On The Road

ST. FRANCISVILLE, ILL. -- Facing a jobless rate of 11.4% and the specter of closing its schools, this declining industrial town on the banks of the Wabash River was desperate for jobs. So when Joseph Fullop III, a fast-talking economic-development consultant, last year proposed a creative financing strategy that he says would have "stimulated the economy beyond your wildest dreams," the town bought in.

In the end, it found itself worse off.

St. Francisville's troubles underscore a predicament shared by depressed rural communities in an era of dwindling state and federal aid. "Small communities have to be creative and entrepreneurial to survive," says Patricia Kelly, former associate director of the California Association for Local Economic Development. "But they often lack the expertise to assess which deals are sound." The result, says Doug Henton, president of Collaborative Economics, in Palo Alto, Calif., is increased vulnerability to ambitious plans that are highly complex.

In St. Francisville, population 850, "we didn't have any kind of businesses at all," explains former mayor John Paul Jones II. "When a man comes along and shows on paper a way to raise that kind of money, you've got to be nuts not to think about it."

Fullop's proposal was to have residents invest in local companies, beginning with Three River Farms, a grower of exotic mushrooms. Last summer the town started selling $5,000 securities that gave the buyers ownership of Three River Farms' assets. They would then rent the assets back to the company in exchange for a percentage of monthly sales. That royalty would begin at a whopping 32% of gross receipts, then diminish until investors recouped 250% on their money.

The proceeds of the $5-million offering would become Three River Farms' growth capital. What's more, in exchange for administering the trust, the town could siphon 10% of the royalty stream into its coffers, which Fullop says would generate $40 million in revenues over 10 years.

How could such riches be made to flow from a small grower of edible fungi? Fullop ascribes it to "Wal-Mart economics": the capital would allow Three River Farms to reduce costs through such advantages as bulk purchasing. "I can guarantee any city that does this [offering] as many jobs as it has space to fill," he adds.

As curious as Fullop's math sounded, his plan faltered on a completely different basis: the law. Fullop contended that the offering was exempt from registration requirements because it was benefiting a municipality, but the state disagreed. It issued an order prohibiting further sales and permanently barred St. Francisville from issuing securities in Illinois without permission. Fullop, who had previously been cited for securities violations in Wisconsin and Indiana, argued that the state had misinterpreted the law and overstepped its jurisdiction. He filed a countersuit.

Meanwhile, Three River Farms has pared its payroll from 23 to 13 employees, and owner Dan Teague says he is preparing to move the company out of state. Like most townspeople, he blames the bureaucrats. "The state of Illinois," Teague complains, "is not interested in small-business development whatsoever."

But Henton says that hard work on such fundamentals as education and infrastructure is the most effective approach. "There are no quick fixes," he adds, "in economic development."


CALIFORNIA ASSOCIATION FOR LOCAL ECONOMIC DEVELOPMENT, 1010 F St., Suite 100, Sacramento, CA 95814; 916-448-8252 31

COLLABORATIVE ECONOMICS, Doug Henton, 350 Cambridge Ave., Suite 200, Palo Alto, CA 94306; 415-614-0230; www.coecon.com. 31