3c hapter - Index of

A Model to LIONize 101
other communities interested in setting up LION- like investment
groups. It’s not hard to do. LION makes available on its web site
its three key documents: a membership application for prospective
investors, a membership agreement that lays out policies and
procedures, and an investment opportunity submission form.
But, Frazier warns, the model is not easily scalable. Each investment
requires a lot of work; potential borrowers must be interviewed
and their businesses vetted. And the investments aren’t
very liquid—they can’t be fl ipped for quick profi t. “It really takes
it back to the original model of investing. It’s all handshakes and
getting to know someone and building trust before you invest,”
says Frazier. “It’s not really effi cient so it’s forced to be small, to be
person to person and to create community. That’s the beauty of it,
in a way.”
Kolff believes the LION model can work for any group of people
who share a focused interest. These days, he says, “More and
more people are saying, ‘We need to preserve our local small businesses.’
If you took every single person in this county and said,
let’s put 20 percent of your investments into local businesses, my
god, the local wealth would be incredible.”
Still, for all of its potential, LION operates in a sort of gray
area, as far as securities laws are concerned. Unlike most private
and angel investors, LION’s members are not necessarily accredited
investors, who have the SEC’s blessing to wade into small, private
deals that the agency considers risky. “We’re more going on
the concept of the securities law exemption for non- public offerings,”
explains Frazier, who is a registered investment advisor.
By that, he means the “private offering exemption” under Section
4(1) of the Securities Act. But what exactly constitutes a nonpublic
offering is open to debate. Frazier points me to a 1962 SEC
ruling that attempts to clarify when such exemptions from registration
are allowed. Traditionally, the private offering exemption
has been available for “bank loans, private placements of securities
with institutions and the promotion of a business venture to a few
closely related persons,” the ruling explains. So, as long as the
potential investors have a preexisting relationship and familiarity
with the offerer of the securities, it can be considered a nonpublic