NC PACES Act Crowdfunding Law and Rules Now in Effect

By Mark Easley

Good news, the NC PACES Act crowdfunding rules have been finalized, and the act is in effect as of today, April 1^st 2017. The Secretary of State web site has the rules, forms, instructions and FAQs that startups and small businesses need to start using this new type of intrastate investment crowdfunding financing.

https://www.sosnc.gov/divisions/securities/crowdfunding

Mark Easley

Businesses ranging from brand new to mature can make use of the new law for financing. North Carolina based startups and small businesses that want to raise money using the NC PACES Act crowdfunding law (referred to as issuers of an investment offering) will follow the registration, reporting, escrow management, record keeping, promotion, and procedure rules of the PACES Act on the Secretary of State website. Once a registered offering is approved by state regulators, issuers can promote equity or debt offerings to raise up to $2M if they have reviewed or audited financials, and up to $1M if they do not. North Carolina accredited investors can invest an unlimited amount, and North Carolina retail unaccredited investors can invest up to $5000 per offering. Issuing companies can promote the offering using the internet including social media, email, a website and other types of advertising provided they follow the content and procedure rules for the PACES Act. The maximum length of time for an offering to be open is 12 months, and businesses may make one PACES Act offering every 12 months.

Local Public Offering

A very important new idea enabled by the NC PACES Act and the new rules is called the Local Public Offering, or LPO. This is a new and innovative idea that has not yet been tried at the Federal Level or in other states. By following the rules for an LPO, the startup or small business can raise up to $250,000 on their own, and they do not need to use a crowdfunding platform or registered broker/dealer. They can put together a simple equity, debt, or revenue share loan offering, set up an escrow account with their bank or lawyer, and then register the offering with the state. Once approved, they can promote the offering to their friends, family, customers, and community to get the funding. The LPO is a very cost effective way for small businesses and startups to do crowdfunding, and achieves a good balance between cost and risk for both issuers and investors.

Investor Protections  

The PACES Act and the rules also have some very important investor protections built in. All offerings are registered with the state, they must declare a target amount to be raised and a minimum amount to be raised, and they must include information about the use of the funds and other business plan details. Money collected for the offering is kept in a registered escrow account and cannot be distributed until the minimum is in escrow. If the minimum is not reached, all money is returned to investors without charges or fees. If the minimum is reached, the money is distributed to the issuer according to the terms of the offering. The PACES Act and rules also require the issuers to make regular reports to investors about the progress of the offering, and once it is funded, the progress of the business.

There are many other details to consider in the rules, and this summary is not legal or investment advice. Consulting with a business law attorney about your offering documents and the crowdfunding rules is a good idea, and for those raising larger amounts a crowdfunding platform will be a good option, as they can take care of many of the details for you.

The good news for today is that intrastate investment crowdfunding is now available in North Carolina. And yes, this is for real, not an April Fools!