How states can incentivize local investing to find new capital for businesses and housing

Across the United States, the geographic and corporate concentration of banking access and retail amenities is limiting entrepreneurship in left-behind communities. An extensive body of literature has explored the potential of place-based policies—ranging from federal tax credits to local infrastructure investments—that address this inequality. Yet these solutions often involve choosing a very small number of winners and leaving out most places in need, because the scale of the consolidated capital system—even including community development financial institution (CDFI) alternatives—cannot and does not organize investments in ways that are absorbable, tailored, and replicable for all communities, rural and urban.

Less explored, however, is the potential for empowering these communities with new tools to help themselves. This report argues that disinvested places have real assets, but they face systematic barriers to organizing and aggregating them. Community investment funds (CIFs) are a promising, scalable tool that enables people and places of all kinds to organize capital, signal to institutions, and achieve repeatable scale by engaging an entirely new class of everyday investors in a transparent marketplace who are motivated by a mutual sense of belonging in their own communities.

State policy shapes CIFs’ feasibility by building markets through policies and spending that ease and incentivize local investing. This report presents a landscape review of current state policies covering these topic areas and highlights lessons learned from existing policies in action. We find that:

1. Investment crowdfunding is a key channel to capitalize CIFs. The federal Jumpstart Our Business Startups (JOBS) Act of 2012 and subsequent Securities and Exchange Commission regulations governing crowdfunding enabled entrepreneurs to raise both debt and equity investments in new ways and from new sources. There is significant and scalable innovation happening in investment crowdfunding, and some evidence showing that investment-crowdfunded businesses fail at lower rates than private businesses in general.
2. Federal incentives to invest in place either have very high transaction costs (limiting scalability or replicability) or are structured to serve accredited investors that have limited alignment with local priorities—and are the same investors who already have many other investment options. States can pursue policy alternatives: Many have created incentives to promote investing by professional investors, but results suggest such incentives are a much better fit for targeting unaccredited investors to act locally.
3. International experience with incentives and vehicles to raise community capital shows promising results, especially for rural areas. Since 1999, residents of Nova Scotia have been able to put their money into tax-incentivized community economic development investment funds (CEDIFs). These funds have generated a direct positive return on investment of almost 1,000% to the public sector when comparing foregone tax revenue to new tax revenue generated by investment-enabled business growth. However, this success is contingent on a broader ecosystem of financial institutions, intermediaries, administrative capacity, and standardized structures that were created in part through provincial policy and support.

We conclude that states should consider tax incentives for local investors to make smaller-dollar investments in local businesses, as well as policies and spending to build a broader ecosystem that supports execution and scaling. The bottom line from the evidence is clear: State governments have a significant opportunity to expand the capital pool for investment in localities that have struggled to access capital by targeting smaller-dollar investors. Such policies give residents across a wide range of incomes the chance to build wealth while their community benefits. There are proven methods using tax incentives and targeting methodologies that are just waiting to be scaled. And the timing is especially propitious: There is a clear opportunity to align such incentives with Opportunity Zones, which states are redesignating this year, and which could encourage that program to include more kinds of investors and direct capital flow to projects that have strong community support.

Incentives and policies to democratize investment provide an exciting yet pragmatic way to respond to unprecedented inequality of wealth and opportunity. Local investment for all captures the spirit of democracy by providing a new platform for a new class of investors—residents—to exercise greater agency in the future of their communities.

The case for community capital

The U.S. began to witness considerable consolidation (i.e., mergers) of banking institutions and the rise of major regional banking networks in the 1980s, as deregulation permitted financial institutions to operate across state lines and expand their financial services.¹ This consolidation reduced the geographic and social proximity of lenders to many communities. As a result, census-tract-level analysis of bank branch closings from 1999 to 2012 found that branch closings have a localized and persistent negative impact on small business credit access and lending.

The National Community Reinvestment Coalition’s most recent analysis of Federal Deposit Insurance Corporation (FDIC) bank branch data finds that while the rate of bank branch closures stabilized in 2024 and 2025 after the dramatic decline observed following the COVID-19 pandemic, the number of branches remains historically low. Between 2017 and 2025, the number of branches in operation shrank by 14.8%, from 86,469 to 73,649. These impacts are not even across communities: The Fed Communities and Federal Reserve Bank of Philadelphia’s Banking Deserts Dashboard and analysis found that while the most bank branch closures and growth of banking deserts occurred in higher-income, suburban, and mostly white neighborhoods, low-income and minority neighborhoods lost branches at a disproportionate rate between 2019 and 2023.

