Efforts to rescue RiverRun Bookstore reflect a movement around the country to support small businesses with local investing.

If there was any question about whether Seacoast residents are interested in investing in the local economy, public response to the plight of RiverRun Bookstore provided the answer. Owner Tom Holbrook’s recent announcement that the store was in danger of closing triggered a torrent of support. Within days, Holbrook was convinced there might be hope of saving his business, after all.

The campaign to rescue RiverRun reflects a wave of momentum behind local investing both locally and nationally. Campaigns to invest in local economies have sprouted up across the nation, and a bill currently torpedoing through Congress could make those efforts much easier. The fundamental theory behind the movement is that people are willing to invest in businesses they know and care about.

the RiverRun saga
In some ways, the journey RiverRun Bookstore has taken since moving into its prominent downtown space in 2006 reflects how much the book industry—and the entire nation—has changed over the last five years.

When RiverRun left its former location on Commercial Alley, the national economy was booming. The store’s sales had increased by 10 to 15 percent each year since opening in 2002. Holbrook was so inspired by his success that he moved into a 1,700-sqare-foot storefront near Market Square and bought out his two partners, each of whom had owned 25 percent of the business.

Then things went sour.

“Since I did that we have not had any profits,” Holbrook said during a meeting at the store on Nov. 9. “My timing was poor.”

Not only did the economy take a nosedive in 2007, but Amazon introduced the e-book reader Kindle, which accounted for just 2 percent of national book sales in its first year but will reach 30 percent this year, Holbrook said. Plus, Amazon offers bestsellers at a price cheaper than Holbrook can buy them for from publishers.

Altogether, he found he had little money to buy new books, resulting in a growing stock of used items. Meanwhile, he has struggled to cover the high rent at 20 Congress St.

“Books are not a good thing to sell in the most expensive space in town in 2011,” Holbrook said. “So we need to remove our debt and we need to move the store, and that’s why we’re all here.”

Holbrook was on the verge of giving up hope for RiverRun. He announced in early November he would not renew his lease at the end of the year and that, if he did not find a new space and reduce his debt, the store would likely close for good, a fate to which he had resigned himself mentally and emotionally.

But his many local supporters were not about to let that happen. Over the last five years, RiverRun has hosted roughly 500 events, including numerous author readings, concerts, dance classes, spelling bees and more. The store has collaborated with The Music Hall and New Hampshire Public Radio to produce the Writers on a New England Stage series. Holbrook is a co-founder of Seacoast Local and has assisted with events like the Portsmouth Halloween Parade and the RPM Challenge.

Within six days of announcing the store’s potential closure, he had heard from several customers who expressed interest in investing in the store or making a small donation. He’d also identified a potential 1,500-square-foot space on nearby Fleet Street that would save him $60,000 a year on rent.

Holbrook called the meeting on Nov. 9 to outline RiverRun’s challenges and collect feedback on potential solutions. The event drew a crowd of close to 200 people concerned about the bookstore’s future. With his lease expiring on Dec. 31, Holbrook’s time is limited, and he needs to devise a long-term plan that will keep his business viable for years to come, he explained.

“It needs to be a complete solution that puts the store on a sound footing for a couple of years,” Holbrook said. “It can’t be just enough to limp along like we’ve been doing.”

By the time the meeting was over, several residents had told Holbrook they were each willing to invest upwards of $10,000 in exchange for a stake in the store’s ownership. There was enough tentative interest, in fact, to potentially rescue the business.

But there are legal complications. The U.S. Securities and Exchange Commission has strict regulations regarding unaccredited investors, and a small business cannot solicit such investments without going through a lengthy and expensive legal process. Asked how many of his tentative investors are accredited, Holbrook replied, “probably none.”

Fortunately for him, a couple of lawyers have volunteered their legal services. As of early this week, Holbrook was still exploring the feasibility of securing a partnership with locals, and he still had not signed a lease on Fleet Street. But he was highly encouraged by his progress.

“There is a lot of work to be done yet to make this a reality,” Holbrook wrote on the store’s website. “But I have to say my cautious optimism is creeping toward impetuous optimism, or whatever the more optimistic form of cautious optimism is.” 

community investing
RiverRun is not the only bookstore that’s turned to the local community to rejuvenate its business. Journalist Amy Cortese came across many similar cases around the country while doing research for her new book, “Locavesting.”

“I noticed a lot of things going on, kind of like the RiverRun Bookstore, where residents would rally to support or save a beloved merchant in their town that was struggling,” Cortese said at Veris Wealth Partners in Portsmouth on Nov. 10.

When Community Bookstore in Brooklyn was in danger of going out of business, a group of about 10 residents (including actor John Turturro) invested in the store and helped it write a new business plan and renegotiate its loan.

Another bookstore was struggling to secure the final loan it needed in order to open in the Fort Greene neighborhood. About two dozen residents chipped in and lent them around $70,000 at a modest interest rate of 2.5 to 4 percent (plus discounts on books), and the store was able to open its doors.

