No Payne, No Gain: Chris Payne on Hyperlocal Investing (Part 1)
For the last 10 years, Chris Payne has headed up an innovative program to drive hyperlocal investing in the province of Nova Scotia. Chris doesn’t use the term ‘hyperlocal investing’, but it seems apt. Nova Scotia’s Community Economic Development Investment Funds (CEDIF) offer unique opportunities to help local farmers and small businesses gain access to capital on a county-by-county and town-by-town basis, and sometimes even more local than that.
Below is the first of a two part blog entry featuring highlights from a recent SocialFinance.ca interview with Chris Payne, Investment Manager for Nova Scotia CEDIF.
What's a CEDIF?
Payne: CEDIF is an acronym for Community Economic Development Funds. Back at the time when this was first being discussed, I was running the tax credit program in Nova Scotia’s Department of Finance. We asked ourselves, could you have a tool that helps entrepreneurs and investors get in the same room together? And how can we use the resources of government to make this happen? We decided that we needed to enhance the equity tax credit that already existed, making it easier for people who don't know where to invest their money locally to do so.
Why Equity?
Payne: Companies that are heavy on equity and light on debt have more flexibility than companies that are light on equity and heavy on debt. That formula works great if you run a company with connections to the investor community. More often then not, entrepreneurs in Nova Scotia don’t travel in the same circles as investors. The fact that we don't have a vibrant capital market means that individuals have an extremely hard time investing money locally and entrepreneurs seeking capital often have to take on debt. CEDIFs help entrepreneurs who may not have connections to investors to package equity investment opportunities in their businesses in a cost-effective and efficient manner.
Aside from the 35% tax credit for investors, what’s the advantage to offering equity through a CEDIF?
Payne: Under securities legislation, generally, if you're going to solicit funds you need to prepare a prospectus unless you have an exemption. Typically exemptions will apply to people with enough capital who can protect themselves, or friends and family of the company’s owners. The prospectus is an extremely costly and time consuming document to prepare. In the context of community capital, it just doesn't make sense to raise money to prepare a prospectus. Sometimes a group would spend as much on preparing the prospectus as the amount they are seeking to raise. An advantage to the CEDIF model is that we have created standard documentation, which allows for a community group to register a CEDIF and then sell shares for a fraction of the cost that it would cost to prepare a traditional prospectus. We offer a simplified boiler plate document of 29 pages. People in the community generally chuckle when we say its a simplified document.
What has been the uptake?
Payne: In the first year, three funds were created and sold. And since then, we've been working to improve the system. Every year, I host an annual general meeting. Investments in CEDIFs have been growing reasonable well, although there haven’t been any big bursts of growth. Nevertheless, $5 million dollars a year and close to $35 million invested since the program started is pretty incredible for an entirely self-organizing marketplace.
When we were having our blue sky conversations about where all this could go, we thought the who’s who of local communities would step forward, create local investment funds, and proactively invest in local companies. Of the 45 CEDIFs that have been setup, only 7-8 have taken that form. The remainder are individual companies and cooperatives that have created CEDIFs in order to issue their own equity.
Note: For additional coverage of CEDIFs on SocialFinance.ca, see No Payne, No Gain: Chris Payne on Hyperlocal Investing (Part 2) and Nova Scotia’s CEDIF Program: A Model for the Rest of Canada?.
Photo: Chris Payne, Investment Manager for Nova Scotia CEDIF
