spent at other local small businesses, increasing prosperity for all. Local investment funds can take many forms, from securities to non-securities, and there is no one-size-fits-all approach to creating them. They can be structured as charitable loan funds, pooled income funds, or investment clubs, each with its own advantages and considerations. These funds can help local businesses access capital, fill gaps in the market, and create positive change in the community.

Local investing vs. conventional investing

Local investing is defined as putting one's money to work for the mutual benefit of the investor, local small businesses, and the community as a whole. Local investing is very different from conventional investing. In today's globalized world, investing has become synonymous with putting one's money into shares and debt of multinational corporations and governments via high-speed, electronic trading platforms. A vast network of funds, brokers, advisors, and investment managers disconnect investors from knowing what their money is doing.

Local investing, on the other hand, is slow and engaging. Local investors must have the passion, time, and energy to find and evaluate local investment opportunities and get to know the people offering these opportunities. Local investors can make money on their investments, but local investing is about impact as much as it is about profits. Local investors can help start or expand businesses, create jobs, and increase prosperity in their communities. They build relationships and goodwill that last well beyond the investment time horizon.

Local investing opportunities come in many forms, with varying degrees of complexity and risk. Securities, such as equity, debt, and royalty agreements, are legally regulated and generally more complex and risky, making them appropriate for experienced investors. Non-securities, on the other hand, are not regulated and are generally simpler and more appropriate for novice investors.

When compared to conventional investing, local investing may offer higher financial risk due to a lack of diversification and liquidity. A localized investment portfolio holds fewer, geographically concentrated investments, making it vulnerable to changes in the local competitive environment or community-wide events. Additionally, investments in local businesses may be challenging to sell due to a lack of a liquid market.

However, local investing can provide benefits such as supporting small businesses, strengthening communities, and keeping capital local. Local small businesses contribute to the unique culture and character of communities and are often owned and operated by individuals within the community. By investing locally, individuals can contribute to the growth of these businesses, bringing essential products and services to their communities and enhancing the local quality of life.

In conclusion, local investing and conventional investing differ significantly in terms of scope, pace, and impact. While conventional investing focuses on global markets and high-speed transactions, local investing is a more deliberate process that seeks to benefit local businesses and communities directly. Local investing may carry higher financial risks, but it also offers the potential for meaningful connections and positive societal changes.

Securities laws and regulations

United States

The U.S. Securities and Exchange Commission (SEC) plays a significant role in regulating the securities industry in the United States. Some of the key securities laws and regulations include:

• Securities Act of 1933: Often referred to as the "truth in securities" law, this Act requires companies to provide financial and other significant information to investors when offering securities for public sale. It also prohibits deceit, misrepresentations, and fraud in the sale of securities.
• Securities Exchange Act of 1934: This Act established the SEC and grants it broad authority over the securities industry. It includes the power to register, regulate, and oversee brokerage firms, transfer agents, clearing agencies, and securities exchanges. The Act also prohibits certain types of conduct in the markets and provides disciplinary powers over regulated entities and associated persons.
• Investment Company Act of 1940: This Act regulates companies that primarily engage in investing, reinvesting, and trading in securities (investment companies). It requires these companies to disclose their financial condition, investment policies, and investment objectives to investors. The Act also focuses on the structure and operations of investment companies.
• Investment Advisers Act of 1940: This law regulates investment advisers, requiring those compensated for advising others about securities investments to register with the SEC and comply with regulations designed to protect investors. Advisers with at least $100 million in assets under management or advising a registered investment company generally must register.
• Commodity Exchange Act: This Act regulates the trading of commodity futures and imposes registration and compliance obligations on participants in commodity futures markets.

Canada

Canada has a comprehensive regulatory framework for securities, which includes the following key aspects:

• Registration Requirements: Any firm or individual directing the business, operations, or affairs of an investment fund must be registered as an investment fund manager. This includes managers of mutual funds and non-redeemable investment funds.
• Regulatory Framework: Each province and territory in Canada has its own securities legislation and regulations, with the collective of provincial and territorial securities commissions known as the Canadian Securities Administrators (CSA). They work to improve, coordinate, and harmonize the regulation of Canadian capital markets.
• Prospectus Requirements: Investment funds seeking to offer their securities to the public must prepare, file, and obtain receipts for a preliminary prospectus and a final prospectus from Canadian securities regulatory authorities. The prospectus must provide full and accurate disclosure of all material facts relating to the offering.
• Marketing of Public Funds: Sales of investment fund securities must be made by registered dealers, such as mutual fund dealers or investment dealers. There are specific restrictions and requirements for marketing communications, including the prohibition of monetary payments and certain non-monetary benefits to dealers.
• Alternative Investment Funds: These funds are typically characterized by their reliance on exemptions from registration requirements. Common types include limited liability companies (LLCs) and limited partnerships (LPs), which must comply with state laws in their jurisdiction. Managers and advisers of Alternative Investment Funds are generally subject to registration and regulation by the SEC and/or state securities regulators.