“The great thing about that is those lenders are the bookstore’s very best customers and ambassadors,” Cortese said. “That’s what’s so great about this model, is people have a stake in the store and everyone’s goals are more aligned. There are a lot of things like that going on, and apparently right here, as well.”

The problem, she said, is that these cases represent individual rescue efforts, when what’s needed is a jolt to the entire system.

“It’s my view that to really fulfill the potential of community investing, we have to make these things more mainstream,” she said.

Cortese’s appearance was presented by Veris Wealth Partners, an investment advising company in Portsmouth, and the New Hampshire Community Loan Fund. She said the simplest ways to invest locally include switching to a community bank or credit union and lending to community loan funds. 

The same night Holbrook was holding his meeting about the future of RiverRun Bookstore, the New Hampshire Community Loan Fund was celebrating its 28th anniversary. Alan Cantor, vice president of philanthropy for the Loan Fund, said the company was founded on two core beliefs.

“One is that there are people with lower incomes who would be more successful if they had access to fair financing,” he said. “The other is that there are people who would be happy to make their money available, either their own personal money or money from an institution that they are involved with, if there were a safe, efficient, effective intermediary for getting the money out there.”

Individuals, religious organizations, foundations, banks and other entities can lend money to the Community Loan Fund for a term of years and earn interest on it. The company now has a diversified group of close to 400 investors and a pool of about $74 million, “most of which is out in the community working,” Cantor said. “We’re kind of a mutual fund for local community investors.”

Among the beneficiaries are manufactured housing communities (a.k.a. mobile home parks), where residents own their homes but not the property beneath them. The Loan Fund helps groups of such homeowners purchase the land and form resident-owned communities, or ROCs. To date, they’ve helped form 99 ROCs, housing about 6,000 families, whose homes are now more valuable. They’re free to fix their own water and septic systems and make other improvements to the property.

The Community Loan Fund also lends to small businesses, childcare centers, multi-family housing developments and more. The idea is to help underserved people who would struggle to get a loan from a big bank.

“Bank funding is very, very, very difficult to get right now,” Cantor said. “If you had a bad quarter in 2008—and who didn’t?—then there are all sorts of reasons not to lend you traditional debt capital.”

Venture capitalists, on the other hand, will give you a loan in exchange for majority equity, he said, and then they’ll sell at the first opportunity. 

As an alternative, the Community Loan Fund offers “royalty financing.” Under that model, a borrower makes monthly payments on its loan and gives up 1.5 percent of its profits. The better the company does, the better the Loan Fund does.

Cantor cited the example of Blake’s, a natural foods company based in Concord that specializes in chicken and turkey pot pies. Their sales tend to drop in the summer and spike in the winter, he said.

“We get paid more in February, but we don’t bust them in July,” he said. “We’re on the same side of the table. If they’re thriving, then we get more of a return.”

Making the relationship between lender and borrower less adversarial is better for everyone. To Cortese, the challenge is making that model the norm rather than the exception, which means reducing the stranglehold of giant banks. “So, how do we make these things more mainstream and formal?” she said.

locavesting models
The movement to expand local investing has been gaining steam around the country for several years. Cortese outlines a number of initiatives in “Locavesting” designed to redirect investment dollars into the local economy. Some of them have existed for decades but are only now resurging, while others are brand new.

•Local investing clubs: A group of residents in Port Townsend, Wash., have united to form the Local Investing Opportunities Network, better known as LION. The group invests in local businesses and has already contributed hundreds of thousands of dollars to around 10 or 15 projects, Cortese said. Closer to home, No Small Potatoes is a similar group based in Portland, Maine, with a focus on food and agriculture.

•Multi-stakeholder cooperatives: Cooperatives, in general, have been gaining recognition in recent years, especially food co-ops. In fact, the United Nations has named 2012 the “Year of Cooperatives.” Typically, a cooperative is owned by a group of consumers, producers or suppliers. But multi-stakeholder cooperatives can be owned by groups of all three, integrating more links in the supply chain. A couple of multi-stakeholder cooperatives have taken root in Wisconsin, including one for maple syrup. Cortese noted that these cooperatives arose amid a heated political debate over union bargaining rights in Wisconsin. “This is so much of a better model,” she said. “When you bring together the different stakeholders, they’re all working together and they all have the same goal, and you would never have this antagonism between labor and employer."

•Slow Money: The Slow Money Alliance is a national non-profit organization working to create new ways to channel funding to local sustainable food and agriculture ventures. It was Slow Money’s first conference in 2009 that inspired Cortese to begin researching the local investing movement, and the network has been growing ever since.

•Direct public offerings: Direct public offerings are like initial public offerings—when a private company starts selling stock—but without the Wall Street middleman, which ordinarily charges prohibitively hefty fees. “It’s like a do-it-yourself IPO, and by doing it yourself you bring the costs way down, and it just puts public markets in reach of companies that would never be able to consider (an IPO),” Cortese said. “It’s amazing how our financial system has evolved to serve the very biggest companies. I think the median IPO size these days is $140 million, and that’s up from $10 million about 20 years ago.” The most famous example of a DPO is Vermont-based ice cream company Ben & Jerry’s, which sold shares directly to investors under the slogan, “Get a Scoop of the Action.” A more recent example is the Saranac Lake Community Department Store, which opened after residents  successfully fended off Wal-Mart and raised $500,000 to start their own department store.

