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Old Posted Apr 12, 2021, 7:40 PM
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How “Closed-Loop Capital” Builds Local Businesses and Stronger Local Economies

How “Closed-Loop Capital” Builds Local Businesses and Stronger Local Economies


April 8, 2021

By Nick Mathews

Read More: https://www.strongtowns.org/journal/...d-loop-capital

Quote:
Closed-loop capital refers to the concept in which investors in a business are also the beneficiaries of its services. The benefit of closed-loop capital is that the people financing a new product, location, or venture are closely tied to its success. In the context of small businesses, closed-loop capital typically means that patrons or supporters of a given business are also the ones supplying some of the capital needed to operate that business.

- Essentially, closed-loop capital is a strong way to build connected communities. It relies heavily on vested interest, such as locale or connection to the locale, affinity towards a business model, relation with the entrepreneur, and much more. If communities had vested interest in a business, they would be working collectively to ensure its success and ultimately creating localized economies started and supported by a group of people connected in more ways than just one. — Closed-loop capital has not always been an option for businesses. Until 2016, only accredited investors were typically able to deal in securities for small or private business. This meant that your average American did not have the ability to invest in businesses or in their communities in the same way that a professional investor could.

- Small, brick-and-mortar businesses generally do not have access to venture capitalists, and look to traditional sources of financing, such as small business or personal loans, to get started. Lenders may provide the necessary funds but have very little stake in the success of the business beyond its ability to make its set interest payments. — One alternative to this traditional funding model is donation-based crowdfunding. Donation-based crowdfunding is a type of funding in which a founder can seek capital aimed at growing their business by asking for donations from a wide array of people, the “crowd.” Oftentimes, donation-based crowdfunding comes with some sort of perk and has traditionally seen successes in the product market in which funders get the product on offer in exchange for their donation.

- Regulation crowdfunding or RegCF, according to the SEC, "enables eligible companies to offer and sell securities through crowdfunding." The rules surrounding RegCF include allowing transactions only within online SEC-regulated broker-dealers or funding portals such as Mainvest, limiting the amount of money a business can raise and the amount individual investors can invest, both within a 12-month period, and requiring a disclosure of information in filings with the SEC. — Because community members that become investors have both a financial and emotional tie to the business, investors may be more likely to support, patronize, and champion the business. Opening a small business to investment inherently creates vested interest and new avenues for shared advice as well as potential connections, all more in line with the relationship a venture capital firm has with a tech start-up.

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