We Made It! NC PACES Act to Become Law

By Benji Jones

The NC PACES Act: “Providing Access to Capital for Entrepreneurs and Small Business” has been passed by the NC House by a vote of 114 to 0, the NC Senate by a vote of 49 to 0, and is now headed to Governor McCrory for his signature.  After 3.5 years in the making, intrastate investment crowdfunding is finally coming to North Carolina!  

 

Senator Tamara Barringer

Senator Tamara Barringer, co-sponsor of the bill, states: “The NC PACES Act has passed the North Carolina House and Senate unanimously, paving the way for small businesses to raise much needed capital, providing jobs and opportunities for North Carolinians.”

What does this mean? 

A North Carolina business will be able to raise up to $1 million in any 12-month period (or up to $2 million with audited or reviewed financial statements) from investors who are North Carolina residents.  There are no wealth or income limitations on who can invest; however, investors who are not “accredited” may only invest $5,000 in a particular venture in any 12-month period.

Companies will be permitted to promote the offering publicly, after filing a notice (as well as substantive disclosures) with the Securities Division of the North Carolina Secretary of State.  A fee of $150 will also be charged.  Companies are required to communicate in writing the business plan, financials, use of funds, and risks of the offering. Investors are required to certify in writing at the time of sale that they understand the risks of purchasing unregistered securities and that they may lose their entire investment.

Companies may (but are not required to) use a professional crowdfunding intermediary that meets the requirements established by NC PACES and related rules.  They are required to establish an escrow to hold funds prior to closing.

Benji Jones

Companies that issue securities under NC PACES will be obligated to provide quarterly reports to investors discussing management compensation, operating results, and financial condition, etc.

When can we start?

Companies can start gathering materials, preparing disclosures, and consulting advisors now.  However, you will not be able to formally pursue investors under NC PACES until the Securities Division of the North Carolina Secretary of State’s office adopts specific rules to implement the provisions of the Act.  The Secretary of State’s office has played a critical role in formulating this exemption and, although the law gives it a 12-month period to act, hopefully, it will give implementation of these rules highest priority. 

There are some details to iron out so stay tuned here for more updates.   

The content contained on this blog does not provide, and should not be relied upon as, legal advice. It does not convey an offer to represent you or an attorney-client relationship. All uses of the content contained in this blog, other than for personal use, are prohibited.

Benji Jones is a partner at the Ward and Smith law firm with extensive experience in representing companies in exempt and non-exempt securities offerings.  Feel free to reach out directly to the author with questions or comments.

Why Are State Crowdfunding Laws Still Useful Now That Federal Crowdfunding Has Arrived?

May 16th, 2016 was a notable day for the investment crowdfunding community. After 4 long years, the SEC finally allowed Title III of the Federal Jobs Act, called 'Regulation Crowdfunding', to go into effect. This is the section of the Federal Jobs Act that allows non-accredited retail investors to invest in startups and small businesses. Now, for the first time since 1933, everyone can invest in securities issued by private companies within the limits defined by Title III and the SEC regulations about it.

So why do we still need State laws and regulations about intrastate investment crowdfunding exemptions like the NC PACES Act? Crowdfunding expert and securities attorney Jim Verdonik makes the case.


Why Are State Crowdfunding Laws Still Useful After Federal Crowdfunding? 

By Jim Verdonik

The SEC's Regulation Crowdfunding became effective on May 16, 2016.  Unaccredited investors can now invest in offerings on investment platforms.  There are now four new Federal Crowdfunding exemptions that allow you to advertise offerings.

Jim Verdonik

Having so many new Federal capital-raising alternatives raises the question:  Do we still need state crowdfunding laws?

Let's answer that question from three perspectives:

• Investors

• Securities regulators

• Businesses Raising Capital

People and Communities are the Biggest Reason for State Crowdfunding

State Crowdfunding laws are needed for reasons that have little to do with technical legal rules.

• People like the idea of investing in their neighbors' businesses.

• People like reinvesting in their own communities.

This should come as no surprise.  People like to buy fresh locally grown fruits and vegetables.  People like to drink local craft beers.  People like to root for their local high school or college team even though professional athletes are bigger, faster and stronger.  People like local live concerts by musicians who don't have a national audience.

Collectively, we call these things our local culture.  Laws that make it difficult to create a healthy local culture are bad, but that is what securities laws have been doing for decades.  Securities laws divert money away from local communities to international money centers.

State Crowdfunding laws that legalize platforms that are limited to local businesses simply help investors find the local investment opportunities they want.

State Crowdfunding laws are the equivalent of state run farmers markets.  They bring together local buyers and sellers in an identified safe place.

Isn't it foolish for state government to get in the way of people building and investing in their local communities?

Why should it be easier to invest in a business that is halfway around the world than one that is in the next town?

