Quick Start Guide To Impact Investing
Most impact investing occurs with exclusively the world’s wealthiest people. However, it’s not impossible for everyone else (98% of the population) who do not fit the criteria with this type of investing.
What is impact investing?
This relatively new term, “impact investing” is still not even commonly known by many professional investors. What it refers to is the process of putting capital into businesses that will benefit their local area economically and socially. Typically these types of businesses are working to support poverty stricken or developing areas. Think of the same benefits that philanthropic organizations add to these areas around the globe, but there is a financial return for the company, and its investors, as well.
The Requirements Of Investment
Investors interested in investing funds in these types of companies or Funds generally must be “Accredited Investors” as defined by the Securities and Exchange Commission. This “accredited” certification is policed by the Securities and Exchange Commision, but it is up to the company which seeks investment to ensure that it markets to primarily accredited investors. If the company fails to comply, it is required to make increased levels of disclosure, which are often cost prohibitive. While this may seem like various skills or knowledge must be demonstrated in order to become certified, the only tests that occur are measuring income and net worth. According to the Securities and Exchange Commision, any investor asserting accredited investor status must consistently earn more than $200,000 per year in salary ($300,000 for a couple), or have a net worth of $1 million excluding their primary residential property. Obviously, this type of investment strategy isn’t for everyone considering that criteria fits only about 2% of the population.
The Other 98%
The range of opportunities for impact investment of those who do not meet the financial criteria is extremely limited. Just how limited? If you are comparing opportunity from the perspective of a traditional process, they are virtually non-existent. Luckily there are a few options for those engaged in impact investing in this category of income. Further, if you happen across an opportunity, contacting the company seeking investment may be worth your time, because SEC rules permit a limited number of non-accredited investors to be accepted without increased scrutiny. Often when advising companies or Funds on these issues, securities lawyers recommend taking the conservative approach, and not market to any non-accredited investors.
Impact investing really boils down to screening for which companies have the most influence on their sphere of social and economic assistance. Screening for good companies through environmental, social, and corporate governance (ESG) standards is the simplest way to find impactful companies to invest in. Different rating systems will suggest some companies that may not perform well in every area (for instance, oil companies not meeting marks in the environmental category), but relatively few publicly traded companies actually qualify at all for impact investment.
Ways to Invest
Donor Advised Fund
Of course the limiting factor in investing for everyday people with “normal” incomes is that ways of investing are guarded for accredited investors only. One way to bypass this is to invest with a donation through a donor advised fund (DAF). This is an account that is opened with a public charity like a private foundation would, and you get to advise where the funds are placed. Some charities that manage DAFs will even allow you to advise them on investments. This work around operates this way because the money is not yours, and you won’t be able to see any of it go directly into your pocket.
Another way to invest is through social enterprises that work to raise money for small businesses through crowdfunding. A recent implementation of a platform called Investibule offers numerable ways to fund state-registered public offerings, donation-based crowdfunding, and zero-interest Kiva loans. Wefunder is another site that raises money from ordinary investors that want to find startups, including impact investments.
Because of the JOBS Act, “everyday” people can now have access to an investment with socially and environmentally impactful companies. These companies and their technologies are here to change the global sphere for the better. It’s online public offerings that are bringing opportunity with investment for virtually every income level.