Community bonds not only help raise funds for specific projects, but can also help contribute to the long-term social health of a community.

A community bond is a financing tool used by social-purpose entities like charities, non-profits, and co-op, for raising money, and by investors who want to see their money put to good use while still earning a return on investment.

Community bonds were created by the Centre for Social Innovation (CSI) “as a means to turn a non-profit’s social capital into financial capital” and were first offered in 2010, when CSI raised money to buy a building. Community bonds have since been widely adopted, including by Habitat for Humanity Guelph Wellington.

Like other bonds, community bonds are interest-bearing loans with a fixed term and rate of return. However, community bonds localize the positive effects of loans and offer additional benefits to both the borrower and the lender.

For the borrower, issuing community bonds allows for control of the terms attached to the bond, such as price, interest rate, and term, designed to attract a desired level of investment, without the delays often incurred when applying for grants and subsidies, and without the need to meet the requirements of institutional lenders, which are often difficult for social-purpose enterprises to satisfy. In other instances, entities who might otherwise qualify for traditional bank loans may prefer to raise money through community bonds, as it allows them to work with investors whose values are aligned with the borrower.

Additional appeal to borrowers comes from the fact that community bonds do not have be asset-backed, though they can be, and borrowers can offer bonds in denominations that encourage participation, or even limit the amount that one bondholder can buy so that that benefit of holding the borrower’s bonds is delivered to a larger group of investors in its community.

For the investor, community bonds offer a dual yield – one in the form of the satisfaction derived from using one’s money for the benefit of local initiatives, and another in the form of retrun on investment, though it is often the case that community bonds will offer lower returns than other market offerings then available. Investors may be individuals, or foundations whose mandate includes impact investment or place-based investing.

As Ryan Deska, director of engagement and development for Habitat for Humanity Guelph Wellington told the Canadian Press in December of 2023: “It’s been a really exciting process because, you know, it’s anyone from, like, a city bus driver popping in on their route to drop off a cheque, all the way through to people selling their homes and investing.”

According to Tapestry Capital, a feature of community bonds is that “[on] average, 70% of investors choose to reinvest in a future project rather than redeeming their bond. This means that once an issuer has completed one campaign, they will have a pool of capital that they can continually deploy for future projects… [w]hen you extend that across a whole community and beyond, the numbers add up pretty quickly.”

Before making any investment decision, it is prudent to evaluate the regulatory framework, the re-sale market, and the security.

Per Tapestry Capital, “laws in every Canadian province and territory recognize the value of community bonds and provide a prospectus exemption which allows qualified issuers to deal directly with investors wishing to invest in the community bonds without any dollar limits or income or asset tests for the investors.”

With potentially long lock-in periods, and without a market for re-selling such investments, community bonds can be difficult to liquidate on short notice. However, an investor who has carefully reviewed the offering memorandum will understand how much money is to be raised, how it will be used, and the assets being put up by the borrower as security.

Filed in: Charities, Co-operative Law, Not for Profit Law