(cross-posted from blog.neighborly.com)
At Neighborly we want to make it possible for everyone to invest in their community: to be able to shape the future of their cities by investing in the change they want to see. Last month, we took an exciting first step towards that vision: we sold the first ever Microbonds for a public project, to support the San Leandro Unified School District (SLUSD).
Of course we suspected this opportunity would be popular. Our users regularly highlight education as the issue they care most about, and it was a unique opportunity to be among the first to try a brand new investment product. We’re delighted to have offered early members of the Neighborly community this opportunity, and the feeling was mutual. So far, so awesome.
About San Leandro School District
The San Leandro Unified School District was formed in 1952 and covers about 12.4 square miles in California’s Central Alameda County. An estimated 8,617 students were enrolled for the 2014-2015 school year. The District currently operates 13 schools, including:
- 8 elementary schools
- 2 middle schools
- 2 high schools
- 1 adult school
- 1 independent study program
In recent years, the District has been focusing on improving its facilities to better the lives and educational experience of its students.
What’s Special About This Investment?
Let’s talk about why we think people chose to invest in San Leandro with us – and why we’re so excited about what’s to come.
Transparency. While California code required us to limit this to our neighbors that met certain legal qualifications, those qualified neighbors found a clear picture of what they’d be investing in and where their money would go. We deciphered a 150-page document to highlight the impact the funds would make to the school and community. Like anyone selling an investment product, we provided detailed information on the bonds, such as the Official Statement filed by the school district – but we also gave our neighbors much more compelling and digestible content to get them started before they dug into the documentation.
Impact. We all know that improving our educational system is a critical problem, and it’s central to building the future of our country. Most people rarely have the opportunity to do more than learn about the problem. By offering these Civic Microbonds, we gave people a chance to be part of the solution, helping to shape the lives of students and set them up for brighter futures.
Financial Return. The Microbonds were a considerable financial opportunity: they pay 2% tax-free interest for one year, without the risks associated with stocks and other more volatile investment vehicles. Taking into account the tax savings, that could be a return of 3-4% for our neighbors depending on their personal tax situation.¹ In exchange, we asked our Neighbors to commit to investing in San Leandro Schools for one year, since there isn’t an active secondary market for this type of investment. Considering how little savings accounts are paying at the moment, our neighbors realized that this was a way to put money into a tax-free investment and come out ahead. Wealthy people get and remain wealthy because they have access to vehicles like this private offering. Neighborly believes that everyone should be able to invest in their community and share in the upside.
(In order to participate in this investment, users needed to qualify as accredited investors resident in the state of California. The 3-4% tax-adjusted return was calculated based on the example of a CA-resident individual earning $200,000.)
Access. For most municipal bond investments, you need to invest $5,000 or more – but we were able to make this investment available at a minimum of $500. That’s a change we believe needs to happen much more widely. Everybody should be able to invest in and improve communities. It’s in our collective best interest, and it’s part of our civic responsibility.
So, how did we make it happen (and why hasn’t it happened before)?
Municipal bonds are investments created by, of and for the people, and should be available to all regardless of income levels or wealth, but making these Microbonds available at $500 wasn’t as easy as it should have been. Not even close.
The municipal bond industry follows the convention of asking people to invest at least $5,000, which restricts access for many people. It’s not a rule or regulation, but it’s a convention that this is how bond deals are done. Unfortunately it’s a convention that both causes and reflects the fact that the industry has excluded regular people in favor of the wealthy. We jumped through numerous legal hoops to make these Microbonds available at $500. We bought the San Leandro bonds, created a single-use LLC to own them, and sold shares in that company priced at $500 each. In this way we were able to divide an existing bond into smaller pieces, and make those Microbonds available under regulation 25102(f) of the California code. It was an experiment to show what small-scale retail investing in municipal bond projects could look like.
Bond funds have pooled small-scale investments into larger ones for decades. The difference with a Microbond is that instead of simply investing in a generic area such as ‘California municipal bonds’ with no clear sense of where your money is going, Microbonds enable investors to participate in specific municipal bonds that match the type of infrastructure project they would like to support (in this case a school district) and the locality of their choosing (San Leandro). We believe that restoring the connection between the investor and the recipient of their investment is a significant step forward in improving how communities are financed.
It shouldn’t be this way, and we’re hoping to sound a wake up call to the public finance industry: investment opportunities should be open to everyone.
Lowering the denomination will open the benefits of community investment to a much wider range of people. In a digital age of public investment, the excuse that lower denominations and greater numbers of investors leads to ‘more paperwork’ doesn’t wash. We look forward to the day when investing in your community is as easy as buying a stock. We’re excited to work with the many folks in the industry who want to get to that day soon.
This Is What We Do Best, and What’s Ahead of Us
We’re thrilled to have offered our neighbors an opportunity to invest in something as important as education. Thank you to those of you who participated. To you, and those of you who didn’t invest this time, Neighborly will be curating a range of investment opportunities in the months ahead. They will all help us to build better neighborhoods and communities. To learn more about similar opportunities in your area, join Neighborly and explore opportunities to invest in your community.
The best part? This is only the beginning. We’re putting a new spin on civic finance, and this deal is the first of many you’ll see on Neighborly in the coming months. And because you’re getting involved now, you’ll have a chance to take advantage of similar opportunities as soon as they appear. Lead the crowd instead of getting beaten by it, right?