Local investment opportunities

Local Investing

Local investing is about putting your money to work for the mutual benefit of yourself, local small businesses, and the community. By investing in local businesses, you can help bring essential products and services to your community, grow the local economy, and enhance the quality of life for everyone. Local investing often involves finding and evaluating local investment opportunities, building relationships with local business people, and focusing on impact and profits.

Securities and Non-Securities

Community Investment Funds (CIF)

Community Investment Funds are a type of local investment opportunity that aims to build local wealth, equity, and justice. Creating a CIF involves assembling a committed team, defining the fund's objectives and geographic boundaries, and determining its business model and legal structure. CIFs can take various forms, such as charitable loan funds, pooled income funds, or investment clubs, each with its own advantages and considerations.

Local Government Investment Pools (LGIPs)

Local Government Investment Pools are pooled investment funds overseen by state treasurers or authorized governing boards. LGIPs operate like money market mutual funds, investing the combined cash of participating governments into securities allowed under state laws. They offer benefits such as economies of scale, full-time portfolio management, and liquidity. However, investments in LGIPs are not insured or guaranteed, and there have been instances of substantial losses. It is important for investors to understand the investment objectives, legal structure, and operating procedures of LGIPs before placing their money in them.

Local Agency Investment Fund (LAIF)

The Local Agency Investment Fund is a program that offers local agencies the opportunity to participate in a major portfolio that invests hundreds of millions of dollars. LAIF utilizes the investment expertise of the State Treasurer's Office investment staff at no additional cost to taxpayers. Agencies can register and access LAIF Online to manage their investments, with transactions completed by 10:00 am being processed on the same day.

These are just a few examples of local investment opportunities. By exploring these options and conducting due diligence, you can find meaningful ways to invest in your community while also considering potential financial returns.

Community Investment Funds (CIF)

Local investing is the act of putting money to work for the mutual benefit of investors, local small businesses, and the community as a whole. Community Investment Funds (CIF) are a type of local investment fund that aims to build local wealth, equity, and justice. There is no single formula for creating a CIF, but there are critical areas to consider when setting up a fund.

The first step is to assemble a committed team of forward-thinking community builders, including representatives from financial institutions, philanthropic institutions, community nonprofits, and government agencies. The team should reflect the community members that the fund aims to serve and prioritize their input.

The second step is to define the fund's objectives, including its theory of change, geographic boundaries, economic mission, and risk tolerance. The fund's purpose should be to have a positive impact on the local community by providing capital to local businesses or nonprofits.

The third step is to determine the business model, including the target fund amount, the types of investments to be made, and the legal and operational structure. The fund's business model should be aligned with its theory of change and economic mission.

The Community Investment Fund 2030 (CIF) is an example of a CIF that aims to foster economic development in historically underserved communities. It provides grants for capital improvement programs and planning for capital projects.

Overall, Community Investment Funds (CIF) are a powerful tool for driving local economic development and building wealth, equity, and justice in communities. By bringing together community members, businesses, and investors, CIFs can unlock economic potential and create positive change.

Local Government Investment Pools (LGIPs)

LGIPs typically combine the cash of participating jurisdictions and invest it in securities allowed under the state's laws regarding government investments. By pooling funds, participating governments benefit from economies of scale, full-time portfolio management, diversification, and liquidity. Interest is normally allocated to participants daily, proportionate to the size of the investment. Most LGIPs offer a check-writing or wire transfer feature that adds value as a cash management tool.

LGIPs may be authorized under state statutes and sponsored by state or local governments, or they may be set up through intergovernmental agreements known as "joint powers" agreements. In several states, local governments have joined together through joint powers agreements to sponsor the creation of LGIPs that operate independently of the state government. A board of trustees, typically composed of public officials, oversees these pools and selects a financial services firm to provide services such as investment management, custodial services, participant record-keeping, independent audits, and legal services.

It is important to note that LGIPs have different investment objectives. Some LGIPs aim to maintain a constant Net Asset Value (NAV) of $1.00 and provide excellent liquidity for the investor. These LGIPs invest in short-term securities with average maturities sufficiently short to avoid market price risk. Other LGIPs have an investment objective of maximizing returns and introduce market risk through a fluctuating NAV. They invest in longer-term securities, subjecting their portfolios and participants to greater market price volatility.

When considering investing in an LGIP, it is crucial to understand its investment objectives, legal structure, and operating procedures. Investors should carefully review the pool's offering statement, investment policy, and audited financial statements. It is also important to pay attention to the investment objectives to determine whether the pool seeks to maintain a constant or fluctuating NAV, as this will impact the suitability of the investment for different strategies.

Frequently asked questions