29 Jul July 29, 2020 – Mom to Millionaire Margaret Curlew and Local Incentives Michael Shuman
Margaret Curlew – Momprenueur and Author of Mom to Millionaire
Do not be a victim! Decide to be a victor!
Dr. Margaret Curlew, PhD, is a working professional, a mompreneur, and a real estate investor. She is a specialist in income generation and wealth-building, and has mentored and contributed to the success of many individuals. She is great at recognizing opportunities and making the most of it, and giving back to society and assisting those in need has always been her passion. Margaret is a firm believer in the principle that we can all influence our destiny through vision, execution and hard work. She has authored several books, most recently her new book Mom to Millionaire: Finding the Path to Financial Peace, which explains how Margaret, who had all the odds stacked against her, became successful in life.
Michael H. Shuman – Director of Local Economy Programs for Neighborhood Associates Corporation – Read interview highlights here
In a well functioning capital market, 60-80% of savings belongs
in the 60-80% of the economy that is local. Yet, almost none of that
savings touches small business.
Michael H. Shuman is an economist, attorney, author, entrepreneur, and leading visionary on community economics. He is the director of local economy programs for Neighborhood Associates Corporation; a nonprofit affordable housing company, where he researches and develops programs and policies to support entrepreneurship. Michael is also an adjunct instructor at Bard Business School and at Simon Fraser University. He is a Fellow at Cutting Edge Capital and a founding board member of the Business Alliance for Local Living Economies. He is credited with being one of the architects of the 2012 JOBS Act and several state laws overhauling securities regulation of crowdfunding. A renowned local-economy advocate, he is the author of 10 books including the most recent one, Put Your Money Where Your Life Is: How to Invest Locally Using Self-Directed IRAs and Solo 401(k)s, where he explains the nuts and bolts of self-directed IRAs and solo 401(k)s and how they can be combined with other recently legalized local investing tools. One of his previous books, The Small Mart Revolution: How Local Businesses Are Beating the Global Competition, received a bronze prize from the Independent Publishers Association for the best business book of 2006.
Highlights from Michael’s Interview
So the book is called Put Your Money Where Your Life Is: How to Invest Locally Using Self-Directed IRAs and Solo 401(k)s. Basically, this is a trillion dollar problem for most Americans. There are estimates now, at least before the COVID pandemic, that Americans had $56 trillion in long-term savings: in stocks, bonds, mutual funds, and insurance funds. In a well-functioning capital market, 60 to 80% of that money belongs in the 60 to 80% of the economy, that is local small business. Yet, almost none of that money touches small business. So the economy, we’ve got to fix that. The rationale behind this percentage of money belonging locally is, let’s just take a lower number: 60%. If 60% of our economy is small business, and those small businesses are profitable and competitive, then a well-functioning capital market would put at least 60% of our money into those businesses. The fact that it’s close to 0% shows how malfunctioning our capital market is.
Now, as far as mechanisms to invest in these small businesses, there are a bunch of them for doing it. But I’m going to point out one mechanism that is relatively new. Starting in 2016, we legalized investment crowdfunding, and that makes it cheap and easy for local businesses to put an offering, alone or a stock investment or a royalty deal, on one of three or four dozen federally licensed websites, and then grassroots investors of any wealth can go there and put up to $2,200 per year into a small business. Roughly, half a million Americans have done this since 2016.
Now, it’s one thing to say how can you invest in local businesses, but it’s another thing to say, how can I tap my pension funds? Because that’s where most people’s disposable investment wealth is: it’s in their IRAs and their 401(k)s if you’re in a nonprofit, a 403(b). The way that you tap those is you use one of two tools, either a self-directed IRA, where you hire an outside custodian and pay that custodian a couple of hundred dollars a year and then tell the custodian where you want your money to go, like a crowdfunding issue. Or it could be a solo 401k, which is even more powerful. It’s only available for people who are self-employed. But honestly, if you have $1 of self-employed income that you report on your Schedule C because you sold something on eBay, you can open up a solo 401k. Basically, a solo 401k allows you to administer your reinvestment activities out of your own bank account.
So here’s one of the challenges, I think, with local investment generally, which is you have to make good judgments about the companies. Now honestly, the way that the stock market has been performing over the last six months, the benchmark you’re trying to be is not so great. So I would feel confident that you could make a better judgment than a lot of what the general markets are giving you. But a smart local investor, particularly if that investor is looking at a local business, wants to really know that business: meet the management, test out the products, ground truths of the company. But that’s the advantage of local investment because you cannot do that with a company whose management you never can talk to.
Another one of the challenges right now is that the mechanisms for all of these businesses just aren’t there to invest in. You don’t have a way to invest in the broad market, for example, you can’t go invest in 100 small businesses. But here’s what I will tell you, we’re pioneers in a field that is really just getting started, and I predict that in a few years, you will have a lot of these mechanisms. We’re already beginning to see the proliferation of local investment funds. I just put out a handbook a couple of months ago, profiling 10 of these local investment funds around the country. Some of them focus on small businesses, some focus on real estate, some focus on the transitions of legacy businesses to new owners, some focus on energy, some focus on food. So you can begin to find these kinds of portfolios. I think the number of these funds is going to multiply by a hundredfold within five years.
If you are on NASDAQ, you can buy QQQ, which is buying NASDAQ; it’s buying the exact index. So in 2007, I wrote a paper and gave a talk proposing the creation of a local stock market where you could easily create this alternative QQQ. But here’s the problem. The problem is we have really dumb securities laws that were enacted in the Jurassic period, and we’ve got to bring them up-to-date. We did bring them up-to-date around the issuance of securities, with the crowdfunding laws done over the last decade. But we haven’t done anything on the resale of the securities, the pooling of the securities, and the way that institutions then invest in security. So we have to do massive work with federal and state securities laws to make it cheap and easy to create this alternative QQQ. It will take a federal law change, but I think the SEC is now being responsive to this.