•Local stock exchanges: These were common around the country as recently as 70 years ago, Cortese said, but they gradually dwindled to a couple of massive exchanges in New York. Efforts to bring back local exchanges are afoot in places like Pennsylvania, Kentucky, Toronto and Hawaii, although most of them are still a long way from materializing.

•crowdfunding: Crowdfunding involves aggregating a large sum of money through numerous small donations for a particular purpose. There are several Internet-based examples in the United States, including Kiva, Kickstarter and IndieGoGo, all of which allow people to donate money primarily for artistic ventures.

According to Cortese, Kiva has lent about $250 million over the last five years to micro entrepreneurs around the world. Kiva has been raising more than $2 million per week, which means it will soon match the annual budget of the National Endowment for the Arts. The model is more common in Europe, where the UK-based Funding Circle has been lending more than $2 million per month.

But, currently, crowdfunding raises a number of legal complications. Once you promise a financial return on an investment, it becomes a security, which must be registered with the SEC—an arduous and expensive process.

“Everything I just went through has some kind of challenge,” Cortese said. “Either they don’t scale, they don’t provide liquidity, they have regulatory hurdles to overcome, or there’s not a good way to manage risk yet.”
Some of those challenges could soon be overcome if a bill that recently cleared the U.S. House of Representatives becomes law.

the push
HR 2930 passed the House with bipartisan support in early November on a lopsided 407-17 vote. The bill would offer exemption from SEC requirements for businesses seeking to raise up to $1 million in capital, with individual investments capped at 10 percent of the investor’s income. Essentially, it would eliminate the regulatory hurdles that currently swamp crowdfunding campaigns.

President Obama suggested the legislation in his new jobs plan, and Rep. Patrick McHenry (R-N.C.) introduced HR 2930 a few weeks later. It passed the House with nearly unanimous support and now heads to the Senate.

“It is a rare moment where the Tea Party and the Obama administration can agree on something,” said author Michael Shuman, research and economic development director of the Business Alliance for Local Living Economies.

Under existing law, Shuman said, it is nearly impossible for most people to invest in local businesses, which inhibits economic recovery.

“Ninety-nine percent of the public is effectively unable to invest in the local half of the economy,” he said. “That local half of the economy is probably the most significant creator of new jobs and economic wellbeing.”

Critics of the bill, including the SEC, worry that loosening investing regulations could lead to fraud. But Shuman believes those fears are overblown. Although fraud is always a legitimate concern, the current system clearly isn’t working.

“The SEC has proven beyond a shadow of a doubt that its existing laws do not prevent fraud,” Shuman said, citing Bernie Madoff as a potent example.

Capping investments at 10 percent of people’s income means it’s unlikely to bankrupt them, even if fraud occurs or the business fails. Plus, while the government professes to protect people from making bad investments, it freely allows them to waltz into a casino in Las Vegas and blow every dollar they have.

“There is this hypocrisy and inconsistency tilted against small businesses that was never excusable, but at a moment when the economy is in such dire straights, it’s utterly inexcusable,” Shuman said.

Shuman believes HR 2930 will pass, potentially opening up an enormous pool of capital for entrepreneurs who badly need it.

The effects could be felt locally, where RiverRun is mired in the legal complications that come with unaccredited investments. During the Nov. 9 meeting, some people expressed interest in making small investments of around $1,000 apiece. Holbrook cited the legal challenges to accepting such amounts. 

As a possible solution, local Web developer Joshua Cyr volunteered to set up a corporate structure that would bundle smaller investments of $1,000 into a single investment of $10,000 or more. Local attorney Corey MacDonald, a Portsmouth police captain, offered free legal services to help establish such an entity.

In the end, Holbrook declined Cyr’s offer, but the model he suggested could eventually form the basis of a local investing club.

Bob Marino, a financial professional and board member of Seacoast Local, said the organization has spent time this year researching ideas to enable local investing, including the LION model, a local investment network aimed at connecting entrepreneurs with potential investors. Another is a local investment club that would actually pool money and offer it to business entrepreneurs who go through an application process.

Such a club could circumvent some SEC requirements by offering loans rather than equity investments, Marino said. If HR 2930 passes, however, it would open up greater possibilities for investments.

“That would be huge,” he said. “If that passes, that would basically remove those regulatory issues. You could do loans or equity stakes.”

Marino said Seacoast Local will assess how much interest exists in a local investing club, but RiverRun’s case demonstrates the potential need and opportunity. Depending on when it comes together and how much Holbrook needs, the club could lend a hand.

“I don’t know if what we have in mind will necessarily come together quickly enough for RiverRun, but sometimes necessity makes you do things a little more quickly,” Marino said.