Planning and Developing A Community Investment Fund
Community Investment Funds (CIFs) are innovative financial vehicles designed to empower local economies by aggregating capital from community members and deploying it into mission-aligned assets and ventures within the community. CIFs can be set up to accept non-accredited investors (i.e., those who don’t meet high income or net worth thresholds), making them more accessible impact investment options for all community members. CIFs are often designed with the primary goal of making a difference in their communities and may therefore offer only modest potential returns, preferring to prioritize meaningful impact over extractive return
CIFs have several key aspects that make them an exceptional community impact initiative:
- Local Control: Community members decide where capital flows.
- Economic Resilience: Keep money circulating locally.
- Inclusive Growth: Prioritize projects that benefit underserved populations.
- Social Impact: Align investment with community values.
National Coalition for Community Capital (NC3) is an excellent resource for community capital and community investment fund information and guidance. In particular, their community investment fund handbook and toolkit, as well as their community capital accelerator, are cornerstones for those organizing CIFs.
How to Start
- Build a Team and Engage Community:
Begin by identifying local stakeholders to guide the fund’s formation and then identify community priorities through town halls, surveys, or workshops. - Define Values and Investment Goals:
Clarify the CIF’s mission. Are you focused on job creation, affordable housing, or environmental sustainability? Your goals will shape the fund’s structure and investment criteria. - Choose a Fund Structure and Compliance Strategy:
Consult with legal counsel to determine the best structure for your fund, especially if you plan to include non-accredited investors. Compliance with securities laws is critical. See the synopsis below on types of funds and the links to our other resources. We can help you plan and execute your vision. - Form an Entity and Determine a Capital Raising Plan:
Design and launch a campaign to gather initial funding based on your investment goals. This may include small-dollar contributions from community members, angel investment, and/or grants from local foundations. Again, we can assist with strategies that best fit your mission and goals. - Develop an Investment Pipeline:
Identify potential projects or businesses to invest in. Evaluate them based on their alignment with the fund’s mission and financial viability.
- Deployment and Management:
Once capital is raised and outgoing investments are made, maintain transparency with regular updates and reports. Ongoing community engagement helps build trust and long-term success.
Some Key Types of CIFs
Below is a summary of the types of fund structures that are often chosen for Community Investment Funds. The impact and investment goals determined in the CIF planning process will provide guidance as to which type of fund structure is the best fit.
- Charitable Loan Fund: A 501(c)(3) nonprofit entity that raises debt capital and provides loans to organizations working towards its charitable mission.
- Real Estate Fund: This type of fund primarily invests in real estate. By focusing on real estate, these funds can often navigate securities laws more efficiently, potentially staying out of the Investment Company Act of 1940. They can be powerful tools for urban or rural revitalization, acquiring, renovating, and leasing properties.
- Diversified Community Investment Fund (DCIF): A versatile variation of the real estate fund, a DCIF can invest a portion (up to 40%) of its portfolio in local businesses through various forms such as equity, debt, or revenue share, while primarily holding real estate or other non-securities assets.
- Supplemental Fund: This type of fund is housed within an existing business and is merely supplemental to that business’s operations. The existing business cannot be in the business of investing in securities and the fund cannot be the primary source of the company’s revenue.
- Holding Company: This fund model acquires controlling stakes in its portfolio companies, with its primary focus being the management of these subsidiaries.
- Private Fund: While a more traditional structure, typically with fewer than 100 accredited investors, this model can be adapted for non-traditional and truly community-serving purposes. Additionally, a fund can be started as a private fund and, once it is seeded and has begun its deployment of capital, the fund can shift to one of the above strategies which would allow for community investors.
These various structures allow CIFs to raise capital publicly from both accredited and non-accredited investors (with the exception of the Private Fund which is limited accredited investors only), offering either debt or equity options depending on the fund type. See a link to our blog post on 5 simple CIF strategies here.
Final Thoughts
Community investment funds are one way to democratize finance and catalyze impact development projects. While setting one up requires planning and legal assistance, the payoff can be transformative—empowering communities to shape their own economic futures.
PathLight Law has additional community investment fund resources available for download along with resources on capital raising strategies and more.