Market Opportunity for States to Get Back Into the Game

State securities regulators have been underutilized for the past two decades, because most securities offerings use Federal exemptions that preempt state laws that require offerings to be reviewed by state securities administrators.

The old state regulatory system is so antiquated that people almost always choose to avoid it, if they can.

The surprising thing about state Crowdfunding laws is that the biggest proponents of state Crowdfunding laws should be people who want to increase state regulation of securities offerings, because state Crowdfunding offerings are reviewed by state securities regulators before businesses can sell securities.

Why would anyone think that regulators reviewing securities offerings would put investors at risk?

Of course, modern state securities regulation requires both carrots and sticks.  The old saying is that: "You can lead a horse to water, but you can't make it drink."

That's the way securities modern laws work.  You have to have carrots to entice businesses to use the state system.  These carrots primarily involve offering alternatives to some of the imperfections of the Federal Crowdfunding laws we discussed below.

Imperfections of Federal Laws for Businesses Raising Capital

If the four new Federal Crowdfunding laws were perfect, then most business would refuse to enter the state crowdfunding system.

But who ever heard of a perfect law?

Each of the Federal Crowdfunding laws lacks some attributes that are useful to some types of issuers:

• Rule 506(c) does not allow sales to non-accredited investors.

• SEC rules and review processes for both Tier 1 and Tier 2 Regulation A offerings are both expensive and time consuming.

•  Tier 2 of Regulation A and Regulation Crowdfunding impose ongoing reporting requirements on issuers that are expensive and may harm their ability to compete by making public information their competitors can use against them.

• Tier 1 of Regulation A does not pre-empt state registration laws.

• Regulation Crowdfunding allows you to raise only $1 million per year.

• Regulation A and Regulation Crowdfunding have expensive financial statements requirements beyond the normal securities rules about disclosing material facts.

Virtues of State Crowdfunding laws

Luckily, we have a Federal system of government where the states have the power to experiment with new laws.  State Crowdfunding laws are imperfect, but they offer some advantages to some businesses:

• Allow unaccredited investors to invest, unlike SEC Rule 506 (c).

• Are much cheaper to comply with than SEC Regulation A.

• Allow businesses to raise more than $1 million, unlike Regulation Crowdfunding.

• Allow businesses to make greater sales efforts outside a technology platform to attract investors to their offering, unlike Regulation Crowdfunding.

• Have greater flexibility than Regulation A or Regulation Crowdfunding for businesses to give investors the types of financial statements that smaller businesses actually prepare to use to run the businesses.

In summary, most businesses will use the Federal Crowdfunding exemptions, but there are good reasons to add state Crowdfunding to the list of capital-raising choices.

You can read Jim's original post here.

Jim is an attorney with Ward and Smith PA.  You can reach him at  JFV@WardandSmith.com

Check him out at www.YouTube.com/eLearnSuccess
Jim writes a column about business and law for American Business Journals http://www.bizjournals.com/triangle/search?q=%22Jim+Verdonik%22&%20title=

You can purchase Jim's book 'Crowdfunding Opportunities and Challenges' at http://www.amazon.com/Crowdfunding-Opportunities-Challenges-Jim-Verdonik/dp/1483442802 

Crowdfunding: Closing the Capital Raising Gender Gap without Really Trying

By: Jim Verdonik

I've always been fascinated by the unintended consequences of tools.  Toolmakers often start out trying to achieve a specific goal, but when people start using the tool they sometimes find that its useful for many other purposes.

Crowdfunding illustrates this point.  Designed as a capital-raising tool, we are just beginning to see some of the many socio-economic effects.

Jim Verdonik

In researching my book Crowdfunding Opportunities and Challenges (Thompson Reuters), I found early statistics showing that Crowdfunding makes it easier for women entrepreneurs to raise money.

 Early statistics were startling.  Women led businesses get:
•4% of SBA loans
•7% of venture capital investments
•34% of online capital

The Crowdfunding success rate of 52% for women was higher than the 39% success rate for men.  Women were also getting higher valuations.  But the men also benefitted. Crowdfunding success rates and valuations are higher for both men and women compared to traditional capital-raising.  So, Crowdfunding is a rare win-win solution. I note these Crowdfunding statistics were based on only one large Crowdfunding platform – CircleUp.  But even assuming the statistics are not representative of all platforms, something startling seems to be going on in the Crowdfunding world.

Crowdfunding's designers probably didn't know they were unleashing a force that could close the capital-raising gender gap, but that may be just one of the  big unintended consequences.

So, what's going on Online?  Why is this happening?

One thing is that CircleUp attracts a lot of consumer products entrepreneurs and investors.  It has very few technology plays dominated by engineers and Silicon Valley nerds.  Maybe Crowdfunding is like the investor version of Home Shopping Network.  Will Home Shopping Network seize the opportunity to become an investment marketplace too?

