Five Myths About Participatory Investing and the Law

Every new movement for economic change eventually collides with old legal frameworks. The ideas might be bold, but the fine print – fiduciary duty, disclosure rules, nonprofit law – can either get in the way of progress, or enable it.

That’s the case for emergent models of community-controlled capital. Participatory and democratically-controlled investment funds are no longer experiments at the margins. Across the country, with models like the Real People’s Fund, Boston Ujima Project and Kensington Corridor Trust, new economy practitioners are testing how to move investment dollars under democratic control.

But for every promising experiment, there’s a drumbeat of questions: What’s allowed? What’s off-limits? The answers aren’t always clear. Practitioners often bump up against confusion around fiduciary duty, fears of securities violations, or borrowed assumptions from traditional finance. Sometimes these obstacles are real. Other times, they’re myths that have hardened into conventional wisdom.

We spoke recently with Bruce Campbell of Blue Dot Advocates, a lawyer who has spent years structuring community-controlled funds. Campbell has seen the questions and concerns that pop up, and he has also seen seemingly insurmountable obstacles overcome.

Campbell is careful to note that no one should attempt a DIY legal strategy. But he also emphasizes that there’s more flexibility than most people think. Here are several myths about structuring participatory investing vehicles that emerged from our conversation.

Myth: Nonprofits are always the best structure for participatory funds

A lot of new economy practitioners assume that a nonprofit is the “gold standard” for structuring a participatory investment fund, Campbell says. But there are two big reasons to pause before going that route: flexibility and regulation.

First, nonprofits are less flexible in how they can take in capital. Nonprofits can accept grants and also take in loans – but they cannot take equity. By contrast, a for-profit structure allows for equity investment, and is still eligible for grants and loans. That flexibility makes it easier to build and manage a capital stack.

Second, nonprofits are regulated entities. They’re overseen by both the federal and state governments. That always brings some friction, but Campbell says it’s become a much bigger issue in the current political climate. He points to a rise in IRS complaints targeting nonprofits doing racial justice work – and warns that participatory investing initiatives, often framed around racial and economic justice, are likely to face the same kinds of scrutiny.

“The IRS is not like a court of law,” Campbell says. “If someone files a complaint, the IRS can investigate and ultimately take action to revoke tax exempt status or levy penalties without any participation of the person who filed the complaint. Essentially, it is a cost-free way for people to harass nonprofits and to try and terminate or change programs they dislike.”

Myth: Fiduciary duty means you can’t democratize control

Fiduciary duty doesn’t have to be a barrier to participation – in fact, it can be written to support it.

Federal and state law rigidly defines fiduciary duty for corporations - both for-profit and non-profit. However, with LLCs and limited partnerships, the law provides almost unfettered flexibility for stakeholders to define the fiduciary duties of managers and general partners.  

“You’re entering into a contract with your investors,” Campbell says, “And the only mandatory law that applies is that you can’t lie to your investors; you can’t act in bad faith. But otherwise, it's entirely a discussion among the stakeholders in terms of how they want to manage assets.”

Those stakeholders can agree to prioritize impact over profit, or even grant decision-making rights to community members who haven’t contributed financially.

Campbell explained that many funds he sees that are labeled “participatory” have only community advisory boards, many of which have no actual legal authority with respect to the governance of the fund. Typically, they have only informal influence. However, Campbell has set up LLCs where community members are legal members of the LLC with governance rights supported by the LLC agreement and state law, even though the community members make no financial contribution to the LLC.

‍Myth: Disclosure rules are complex to navigate

Disclosure law might sound intimidating, but Campbell says there’s actually a lot of flexibility in how funds communicate risk and expectations. The key is transparency.

If a fund is working only with accredited investors, the rules are straightforward. “Basically all the law says,” Campbell explains, “is that you can’t lie about a material fact, and you can’t fail to share information that would be material to investors.”

That means disclosures don’t have to be lengthy or complicated – they just need to tell investors what a reasonable person would want to know before deciding whether to participate. “As long as it’s accurate,” Campbell says, “and it’s not omitting anything that’s material, that’s really it.”

He adds that it’s especially important for participatory funds to give investors a realistic sense of what kind of financial return to expect — or not expect. If the goal is community impact rather than profit, that should be clear up front. “If the return profile is likely to look different than what investors are accustomed to,” Campbell says, “that should be highlighted.”

Myth: Bringing in unaccredited investors is simple

Many fund designers want to open participation beyond wealthy investors, for good reason – but Campbell says that can introduce some steep challenges. “It’s very hard to design these kinds of vehicles for unaccredited investors,” he explains. “It’s not impossible – it’s just very expensive, and you end up having a lot more limitations.”

The biggest challenge is scale. Federal law allows funds working with accredited investors to raise money freely across state lines. But once unaccredited investors are involved, the rules change: in most cases, states can impose their own regulations, adding layers of registration, disclosure, and compliance. “When you’re in unaccredited land,” Campbell says, “states can almost always mess with you.”

That means raising money nationally from unaccredited investors usually requires registering with the SEC or relying on crowdfunding regulations, which require the use of commercial platforms and carry limitations on the amount that can be raised. . For most others, Campbell says, the realistic path is to keep things local. “Usually when people are raising money from unaccredited investors,” he explains, “they just do it on a state-by-state basis.”

Myth: Responsible investing means moving slowly and cautiously

The conventional wisdom is that “responsible” investing means minimizing risk, carefully analyzing every bet, and moving capital at a snail’s pace. Campbell challenges that assumption. In a world facing cascading crises, responsibility might mean the opposite.

“What is responsible investment in the context of a world that’s essentially falling apart?” he asks. In such a moment, he argues, responsibility might mean making more bets, moving faster, and being willing to take more risks.”

Campbell appreciates his clients that are raising money and doing it on terms that are consistent with a view of how systems need to change, even if it means taking longer to find investors or raising less capital. Campbell points to RUNWAY Roots Investor Manifesto as an inspiring example of principled fundraising. “It could be that, at this moment in time, potency is more meaningful than scale when it comes to changing the trajectory of business and finance.”