Traditionally, investors must cough up at least $5,000 to get into the municipal bond game — a convention that’s driven by the fixed costs associated with trading bonds. But this structure, Davies said, favors wealthy investors and leaves everybody else behind. That’s what Neighborly is trying to change.
In order to make the microbonds available to investors at $500 a pop, Neighborly bought the San Leandro bonds and formed a single-use limited liability company to own them. Then, they sold shares in the LLC at $500.
In their pitch for potential investors, Neighborly highlighted the effects the money would have on the school district and the community. And for those who invested, they’re getting 2 percent tax-free interest for one year — a return of about 3 or 4 percent when tax savings are considered. For municipalities, Neighborly offers free insight into the market, which could drive down issuance costs.
Generally, municipal bonds are sold to older, wealthy people over the phone. But in a survey of Neighborly users, the company found out their audience is different. The median respondent was in their early 30s and could invest $1,000.
Jim Scheinman, the founder and CEO of Maven Ventures who is a Neighborly funder, said he probably would have only bought one of Neighborly’s microbonds, but coincidentally he had a personal connection with the project. His wife, a mathematics teacher, got her first teaching job at a school in the San Leandro district.
“It’s great for the kids, so we invested a lot more than $500,” he said. “If you’re going to invest your money in an investment vehicle, doesn’t it make sense to improve your local school or something that impacts you?”
Only California residents who qualified as accredited investors were able to participate in the experiment because Neighborly was basically selling people stock in a company, which is considered a high-risk investment.
But Davies said the company doesn’t plan to work this way in the future. Because Neighborly is a broker, their goal is to work directly with issuers, such as a school district or their underwriter, and convince them to denominate the bonds at $500 at the start.
Last year, Denver offered $12 million in mini-bonds, each valued at $500, for improvements to the city’s cultural facilities and other projects. People were waiting in line for the mini-bonds when they went public, Davies said, and some had to be turned away because demand was so high.
“They were super popular,” Davies said. “For us, we want to go further and give people an interface where they can say ‘I’m interested in investing in this kind of project in my area,’ and they can find all of the opportunities that are coming up.”