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With volatility, should investors be thinking beyond existing stock markets?

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With all this roller-coaster riding on the ride that is today’s stock market, I was taken by a conversation I had with Amy Cortese, author of Locavesting.

The conversation centered on the after-effects of landmark legislation creating a two-tiered framework of investor classes:

  1. accredited investors (the rich)
  2. the rest of us

This bifurcation of the investor population basically enables the rich to invest in private companies while the rest of us are relegated to investing in public markets (essentially, our current stock exchanges).

Are small investors the suckers?

In an effort to protect smaller investors, the government set up a system where individual investors are tapped to fund larger companies (those clearing the hurdles to be listed on current exchanges — mostly lower risk, lower return) while larger investors can tap companies with higher growth trajectories (private firms).

It’s interesting to think that before the legislation of 1933 and 1934, there were dozens of small exchanges around the U.S. (England, too).  These exchanges were local in nature, providing fundraising capabilities for local businesses and investment opportunities for local investors.

The consolidation of stock exchanges over the past 80 years (first in U.S. and now globally) resulted in  local exchanges slowly merged or died off.

Our investment selection is limited and seems at the mercy of governments, central banks, and Wall Street.

Enter the new players

We’re seeing the emergence of new forms of investments and many are forming in England where the regulatory regime is more flexible.

We’re seeing the emergence of numerous alternatives to traditional stock market investing.  These include:

  • Peer to Peer lending: Companies like Prosper provide communities of people willing to lend and borrow from one another — borrowers get access to non-bank loans while lenders get compensated for the risk they assume.
  • Crowdgiving: One way individuals have gotten around securities laws in the U.S. is by creating platforms that don’t result in the potential of profit.  Kiva is a way to lend money (interest-free for the lender) to individual business owners around the world. Over $1M per week is being gifted (gifted!) to people with big ideas in the arts for projects on Kickstarter.  Givers only receive memorabilia in return for their donations.
  • Non-public investments: Another way entrepreneurs can get around U.S. securities law is by keeping the marketing of their investments to just friends and family (though that’s getting harder in the Age of Facebook Friends).  Profounder is doing just that.
  • Regional exchanges: We’re seeing a global movement to bring back regional exchanges.  The Lancaster Stock Exchange (LanX) is part of this movement to decentralize business financing and institutions and bring funding instruments local.
  • Small business lending: Companies like England’s FundingCircle are providing debt-based, peer-to-peer funding solutions for local businesses.

More Resources to learn about local investing

Cortese mentions Hawaii as a locality ripe for local solutions.  With a lot of money on the islands, most of the investment capital flows to the mainland.  A local funding solution keeps investment money focused on local opportunities for a geography that imports most of its food and energy.

Of course, none of this works if there aren’t true, ample opportunities for local investmentsLarge stock markets also provide liquidity to investors (worth a lot of money if you’ve even needed it and not found it) — something that these alternatives would have to compete with if they’re serious about attracting investors.

I’m feeling a crisis of faith in our existing systems.   Nothing says what we have is what we’re stuck with.  Times like this make it worth exploring the alternatives, no?

What do you think?

 

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