These trends provide notable context to the recent withdrawal of the Community Reinvestment Act (CRA) of 2023 final rule. The 2023 rule update to the CRA aimed to modernize banking regulations and expand benefits to communities and customers without access to physical banking branches by accounting for online lending activity, quantifying satisfactory lending practices to small businesses, and incentivizing investment by banks in rural, Native, and persistent-poverty communities. Between 2009 and 2017, the CRA reduced the risk of bank branch closures in low- and moderate-income neighborhoods by over 8%.

Without the 2023 CRA final rule, it will be more difficult to expand access to banking services, including small business loans, in some communities. Bank branches play an important role in credit access, offering soft information and relational lending that technology has not replaced—perhaps because there is evidence that bank consolidation itself inhibits innovation in the banking sector. When banks consolidate, left-behind communities need alternatives for capital access. Innovation occurs when entrepreneurs solve problems; if we imagine a progressive loss of innovation due to the concentration of capital into fewer businesses and specific geographies, we risk losing much of the creativity that created all the innovation America has benefited from for the last century.

The rise of crowdfunding

Entrepreneurs and real estate investors have always used non-bank sources to raise the money they need to start or grow a business or project—and as bank capital has become less available, reliance on these alternatives, such as credit cards, has increased. Raising capital from individuals is a key strategy, because the potential pool of capital sources is vast: almost every adult.

Because of the risk of financial loss involved in being an investor, the government highly regulates investment activity to protect the public. Most investment opportunities are only available to “accredited investors,” who are high-income or high-net-worth individuals. This limitation has two downsides. First, it limits the pool of potential investors that entrepreneurs can access, because only 12.6% of Americans are accredited investors, and social networks are highly stratified by income. Second, while current regulations covering most investment opportunities protect unaccredited investors from risk, they also deny everyday people access to potential reward, which worsens wealth inequality.

Enter crowdfunding. The term “crowdfunding” covers a wide range of activities that involve assembling a single pool of capital from many individuals, and generally implies a social component to the capital-raising campaign. This may be as simple as an individual using a web platform such as GoFundMe to ask for assistance from friends, family, and strangers with paying medical bills. A growing community of creators who have a product or idea in everything from films to board games use platforms such as Kickstarter to offer rewards in exchange for seed capital to pursue production.

A more nascent space is the world of investment crowdfunding, in which the promised “reward” is a potential return over some period of time on an investment. For example, the national platform Small Change connects real estate developers and relatively low-dollar investors; Honeycomb Credit focuses on community-based businesses owned by women and people of color in low- and moderate-income communities; and Wefunder is a vast platform structured as a public benefit corporation, and has raised billions of dollars in capital for startups ranging from the arts collective Meow Wolf to newsletter giant Substack.

Title III of the JOBS Act established Regulation Crowdfunding, and subsequent regulatory tweaks to increase offering limits have encouraged participation in investment crowdfunding by smaller businesses, startups, non-accredited investors, and ordinary people—leading to a boom in investment crowdfunding of over $1.5 billion by the end of 2025. As of 2024, over 20% of U.S. business owners have tried to use crowdfunding to access capital, and crowdfunding has provided an estimated 6% of all startup capital in the U.S.

The growing scale of American losses to financial fraud—and the fact that most financial fraud has a cyber component—may give policymakers pause in considering the merit of online investing. After all, index funds are a relatively low-risk option for giving more Americans the opportunity to accrue capital gains. Yet the popularity of dubious alternatives such as cryptocurrency and lotteries demonstrates that there is real appetite for nontraditional options that feel exciting and tangible, and it is a win-win for individuals and society if a healthy option can feed this appetite.

In fact, there is some evidence that there is a connection between investment crowdfunding success and lower investment risk. A 2022 study of a sample of businesses that had successful investment crowdfunding offerings between 2016 and 2018 found a failure rate of 17.4% by February 2021. For comparison, the Bureau of Labor Statistics reported total private failure rates of 37.9% to 49.3% for businesses founded between 2016 and 2018, as of March 2021.² That the sample investment-crowdfunded business failure rate is less than half of the total private failure rate—which is consistent with industry claims—offers a strong rationale for targeting smaller-dollar investors. It suggests a potential “wisdom of a crowd”—in other words, that investing in small businesses via crowdfunding alongside a group of fellow investors appears to be less risky than directly investing in a business as a solo actor. Crowdfunding success appears to be a sign of a business concept or product that is in real demand or of an entrepreneur who is business-savvy.

