How Basic Capital works

In order to understand how Basic Capital works, you have to understand these three inventions. Let’s dive in.

Invention #1: The FHA Mortgage

The Federal Housing Administration (FHA) was established ninety years ago in the wake of the Great Depression. The singular aim of the FHA was to facilitate housing loans by providing insurance to lenders who were increasingly risk averse and unwilling to extend loans to laid-off workers. The “FHA Mortgage” is something that continues to exist today: the implicit guarantee that the government will bail out organizations who lend to borrowers who meet certain criteria.

The power of the FHA Mortgage is that a large number of people can qualify for an extraordinary amount of credit, generally anywhere from $5 for every $1 invested all the way to $10 for every $1 invested, solely because the FHA stands behind each loan extended to borrowers that meet its criteria.

This enables more Americans to buy homes and generate wealth through real estate.

Invention #2: The Index Fund

Nearly fifty years ago, Jack Bogle launched what was then the first index fund available to everyday investors. An index fund provides a way for everyday investors to have exposure to the entire basket of stocks that comprise an index. The S&P 500, the Nasdaq Composite, or the Dow Jones Industrial Average are three of the largest and most popular indexes to track.

His philosophy was simple: “Don't look for the needle in the haystack — just buy the haystack!” Since then, Bogle’s philosophy has been proven time and time again. There are a handful of investors – literally a handful – who have come remotely close to consistently beating the broad market performance over that time period, however most individual investors would be better off buying an index fund.

This enables more investors to experience the best growth the market has to offer, for low fees, and without having specialized knowledge that tends to only be available to the wealthy and powerful.

Invention #3: The Bankruptcy Remote LLC

The final invention is the bankruptcy remote limited liability company. This invention is straightforward: there is a way to structure a legal entity such that it is not liable for the debts of its related entities.

This is essential to reduce the risk that taking on a loan creates.

Combining these three concepts into one

First, we believe that there should be an FHA mortgage but instead of a loan to buy a physical asset like a house, we believe that it should be available to someone who wants to buy a financial asset. In fact: over the course of the last century, the broad market (which index funds track!) has provided a higher average annual rate of return than real estate.

We are building the legal and financial infrastructure that will provide a similar type of insurance to lenders so they feel comfortable lending to Basic Capital members.

Second, we believe that any money lent to individuals to invest in the stock market must be invested in a security that is safe, diversified, and that has a proven history of reliable returns. So we invest the money lent through the FHA mortgage-like mechanism we’re building into index-linked securities.

Finally, instead of assigning the Basic Capital fund that each member creates when they join Basic Capital and make their initial down payment to the individual, we create a bankruptcy remote LLC and give that individual 100% ownership of it. Even though the underlying investment is an index fund, and that over the long term, index funds not only generate positive returns and outperform virtually all other investment strategies, we still want Basic Capital members to have protection from the risk of loss.

In sum, we are building a way for people like you to get the same leverage you could get to buy a house to buy the market, then we’re giving you the tools to buy the market, and we’re protecting you from the extremely unlikely outcome (like getting struck by lightning unlikely) of the cost of the loans exceeding the rate of return on your exposure to the market.

Phew. If you’re still with us, we salute you, and… we have more to say. For example, you might be wondering: why would a lender give me capital to invest in the stock market?