Successful Crowdfunding offerings use videos and social media to generate investor interest.  Seeing the actual product and how consumers use it is probably a better selling tool than trying to describe a new software product or medical device.

Each investor in Crowdfunding deals usually invests a smaller amount per investor than traditional capital raising deals.  The Crowd seems to love giving small amounts to women entrepreneurs.  The beauty of Crowdfunding is that small amounts from lots of people can create big wads of cash for entrepreneurs.

It will be interesting to see whether the same holds true for minority entrepreneurs. Wouldn't it be amazing if one of the unintended consequences of this new Crowdfunding tool achieved what all the conferences, articles and laws that focus on closing the gender gap couldn't to?  Just think of all the time and money spent going in the wrong direction.  When you are lost in the forest, having a good sense of direction matters more than having good intentions.

This raises a question:  Why has it taken so long for Crowdfunding to come?  Neither the technology nor the business model is really new.  Crowdfunding is just selling something on the Internet.  People have been doing that for decades.  Why didn't we close the gender gap twenty years ago?
The answer, of course, is that securities laws made Crowdfunding illegal until recently.  So, we have the strange situation that the same Government that promotes gender equality made it illegal to use a tool that may outperform all Government programs designed to create equality.

This brings us to my home state - North Carolina.  More than 30 states have legalized Crowdfunding, but North Carolina is still sitting on the sidelines watching.  It's time to pass the NC PACES ACT that will legalize state Crowdfunding in North Carolina.

Bob Dylan said: "Get out of the way if you can’t lend a hand."  That's a good motto for Government to live by every day.
Ronald Reagan said:  "Mr. Gorbachev tear down that wall."
The times won’t be changing if we don't tear down the walls Government builds.
If two very different leaders like Dylan and Reagan both agree, then why does North Carolina still have a legal wall between entrepreneurs and investors?  

Mother's  Day is a few days away.  So, for Mother's  Day 2016, how about giving the Mothers of North Carolina what they really need:  Crowdfunding to grow their businesses.  Your Mom would be so proud of you if you do.  Who knew your Mom would turn out to be such a free market Libertarian?

About Jim Verdonik:

Jim is an attorney with Ward and Smith PA.   You can reach him at  JFV@WardandSmith.com
Check him out at www.YouTube.com/eLearnSuccess
Jim writes a column about business and law for American Business Journals http://www.bizjournals.com/triangle/search?q=%22Jim+Verdonik%22&%20title=

You can purchase Jim's book Crowdfunding Opportunities and Challenges at http://www.amazon.com/Crowdfunding-Opportunities-Challenges-Jim-Verdonik/dp/1483442802  

See the post on Jim's blog here.

(this article is based on Jim's article that was first published by Triangle Business Journal on May 5, 2016)

Investment Crowdfunding is a Proven Success

Since the passage of the Federal JOBS Act, the industry has shown that these new exemptions are a great way to finance startups, small businesses, and real estate among others. This new financial industry is up and running strong, and it is time for North Carolina to join in by passing the NC PACES Act.

Nick Bhargava

Nick Bhargava, who was part of the original NC JOBS/PACES Act team, discusses some of the success stories in a new post in CFO Magazine. Nick writes:

"As an early advocate for the JOBS Act, I firmly believe it has largely been a success. The purpose of the JOBS Act, signed into law April 5, 2012, is to promote capital formation for small businesses, IPO-ready companies, and everything in-between.

There are seven titles in the Act. Though rarely attended to, Title II which allows general offer and solicitation for private placements, and Title IV, which increases the size and flexibility of Regulation A offerings, are, in fact, the most impactful provisions of the JOBS Act."

Click here for Nick's full post.

Comparing Intrastate Investment Crowdfunding Versus Federal Investment Crowdfunding

Illinois attorney Anthony Zeoli, who is the chief architect of the Illinois intrastate crowdfunding exemption, has posted an interesting analysis comparing the various types of investment crowdfunding options available because of new Federal regulations and the JOBS Act, versus the intrastate exemptions created in Illinois and in many other states. Anthony says:

Anthony Zeoli

"One of the questions I get asked most often is “how does the new Illinois crowdfunding exemption compare to the available Federal level crowdfunding options?” I love getting this question as it gives me a chance to really show why the new Illinois crowdfunding exemption is such a workable option. However, given the many subtle nuances between the various options it’s often hard for people to visualize exactly where the similarities and differences really are. To make this visualization easier, I decided to create a handy-dandy comparative summary chart …. wasn’t that nice of me?"

Please click here to see Anthony's full post and download the excellent comparative chart he created.

The NC PACES Act will provide North Carolina small businesses with the option to raise equity and debt financing using a very similar intrastate investment crowdfunding exemption.