There is clear evidence of a very large surge in entrepreneurship in the United States during and after the COVID-19 pandemic. These microbusinesses have created meaningful numbers of jobs and grown the economy, but this does not mean that American dynamism is at its maximum or optimal level. The rise of artificial intelligence and the contraction of the country’s largest employer (the federal government) under the Trump administration mean that ongoing labor market disruption is likely, and state and local governments can create positive value for their communities by making it easier for new entrepreneurs to succeed, including by paving their road to capital access.

The emergence of community investment vehicles fueled by crowdfunding

Community investment in commercial real estate (CRE) and businesses is a broad topic that encompasses a diversity of models striking different balances between power-building, wealth-building, and community revitalization. There is a growing evidence base of economic, social, and civic benefits that has drawn philanthropic and community interest in these models. Community investment funds are a specific legal structure that can seamlessly merge crowdfunding, philanthropic program-related investments, and dollars from accredited investors (including Opportunity Zone funds) to invest in one or more local real estate projects and businesses.

One of the early pioneers of the idea of local capital aggregation and investment was the community investment trust (CIT) model developed by John Haines with Mercy Corps. In 2008, Haines deployed a user-centered design process focused on personal wealth-building and financial resilience in a low-income immigrant ZIP code in East Portland, Ore. He created a pilot project empowering community members to invest in a local commercial property. Now in operation for nearly a decade, the CIT model has enabled non-wealthy community investors to own income-producing real estate and begin the process of multi-generational wealth-building. The CIT model is now being expanded to more communities across the country.

In a similar fashion, Chicago’s TREND Community Development Corporation, led by Lyneir Richardson, purchases, renovates, and re-populates strip shopping centers in a conventional commercial real estate general partner (GP) and limited partner (LP) structure, with a twist: Unaccredited investors from the community served by the shopping center are among the LPs. Using investment crowdfunding, TREND raises capital that is then layered with traditional commercial loans, philanthropic program-related investments, and equity and debt from impact investors. To date TREND has five shopping centers in the portfolio, which is valued at $125 million. A recent closing in Baltimore included investments from 330 community members who contributed an average of $2,363 each. At exit, a recent TREND shopping center sale in Chicago generated a 600% return for equity investors.

In Pittsburgh, Strong II Dry Cleaners is a 95-year-old Black-owned local small business in an industry that faced a devastating drop in demand during the COVID-19 pandemic. At the same time, however, there was a surge in demand for medical-grade sanitizing of uniforms and towels, which required a capital outlay for additional equipment and chemical solutions in order to deliver. The business used Honeycomb Credit to raise capital from their community, with a minimum investment of $100. This type of Regulation Crowdfunding offering can be used to access debt at rates comparable to or lower than typical business loan rates or equity in the form of shares with a variable return that could be lower or higher than the return on debt. The business has also borrowed from a local CDFI, the Neighborhood Community Development Fund, illustrating that no one capital pathway is a complete solution, but rather part of a healthy ecosystem supporting a business that has created three generations of prosperity.

Based in Colorado, the Kachuwa Impact Fund serves as an investment cooperative. Primarily focused on owning and operating “impact real estate,” it also makes investments into “impact companies.”  Kachuwa has invested in 11 real estate projects across Colorado, North Carolina, and Oregon, and in over five dozen impact companies across the country. All investments are evaluated in alignment with human-centered values and benefits. Since raising its first capital in 2017, the 310 co-op members have collectively invested over $26.7 million, and the asset portfolio now exceeds $60 million. ​​​​Of the 310 co-op members, 105 are non-accredited investors, and all 50 states are represented in the membership.³

Each of these cases is presented here as an individual story, which is how crowdfunding campaigns are socially marketed. But in fact, each is an illustration of a replicated or replicable capital pathway, not a one-time intervention. Platforms such as Honeycomb Credit, replicated offerings such as TREND’s shopping centers, and funds such as Kachuwa demonstrate that CIFs are ongoing and durable capital flows that link community priorities with capital while systematically solving the challenges of project sourcing, governance, and investor education to yield repeat execution.

Lessons from Canada for rural areas

In rural areas where access to banking is particularly limited (and has always been so), there is a long history of alternative mechanisms to raising capital. The Canadian province of Nova Scotia has deployed Community Economic and Development Investment Funds (CEDIFs) since 1999, giving the long-standing program a lengthy track record for evaluation. Nova Scotia is a peninsula on the east coast of Canada with a population of approximately 1 million people. The largest city is Halifax, where about half of the province’s population lives, but the province remains one of Canada’s most rural, with a relatively low gross domestic product compared to the rest of Canada.

