NEAR PRITCHARD PARK, ASHEVILLE, NORTH CAROLINA – Last week I was in Midlothian, Virginia, where I described the current state of that town’s economic vitality, represented in large part by a high median household income, large suburban homes and the presence of numerous big box stores like Wal-Mart and Home Depot.

While it all looks pretty good today, I expressed a concern that Midlothian, like a lot of relatively affluent suburban communities throughout the country, functions to some degree at the mercy of the multinational corporations who planted those big box stores there; and that in the event of a flight of multinational corporations, such suburbs might find themselves unable to survive — at least not in the manner to which they’ve become accustomed. In a world of diminishing resources and a higher cost of fuel and credit, such a scenario is not necessarily so improbable.

Here in Asheville there seems to be less dependence on big box stores, at least around here, and there is a more conspicuous presence of locally-owned and operated businesses, many of them supplied locally as well. It is this type of economic activity – not the locally-owned franchise of a major fast food chain, or the locally-operated big box store, but truly local, sustainable enterprises that make more with less, that circulate dollars within a community rather than exporting them to absentee business owners, and that enable a community to rely less on exports through local manufacturing and growing – that will help communities to reclaim their ability to control their own economic destinies.

Sustainable development advocates will say that gross domestic product, or GDP, is a flawed measure of economic performance, and I agree. I think this passage from Bill Bryson’s I’m a Stranger Here Myself tells the tale better than I can:

I was recently in Pennsylvania at the site of a zinc factory whose airborne wastes were formerly so laden with pollutants that they denuded an entire mountainside … From a GDP perspective … this was wonderful. First there was the gain to the economy from all the zinc the factory had refined and sold over the years. Then there was the gain from the tens of millions of dollars the government must spend to clean up the site and restore the mountain. Finally, there will be a continuing gain from medical treatments for workers and townspeople made chronically ill by living amid all those contaminants. In terms of conventional economic measurement, all of this is gain, not loss … [T]he more recklessly we use up natural resources, the more the GDP grows.

Given that, from the point of view of achieving a sustainable economic environment, GDP is a lousy way to measure the economy, yet it continues to be one of the ways in which the U.S. government likes to report to us on American economic success.

Before we completely throw it out, however, it is worth noting that GDP does manage to capture one category of activity that sustainability advocates tend to dismiss, but that is essential to the development of any business enterprise – that is, the sum total of economic activity revolving around the formation of capital for a business, including the costs of raising financing, transaction costs, and the trail of journal entries associated with the speculative exchange of investments in the financial markets. For better or worse, these costs inherently exist within an economy that produces successful national businesses.

As I said in my last stop, the ability of a multinational corporation to access the capital markets that produce this type of activity is an inherent structural advantage available to entrepreneurs who would create such businesses. The capital markets to which I am referring are singularly unavailable to an entrepreneur who would create a sustainable local enterprise due to two main factors: first, there is the high cost of regulation — and here I’m referring to the collection of regulations that apply to the issuance and exchange of securities in this country, which is prohibitive for a relatively small, local enterprise; and second, there isn’t sufficient scale within these enterprises to interest the players on Wall Street or its side streets. Like Linda Evangelista, Wall Street bankers don’t get out of bed for anything less than $10 million. … Actually, I think Linda Evangelista said she wouldn’t get out of bed for less than $10,000 a day, but you get the picture.

And yet, I submit to you that in a world of rising fuel costs it will be essential for the American economy to re-tool itself and figure out ways to bring significant capital to the promotion and development of sustainable local enterprises … the kind of capital, by the way, that is entrusted to Wall Street by people and institutions who, ironically, live right down the block from you, that is aggregated and managed by shrewd speculators, and that fuels the powerful investment engine that exists within our capital markets.

Sustainability advocates tend to think of the capital markets as dirty and icky institutions. When pressed on the issue of raising capital for the development of local sustainable enterprises, they tend to reach into a tired yet quaint old bag of tricks that might include tax-funded community development organizations, certified Small Business Administration lenders, or non-profit development authorities and community loan funds. They’re all well and good, and I commend their efforts – but in an environment in which there is competition for capital, these initiatives are the equivalent of navigating a kayak with a teaspoon. What is needed, to significantly improve the balance in our nation between fuel-dependent multinational businesses and sustainable local business, is a much heavier paddle.

So, the question is, how do you get capital markets interested in local businesses?

Local Enterprise Public Offerings (LEPOs)

First, we have to attack the regulation question.

If I were to want to start, say, a locally-owned and operated alternative fuel bus company here in Asheville, the cost of securities regulation pretty much limits my sources of capital to a small circle of family and friends, and perhaps a loan from a friendly local bank or a leasing company. If I wanted to offer stock to the public of Asheville, where my business will be located, I would essentially be subject to the same kind of securities regulation that applies to a multinational corporation, with some minor differences. Now, it is quite appropriate that a multinational corporation whose stock trades on the New York Stock Exchange or NASDAQ should be required to spend significant capital on accounting and legal costs on a daily basis in an effort to protect a widely distributed group of public investors – from pension funds to mutual funds to you and me – and to mitigate the potential for financial misrepresentations that might have an effect on the value of the stock that we buy. But I’ll never be able to afford to have even a hundred Asheville residents buy my bus company stock – even if they all live nearby, can physically stop by and see me and watch how the business is doing, and have some sense of who I am and my integrity as a businessman.

