Basics

As a community builder, you might see opportunities to improve infrastructure, wellbeing, housing, or any number of other elements in your community. Perhaps you have a specific project in mind, but there are likely many community-driven initiatives in the works around you that could be realized with capital and local engagement. This is where building a Community Investment Fund (CIF) will be most effective.

The Definition of a CIF

CIFs are typically professionally-managed investment funds with two essential characteristics:

capital is sourced from people in the community (including from retail/non-accredited investors); and
capital is invested into local people, projects, and businesses that reflect the values and needs of the community.

A successful CIF benefits investors and the community through a positive rate of return and an influx of non-extractive capital to local businesses and development projects (such as renewable energy infrastructure, affordable housing, or community spaces). CIFs make local investing easier for investors looking to put their money somewhere where they will earn a monetary return and experience the positive social benefits of having a well-resourced local economy, without having to do due diligence on individual businesses and projects. It allows the aggregation of that work and oversight by investment professionals, making community investing accessible.

The Broader Context

There is a broader regulatory environment to be keenly aware of in the creation of CIFs. After the stock market crashed in 1929, the federal government enacted three laws to regulate the emerging field of “securities.” (To simplify, a security refers to almost any kind of investment that promises a financial return.)

The Securities Act of 1933 governed how securities are issued,
The Securities Exchange Act of 1934 governed how they can be resold and traded, and
The Investment Company Act of 1940 governed how they can be pooled.
(Similar laws were enacted by state governments.)

Taken together, these laws represent a dense thicket of dos and don’ts that sometimes demand extensive and costly work by lawyers before even the simplest of investment transactions can occur. In creating a CIF, we must comply with these regulations.

Common Strategies

There are many strategies available to work within these regulations, some of the most common we will describe below. With the exception of the private funds, all the strategies here allow you to raise community capital through some kind of public offering, which means the offering can be publicized and all investors can participate.

Here is an introduction to some of the fund strategies that may be available:

Private funds: These raise capital privately (usually from accredited investors only) and have no more than 100 investors altogether.
Nonprofit funds: These are charities, usually exempt under Section 501(c)(3), that raise debt capital and deploy it in investments (usually loans) that further the organization’s charitable mission.
Pooled income funds: Often used as planned giving strategies, these can raise contributions from anyone, deploy capital in just about any kind of investments, and distribute profits among the contributors (or their designated beneficiaries) for life. When the income beneficiaries have all died, the assets are handed over to the sponsoring charity; so they are a kind of hybrid between an investment and a gift.
Real estate funds: These funds invest substantially all of their assets in real estate projects.
Diversified community investment funds (DCIF): A variation on the real estate fund, these funds are primarily in the real estate investing business but can invest up to 40% of their assets in other types of investments, such as in local businesses.
Aligned community investment funds: Also known as “supplemental funds,” these are companies that are primarily in some non-securities business but, like the DCIF above, can invest up to 40% of their assets in other types of investments.
Holding company: These funds hold a majority or controlling stake in most of their portfolio companies, with the total value of their minority stakes and other securities comprising no more than 40% of their total assets. Holding companies are primarily in the business of managing their subsidiaries.

In addition to complying with the 1940 Act, all of the strategies above involve issuing securities to investors, which means the fund also must comply with the 1933 Act. In most cases, a CIF will do this through a direct public offering registered with state securities regulators (or through an exempt offering for charitable funds in many states). In some cases, this could be done through a crowdfunding offering (like Regulation Crowdfunding) or Regulation A.

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How do you build a community investment fund?