Nova Scotia is historically a natural-resource-rich region characterized by mining boom-and-bust economies, and where rural areas have grappled with economic stagnation and population decline for decades. In 1993, Nova Scotia’s government introduced the equity tax credit to encourage local investment in rural small and medium-sized businesses and cooperatives, which comprise a significant portion of the province’s small economy.

Building on the 1993 equity tax credit, Nova Scotia introduced CEDIFs in 1999 as a more efficient tool for citizens to invest locally—launching 10 capital pools within its first year. Nova Scotia residents who invest in CEDIFs receive a 35% income tax credit after five years. If the investment is re-upped for another five years, they receive an additional 20% credit, and another 10% at the maximum of 15 years—for a total potential subsidy of 65% to their investment. To an American audience, this idea of a step-up tax break over time to incentivize patient place-based investment might sound familiar, because the federal Opportunity Zone program has a similar structure (though it applies to capital gains, not income). Over a 20-year period from 1999 to 2019, CEDIFs in Nova Scotia raised over $100 million in capital.

Nova Scotia’s CEDIF program demonstrates that CIFs can offer relatively safe and reliable investments. Only 6.5% of CEDIFs launched between 2000 and 2013 under the program failed, as compared to the 30% to 40% failure rate of high-potential startups. The program also proves that CIFs can generate a positive return on investment. For example, FarmWorks Investment Cooperative, one of the CEDIFs established under Nova Scotia’s program, demonstrated a positive return on investment, and the provincial government tax revenue generated by their CEDIF supported business activity that outpaced the amount of foregone tax revenue from CEDIF investor equity tax credits.

A recent economic impact study estimated that for roughly $2.7 million in annual foregone tax revenue to fund the incentive, approximately $25 million in tax revenue was generated by the business startups and growth the investments enabled. An analysis of Nova Scotia and five other Canadian provinces’ CIF programs concluded that while CIF programs can promote place competitiveness and retain wealth, success and adoption is driven by the capacity of program staff to promote and administer these programs at the community level. The report recommends that in addition to investing in staff capacity, provincial governments can build a community of practice for participants across provinces, streamline the process for establishing and managing a CIF, clarify program goals, and collect data for improved assessment.

In evaluating the success of Nova Scotia’s CEDIF program, the Canadian government recommended in a 2015 report that the public sector can further support social finance through tax credits, seed funding, and prioritized procurement for social enterprises, in addition to removing the regulatory and legal barriers for nonprofits engaged in social innovation, finance, and enterprise.

A narrative example of a program from a rural Canadian province may seem anecdotal or challenging to place in context for some American audiences. In Figure 1, we normalize the total dollar amounts raised across four approaches to serving small businesses and real estate projects by the number of years the offering or program has existed and the population of the geographic area the offering or program serves. The impact of the Nova Scotia CEDIF model in a rural context with a low administrative burden and a strong ecosystem is striking, and suggestive of the future potential of investment crowdfunding and, ultimately, CIFs, which is currently the only approach shown in Figure 1 that is not tax-incentivized.

Tax incentives are effective at leveraging increased local investment

The U.S. federal government has long recognized the problem of limited access to capital in low-income communities, and has an array of policies, tax credits, and programs to direct the flow of capital to those places. For example, the Community Reinvestment Act is a statutory mandate for banks to extend credit to all of the communities that they take deposits from, in order to address the historic wrong of redlining. On the incentives side, both the New Markets Tax Credit and the Opportunity Zones program use tax incentives to move private capital to low-income communities for investment in real estate and businesses, and have moved a combined $164 billion since 2001. However, we have argued at length elsewhere that there is a fundamental mismatch between the transaction costs and power structures of these federal programs and the actual needs of communities. In addition, almost no Opportunity Zone dollars were invested in growing operating businesses—perhaps as little as 3%.

There is considerable potential scope for states to make better policy in this area, given that states spend billions of dollars on tax incentives as their largest investment in economic development. There are currently 31 states offering tax incentives for angel investors, often aimed at attracting capital from outside the state to targeted industries within the state. While many states have adjusted the way these incentives are structured over time to improve their performance and transparency, critics have highlighted key risks, including that the incentives provide subsidies to the wealthy, are high-risk, and can result in high-profile, large-dollar failures.

There is some state policy interest in a more community-based approach. For example, more than a dozen states have incentives for charitable gifts to community development organizations, sometimes branded as “community investments” or “neighborhood assistance.” However, the direct economic impact of these incentives can be challenging to measure. Most recently, the Michigan and Rhode Island state legislatures are considering proposals for tax incentives for investments by state residents in businesses and real estate projects located in their states.

