Reform of the US Securities Laws is Necessary for Impact Investing to Reach Full Potential

Triple Pundit recently teamed up with SoCap10 to explore the opportunity and challenge of impact investing. In partnership with Myoo Create, we put a call out to bloggers asking: What’s Next? How will social enterprise unlock the $120 billion market opportunity for impact investment?

Leading up to SoCap10 October 4th-6th, we’re featuring the best answers here. Enjoy!

By: Jenny Kassan

As an attorney for social enterprise, I speak with clients almost every day that have no lack of people and organizations that would like to invest in them. Many of their customers, neighbors, and fans would much rather invest their small nest eggs into local socially responsible businesses than mutual funds (even SRI ones) that invest in giant multinational corporations. But guess what? It is illegal for them to do so.

An extremely complicated set of laws and regulations adopted in the 1930s and early 1940s makes it illegal for a business to offer or accept investments from the public without jumping through numerous legal hoops that can easily cost hundreds of thousands of dollars in legal and accounting fees, filing fees, and other costs.

The result is that social enterprise must compete for extremely scarce funding which may require entrepreneurs to sacrifice their vision. And the vast majority of us are prohibited from putting our investment funds where we would like to put them. After all, is it really riskier for me to invest in a business in my community where I shop regularly and know the owners than it is for me to invest in faceless multinational corporations most of which seem to be completely out of touch with the imperatives of the new economy?

The securities laws were put in place for a good reason – to protect average investors from losing their life savings in unregulated investment schemes. Well, didn’t investors lose their life savings in completely regulated and legal investment schemes in the last few years? It is time to ask why these regulations make it almost impossible for small social enterprises to raise capital and what we are trying to protect people from.

This past summer, I participated in a small step toward changing this situation. At Sustainable Economies Law Center, a nonprofit at which I am co-director, two summer law student interns wrote a request for a rule change for the Securities and Exchange Commission, the federal agency that regulates investing. Our request was simple: exempt from the regulatory requirements solicitation of investments of up to $100.

Imagine if social enterprises could solicit investments of $100 and offer a financial return on those investments without having to spend hundreds of thousands of dollars for securities law compliance? This would not solve the current market failure, but it would be an amazing first step that could lead to more extensive reforms.

My colleague Michael Shuman in his book Small Mart Revolution and elsewhere has shown that small locally owned businesses are not the risky investments they are made out to be. They make up approximately half of the economy and are more than holding their own in a system which is stacked almost completely against them. We must do away with the outdated laws that prevent investment dollars from flowing to them.

A recent report by Hope Consulting on Money for Good revealed there is a $120 billion untapped market in the US for individual investors looking to make a positive environmental and social impact with their dollars. In other words, there are a lot of individuals ready to invest in and support triple bottom line business start-ups. So what's the hold-up?Triple Pundit recently teamed up with SoCap10 to explore this opportunity and challenge. In partnership with Myoo Create, we put a call out to bloggers asking: What's Next? How will social enterprise unlock the $120 billion market opportunity for impact investment?Leading up to SoCap10 October 4th-6th, we're featuring the best answers here. Enjoy!

2 responses

  1. Excellent points. I recently heard someone from Profounder talk about how they’ve built the capability to navigate the existing laws, to help in similar situations. It’s not suitable for all types of ventures, because it relies on revenue sharing, but it’s a step in the right direction, none the less. for more information.

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