Let me give you another example of how the SEC is being pressed to rethink things. About a couple of weeks ago, I was involved in a forum that the SEC holds every year on its rules and activities with respect to the small business owners; a couple of hundred people showed up. One of the things that people really demanded is, you guys have this really obsolete definition of general solicitation. If you and I set up a website that invited businesses and investors to just talk with one another, compare notes, and think about possible investment activities, the SEC would take us all to jail for violation of their general solicitation rules. These rules make no sense!
But the laws are to the extent that they’re applied or applied very inconsistently. Small businesses who can’t afford good attorneys, they’re usually the first to have to shut up. So what we’re pressing here is that the SEC allows conversations, in fact, we should be cheerleading for these conversations between businesses and investors to think about how they’re going to work together. Therefore, I think the SEC is going to change its regulations in the next couple of months around general solicitation, all because of public pressure. Then among the things that are on the horizon are changing the rules about creating community investment funds, make that cheaper. I love the idea about creating a marketplace for these local securities, that we can aggregate them and make these pools available across the country.
So then, here’s what you could do. I have a website in Maryland called the Maryland Neighborhood Exchange, and we’re trying to promote conversation between small businesses and local investors in Maryland. What we have been told we have permission to do under current SEC rules is that we can allow accredited investors and wealthy individuals to prove to us that they’re accredited, and then we let them into a special part of our website that allows the discussions. But in terms of the rest of us, no. If I was to do that, either the Maryland securities people or the federal securities people can take me to the pokey.
All of us hate going to prison, especially when we’re actually trying to help rebuild America; it’s really frustrating. It’s clear that the federal regulators in the securities field are trying very hard to prevent us from rebuilding our communities. The last time that we changed securities laws around crowdfunding, it was after the last financial crisis. They realized small businesses are essential to moving us forward in 2008, and there was intense pressure to change the law. I have to say, there was this amazing thing that happened in 2012, bipartisanship. Tea Party Republicans, local boards who love local food, high-tech youth, they all worked together to change the law. That’s what we have to keep doing here.
If you have some shares in a small business that you bought on a crowdfunding site, chances are good that what you bought were not shares but debt notes with a limited payment scheme. In that case, that’s really your liquid exit, is paying off the debt. But if you have stock shares, and there are some stock issues and small businesses that you can buy, you have to read the fine print when you buy it. So most companies say, you can’t resell it for at least a year. After a year, you may have some ability, but there’s not really a marketplace you can go to. So this is why we need local stock markets at some point, at least we need my ability to go onto eBay and say, I got these shares of Joe’s Hardware, is anyone out there interested in buying them? But we can’t really do that yet. So I think that’s one of the next horizons here of changing the law.
Here’s the issue with starting these local stock markets without any amendments in the laws. So America has really three or four, depending on how you count it, significant securities acts; all passed in the 1930s and 1940s. One act, which is called the Securities Act, allows states to have a real say in this. So the state of Georgia could change the way that stocks are issued. But the other act, the Exchanges Act, which is all around resale, it does not get a lot of room for state creativity. Now again, there’s a group of us who are pushing the SEC and saying, this makes no sense, you should allow states to be creative. If Georgia wants to create a local stock market, let them do it, let them set the rules on this. There’s no reason for you to poke around your nose in Georgia’s internal matters. But the SEC does not think that way. So I think there needs to be a little bit more of a public uprising to change these securities laws.
The way to challenge all of these issues is to build the business and then say take us down. In a way, that’s what I am doing with the Maryland Neighborhood Exchange. I’m trying to tiptoe and facilitate these conversations with local business’ investors, and going to the securities department in Maryland to the SEC and saying, Let me do more and tell me a good reason why I can’t. I don’t want you though to be under the illusion that there’s nothing you can do. I want to say, even under the current law, there is lots of stuff out there that you can buy, lots of stuff that has some liquidity, lots of possibilities for putting your money into local investment pools. Let’s not forget, you can also do personal loans or you can buy municipal securities in some municipalities issue securities around interesting projects that you can buy. So we’ve got lots of options, we just want more.
I think educating the public about what’s possible is really important here. So here’s my bottom line message, local investment is a way of saving the economy, especially in this post-COVID environment. If you do not invest in your local businesses, you’re going to lose them, and you’re going to lose your local economy. So it’s critical for people now to think about creative ways of putting money into that. Let me give you an example of something I did in my own backyard in Washington that is completely legal. I love a local restaurant called Busboys and Poets, so here’s what my partner and I decided over the next year. At Busboys and Poets, we typically spend $1,000 bucks in meals. I emailed the head of Busboys and Poets, Sandy Shaw, and I said, “Look, I’m worried about your business, I’m worried about your losing employees. I am going to pay you my $1,000 upfront here to make sure that you stay in business.” He was so thrilled, he gave me $200 more of a gift bonus on top of that. So I got a 20% rate of return on my $1,000. I think everyone should adopt a local business like that with a little bit of a pre-purchase. The SEC won’t get involved in it, but it helps us move our money in the right place.
To find out more about me, you can go to my website, MichaelShuman.com. My newest book is Put Your Money Where Your Life Is: How to Invest Locally Using Self-Directed IRAs and Solo 401(k)s. I write about a bunch of things that are on that website.