The key variables for legislators to consider are the source of the capital (and therefore one of the beneficiaries of the incentive), the anticipated mechanism by which the capital generates value for the state, and the ecosystem and administrative capacity needed to implement and guide the incentive. The Michigan and Rhode Island proposals explore a new approach to incentivizing investment while managing risk: to spread it out by targeting the much broader pool of everyday unaccredited investors and business types. As states consider this alternative approach, The Pew Charitable Trusts’ work in tax incentive policy has emphasized the need for the purpose and mechanism of impact for tax incentives to be clearly stated in the policy design. It is therefore also important to consider what we already know from the literature about how tax incentives related to investment tend to work in practice.

A key finding of the most robust program evaluation across multiple states of tax incentives for angel investment is that non-professional investors are far more responsive to incentives than professionals because of local knowledge of investment opportunities. At the top line, the evaluation also found that these incentives are very effective at leveraging investment—moving an estimated $24.5 billion in investment at a cost of $8.1 billion in tax credits. As one specific illustration, Kansas’ Angel Investor Tax Credit cost $44.4 million in tax credits over seven years, but generated $102.1 million in investment in state businesses. This finding suggests that small business investment incentives are best set up for impact if targeted at goals such as placemaking, economic inclusion, and innovation, instead of attracting out-of-state capital or creating jobs.

A pivotal moment for states to open the spigot on community capital

Innovators have made significant progress in establishing legal structures that bring tangible local investment opportunities to unaccredited investors who want to help their communities. There are two key ways that states could support the scaling of these innovations:

1. Offer state tax incentives for state resident investments in local businesses.

   In the existing state tax incentive landscape, many states already offer incentives for angel investors, but restrict the incentives to specific sectors or minimum investment sizes, and offer the incentives to out-of-state investors. Yet recent research shows that angel investing has close to zero impact for rural businesses. States should consider a parallel or replacement approach structured to work for rural areas and other disinvested communities. Key considerations for state legislators considering this idea include:

   • Staying away from sector restrictions on the kinds of businesses or projects eligible for the incentive. Let entrepreneurs grow the economy.
   • Value local knowledge and encourage communities to invest in themselves by keeping the tax credit accessible to the maximum number of unaccredited small-dollar investors through a relatively low limit on the maximum credit any one individual can collect (e.g., thousands of dollars, not millions of dollars).
   • Make the tax incentive easy to collect and administer, such as through an itemized state income tax deduction.
   • Periodically evaluate the impact of the incentive on capital flow and placemaking outcomes such as participation, inclusion, business survival, and net new tax revenue generated from participating businesses.
   • In considering a new tax credit with uncertain costs and benefits, states can consider structuring an annual cap on credits and first establishing the credit with a sunset provision based on evaluation results.
2. Align with Opportunity Zones or other place-based incentives.

   One way that states could manage the potential cost of a new tax incentive would be to target the incentive to specific places. In 2026, the major policy decision about place-based economic development that state governors will be making is the designation of Opportunity Zones in low-income communities. However, Opportunity Zone funds are only accessible to investors who have unrealized capital gains to invest, typically, accredited investors. To expand participation, states could create a local CIF incentive tool to allow ordinary investors to participate in Opportunity Zones and guide Opportunity Zone incentives to locally led projects.

Conclusion

Linking everyday investors and community priorities at the state and local level has tremendous potential to grow the economy. With the passage of the JOBS Act in 2012, and the creation of Regulation Crowdfunding in 2016, Congress and the Securities and Exchange Commission created a powerful, scalable new tool with the ability to bring millions of new investors into the economy. A decade of experience with this tool has demonstrated it is safe, powerful, and impactful, moving over 1.5 billion dollars in capital to create new businesses and jobs. Incentivizing local investing has an international track record of reaching rural communities and other disinvested areas with a direct, demonstrable, and measurable positive return on investment. States have an opportunity to act now to boost the potential of this tool by providing regular Americans with incentives that are like those the wealthy have long enjoyed. Creating economic resilience and empowering communities to innovate at a time of uncertainty is responsive to the realities that Americans are facing today.

States that are willing to be innovative have the chance to put themselves at the forefront of building sustainable local economies—offering a vehicle that could strengthen their middle class while expanding capital for locally rooted businesses and development. Regular Americans are looking to policymakers for ways to help strengthen their economic security and restore or preserve the vibrancy of their neighborhoods. Incentivizing CIFs could help them participate in a fast-moving, dynamic economy that otherwise seems either out of reach or a source of extraction and stress. What seems like a small tweak can redirect the power of capital toward local agency and local return to a state’s own neighborhoods and communities.