Community Capital – capital sourced from a broad cross-section of the community and invested in the community – is more than a legal and financial strategy. At its core, community capital is about equity, inclusivity, empowerment, and shared prosperity.
Principle One: Community Capital is Inclusive
Community Capital practices provide opportunities for people of all levels of wealth and all demographics to fully participate in the economy as investors. Widening the investor pool creates more opportunities for diverse stakeholders to receive investment from their neighbors and build enduring wealth.
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Entrepreneurs who receive funding tend to reflect the demographics of the investors who do the funding. Entrepreneurs in the US have historically been excluded from funding based on race, class, ethnicity, gender, and so on. This is largely because the investor class lacks diversity. To systemically diversify the pool of entrepreneurs who receive funding, it is necessary to diversify the investor base.
At the same time, the vast majority of the population who are not wealthy have historically lacked opportunities to build durable wealth. Community capital levels the playing field for both investors and entrepreneurs.
At the same time, the vast majority of the population who are not wealthy have historically lacked opportunities to build durable wealth. Community capital levels the playing field for both investors and entrepreneurs.
Principle Two: Community Capital is Fair and Equitable
Community Capital practices redress financial inequity by establishing wealth-building opportunities for all. Unlike historic practices, which provided opportunities and incentives only to the wealthiest Americans, community capital provides opportunities for meaningful returns on investments for everyone.
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Traditionally, the American capital marketplace has been tilted steeply in favor of the wealthy. The investment opportunities that provide the highest rates of return are reserved for the wealthiest investors, who rapidly increase their wealth. The non-wealthy have been limited to investments with relatively low and risk-adjusted returns, discouraging the non-wealthy from investing at all.
The terms of a community capital offering should never penalize those with lesser resources. For example, while the rate of return promised to investors of financial capital may vary according to the level of risk assumed by investors, the rate of return should not be lower simply because the amount of investment is less or because the investor does not meet certain wealth criteria. In some community capital raises, the rate of return may be higher for non-wealthy individuals in an effort to address historic and systemic inequity.
Finally, a venture’s need for capital should be balanced against the need to protect the interests of shareholders. A venture that is raising community capital should take extra care to provide clear and effective disclosure of any unfavorable factors and risks.
The terms of a community capital offering should never penalize those with lesser resources. For example, while the rate of return promised to investors of financial capital may vary according to the level of risk assumed by investors, the rate of return should not be lower simply because the amount of investment is less or because the investor does not meet certain wealth criteria. In some community capital raises, the rate of return may be higher for non-wealthy individuals in an effort to address historic and systemic inequity.
Finally, a venture’s need for capital should be balanced against the need to protect the interests of shareholders. A venture that is raising community capital should take extra care to provide clear and effective disclosure of any unfavorable factors and risks.
Principle Three: Community Capital Empowers and Serves All Stakeholders
Community Capital projects work to incorporate the perspectives and interests of a diverse set of local stakeholders in their design and management. Development projects are commonly designed and governed by wealthy investors, investment managers, and other gatekeepers who are primarily interested in their financial returns. In contrast, community capital projects intentionally balance the needs of many stakeholders fairly and equitably and ensure that none are harmed by the venture’s activities.
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There has been a pervasive myth in US business culture that a venture’s sole purpose is to maximize profits for investors of financial capital. This myth, known as “shareholder primacy,” is not and never has been the law in any state in the US. On the contrary, the “business judgment rule,” which is the law in every state in the US, protects boards and managers when they balance the needs of all constituencies in good faith. Yet the widespread belief that shareholder primacy is the law has produced insidious results. Not only do employees, communities, and the environment itself suffer from the effects of this myth, but studies have shown that it correlates with lower business profitability.
All business ventures impact a wide group of stakeholders: employees invest their time and careers; governments invest the infrastructure necessary for success; communities support ventures in a variety of ways; lenders and shareholders invest financial capital; and the earth itself invests natural resources.
Ventures that raise community capital have an opportunity to overtly reject the myth of shareholder primacy and instead look to provide benefits to the entire community. Every organization, regardless of its entity type, can and should balance the interests of all constituencies without fear.
All business ventures impact a wide group of stakeholders: employees invest their time and careers; governments invest the infrastructure necessary for success; communities support ventures in a variety of ways; lenders and shareholders invest financial capital; and the earth itself invests natural resources.
Ventures that raise community capital have an opportunity to overtly reject the myth of shareholder primacy and instead look to provide benefits to the entire community. Every organization, regardless of its entity type, can and should balance the interests of all constituencies without fear.
Principle Four: Community Capital Facilitates Shared Prosperity
Community Capital projects strive to grow wealth and well-being for local individuals and communities. When investors are also customers, financial beneficiaries, and partners, both the venture and the community prosper.
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When a venture raising community capital effectively balances the needs of all its constituents, the benefits create positive feedback loops for all those constituents. These feedback loops contribute to resilient local economies, more equitable wealth distribution, safer communities, more jobs, higher tax revenues for local governments to fund services, and a healthier environment.
These positive effects can benefit everyone in a community, earn support from across the political spectrum, and signal a much-needed change in culture from a focus on benefiting the few at the expense of the many to a focus on benefiting all of us together.
These positive effects can benefit everyone in a community, earn support from across the political spectrum, and signal a much-needed change in culture from a focus on benefiting the few at the expense of the many to a focus on benefiting all of us together.