Without doing anything to change the way in which a multinational corporation participates in the capital markets and raises capital through public securities offerings, I would call for state and federal securities regulators to carve an alternative path for the development of truly local sustainable enterprises – not just local offices or local franchises of national businesses – by permitting a class of public offering available solely to such enterprises. A Local Enterprise Public Offering, or LEPO, would permit local enterprises to raise capital in small chunks from a large number of community investors – people who, at the time of issuance, dwell in the same community as the business itself. So, for my bus company here in Asheville, I would be permitted to raise some equity participation from anyone who lives in Asheville without having to file an 80-page registration statement with the Securities and Exchange Commission or the North Carolina Department of State – as long as I provide some basic disclosure material to my buyers. Rather than require expensive audits, local enterprises would be required to publish annual compilations of their financial statements, as well as an audit every three years, and would be required to present financial information on an annual basis to a community finance committee made up of non-affiliated local business leaders, who would in turn publish annual “findings” on the financial health of the enterprise – without fear of liability, I should add. The weight of Annual Findings should stand on the local reputations of the people involved in the enterprise.

In essence, for the sake of developing local sustainable enterprises, we will trade the expense and complexity of state and federal securities regulation for a system of community stewardship.

Wall Street on Main Street

With the availability of a lower cost option for public offerings, it becomes likely that regional investment banks and investment advisors would see the advantage of participating in LEPOs, acting as underwriters or placement agents for them, and we would want to encourage that. With the involvement of investment banks and advisors, a trading market for LEPO securities would naturally develop, and because the enterprises are small and not as widely-held as multinational corporations, such trading, with some adjustments in regulations, should be permitted to occur in the over-the-counter markets, the so-called “pink sheets.” Some ability to sell off an investment in a local enterprise would make LEPOs a more attractive investment vehicle, and I would support the ability to trade local enterprise stocks outside of the community after a defined period of time (say, a holding period of one year) in order to increase the potential for greater trading volumes for local stocks.

Still, low trading volume in local enterprises would put a damper on investment enthusiasm in LEPOs. What makes an investment in the stock of Target or Starbucks seem to be a relative safe one is the knowledge that if I want to sell my Target or Starbucks stock, there is an active trading market in it; under normal circumstances on any given day, hundreds if not thousands of people buy and sell it, and as a result the market price of that stock has, at least, an internal authenticity to it. While we can never expect LEPOs, in and of themselves, to experience robust trading, there is another opportunity to create a nexus between local business activity and Wall Street capital markets: the development of Community Local Enterprise Pools, or CLEPs, as publicly-traded investment opportunities.

A CLEP would be, in part, an index fund of publicly-traded local enterprises within a community, as well as an investment pool for funds that could be used in the development of sustainable local enterprises, thus giving a community a means of accessing capital markets directly.

How would this work? Once the initiation of LEPOs within a community reaches a small critical mass – say 5-10 active local enterprises – a community would qualify to form a CLEP and take it public, putting its managers in a position to raise a minimum of $10 million in an initial offering. The use of proceeds? A portion of the fund would be used to buy and hold community LEPOs, and the rest would be used to invest small amounts in additional sustainable local businesses, either in LEPOs or in private equity transactions. CLEPs would be subject to normal securities regulations and would be permitted to trade on a major market, such as the NYSE or NASDAQ, under the community name. A portion of each trade in CLEP stock, say 0.5%, would be retained by the CLEP for future investment – call it a commission, if you like. The scale of these entities would lend themselves to being targets for analysis and trading by Wall Street firms.

Would it be so strange for a nation of investors to look up “Asheville” on the NYSE, and to buy it or sell it? Not any stranger than it is to trade “Oil” or “Cotton” as commodities, or to trade in “Carbon Offsets,” or even in virtual shares in movies, celebrities and music, such as those offered under Cantor Index’s Hollywood Stock Exchange. Or, indeed, it would not be any stranger for a schoolteacher in Austin, Texas to buy shares in “Asheville” than it is for an insurance salesman in Connecticut to buy some stock in Arkansas-based Wal-Mart. This is the mad, crazy magic of a national system of speculative exchange, and it incidentally provides an essential basis for the flow of capital toward productive uses.

So I urge you, those of you who fight the daily battle to mold your communities into self-reliant, sustainable economies – don’t be afraid of speculation as an economic activity. It can be turned to your advantage. And, in my view, it probably needs to be in order for America to be appropriately prepared for a Post-Petroleum Age.

I thank you for listening, and I’ll be seeing you along the trail.

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