Mini-BondsSubmitted by Headwater Investment Consulting on September 13th, 2018
By Kevin Chambers
I’ve been traveling around the state this year giving talks on Bitcoin and Crypto-Currencies. At a recent talk with the City Club of McMinnville, an audience member questioned: “Could Yamhill County have their own cryptocurrency?”
The short answer is yes, the county could technically launch a cryptocurrency, but why would they want to? The attendee posing the question said he was thinking to raise money for public projects. Understanding his line of thought, it made me think of a different type of interesting public funding method: Mini-Bonds.
When most public entities need money, they issue a bond. Most bond measures are passed by the voters of the community, such as a city or county. Then the government issues a municipal bond. Municipal bonds, or Muni-bonds for short, are issued by cities, states, counties, and other local government entities to fund capital expenditures. These bonds are considered riskier than U.S. government bonds because it is more likely that a small local institution would not be able to make all of the bond payments versus the federal government. Muni bonds are given a rating by a rating agency, such as S&P or Moody’s, based on the amount risk or possibility of default by the bond issuer. The main advantage of Muni-bonds is that the returns are exempt from federal taxes. This makes them a popular investment for those investors in higher tax brackets. Most of the Muni-bonds on the market are bought up by mutual funds, hedge funds, and other institutional investors such as pension plans or foundations.
Mini-bonds are a form of muni bonds (I know, mini, muni, super close; I didn’t name them). Essentially, Mini-bonds are crowdsourced bonds. Instead of issuing a bond to the open market, the city offers the bond to its citizens. The normal Muni-bond as a face value of $5,000. Mini-bonds are issued at $500 or $1,000 denominations to keep it affordable for local citizens. The perks to these smaller denominations are that the bond payments stay in the community and give citizens a stake in their local government.
Probably the most successful issuance of Mini-bonds was in 2014 when the city of Denver sold out of their $12 million of Mini-bonds, at $500 a pop, in just 20 minutes. Denver has been using Mini-bonds since the 1990s. The cities of Madison, WI and Cambridge and Somerville, MA, all have or will issue Mini-bonds in 2018.
Just like any Muni-bonds, Mini-bonds come with higher risk than traditional financial investments. Cities and counties are less solvent when compared to the federal government and most of the large corporations that issue bond debt. Although Headwater Investments isn’t advocating for or against a Mini-bond program for our community, it was an interesting conversation that sparked a memory, and who are we to pass up talking about a cool financial mechanism.