Municipal bonds, pieces of debt sold by state governments to build schools or roads, certainly aren’t the sexiest investments in the world. They’re not like Facebook stock, or even Twitter. You’ll never get a 10-times or 100-times return on what you put in, but the bonds will likely far outdo meager one-percent or less interest rates on bank savings accounts. And buyers can feel good about putting some of their money into improving their surroundings.
It’s not just good Samaritanism that’s driving the municipal bond market. In fact, the market has been on a tear lately with 8.7 percent annual return in 2014, according to the Wall Street Journal. That number puts the category above highly rated corporate debt, at 6.97 percent, and 4.6 percent for United States Treasury debt. If that combination of profit and productivity sounds good, then you’re in luck. A start-up called Neighborly wants to open up the market for municipal bonds to the general public, and make it cheaper, more efficient, and more profitable in the process.
The San Francisco-based Neighborly launched in 2013 as a kind of community-based Kickstarter, helping users fund projects close to home. But the site recently pivoted toward presenting a better interface for municipal bonds, highlighting investment opportunities with a slick, Silicon Valley-style interface that makes supporting a local infrastructure project as cool as backing a new model of wrist-wearable computer. It’s bringing innovation to a dusty, though increasingly popular, sector. “You’d be shocked to find how much of the [municipal bonds] process is still being done by email and phone calls,” says Rodrigo Davies, Neighborly’s chief product officer. “This market is really not as modern as you would think.”
“We’re looking at people who live in the cities where the projects are happening ... in their mid-20s to early 40s, who have some money that they want to invest for the future.”
Neighborly enters into a gray space between crowdfunding and crowd-investing. The former is what we associate with Kickstarter and Indiegogo, which lump together many small donations into totals that can reach into the millions. In crowdfunding, donations are often made for no guaranteed return. Contrary to what it might suggest, Kickstarter isn’t selling any products; it’s just giving users the opportunity to freely give away money for a legally non-binding promise of a reward, often in the form of a theoretical product. This disconnect has lead to criticisms that crowdfunding projects are actually “junk bonds,” as a Globe and Mail article recently labeled them.
Crowd-investing, in contrast, exchanges money for equity in a company, or in Neighborly’s case, a city. Shares of stock or debt purchased through crowd-investing ideally result in profit for the holder, though they can hold as much risk as any vaporware crowdfunding project. But crowd-investing remains largely illegal, despite President Obama’s passing of the JOBS Act in early 2012 that was supposed to clear its path to legitimacy.
The obstacle is that the government’s job is to mitigate the financial risks its citizens can take. That’s why Quire, a start-up that allows fans of popular tech businesses to invest in them themselves, is still only open to “accredited investors,” defined by the government as someone “with income exceeding $200,000 in each of the two most recent years” or who has an individual net worth of over $1 million. Legally, a large investment is categorized as too much risk for anyone under that threshold.
That’s exactly the demographic Neighborly is targeting for municipal bonds, which start in minimum denominations of $5,000. “Bond brokers wouldn’t even look at you unless you have $50-100,000 to invest,” Davies says. The new platform, however, doesn’t discriminate. “We’re looking at people who live in the cities where the projects are happening ... in their mid-20s to early 40s, who have some money that they want to invest for the future,” he says. “They put it in a bank savings account or invest it in some funds that they don’t necessarily understand. They should be investing to earn better returns, but they’re not necessarily experienced with financial markets. Those people could benefit a ton from investing in their cities.”
In making the market more accessible, Neighborly is also hoping to cut out what it sees as the fat of municipal bonds—those discriminatory brokers who charge a hefty premium. “The cost to sell a single bond is between $20 and $30,” Davies says. “It’s just not sustainable for cities to be trying to raise money for projects and every single bond in transition is costing $20 or $30 at a time.” In other words, the government’s crowd-investing infrastructure is broken, and Neighborly plans to disrupt it. “If your goal is to get people in the community to invest, that’s just not working right now,” Davies says.
Crowdfunding has caught on with entrepreneurs and mainstream audiences alike because of the seemingly magical way it leverages spare cash into projects that might change how we live. Yet this idea, hyped as revolutionary, is what governmental financial systems have always been built to do, using taxes and bonds to undertake development that helps those who contribute. Our expectations of return on governmental investment have been eroded, however. It’s unfortunate that it takes Kickstarter, or a similar platform, to re-ignite interest in it.
Of course, there’s plenty of risk when expecting a solid outcome from investment in a municipal bond rather than just a monetary return. That bridge might not get built. The school might be shoddy, or sit uncompleted for years. But these investments certainly hold more meaningful equity for locals than the latest social media start-up. Neighborly’s investment platform is set to launch this summer. Volatility is likely to increase for municipal bonds in 2015, according to Schwab, but they’re still beating Treasury bonds. Plus, if you buy into them, you’ll be making money as well as helping to make a difference.
Disruptions is Kyle Chayka’s weekly column for Pacific Standard about personal technology and the way it influences our daily lives.