WHY NORTH CAROLINA NEEDS CROWDFUNDING LEGISLATION
April 30, 2015
By Jeff Wolfe
I typically utilize this blog to educate business owners, business executives, and other interested parties about various legal issues that may impact them. However, in addition to educating and advising clients, it is my duty as an attorney to advocate their behalf. The purpose of this piece is to educate our readers on the existing crowdfunding landscape in North Carolina and then to advocate on behalf of small and growing businesses in this state for the North Carolina legislature to pass, and the Governor to sign into law, crowdfunding legislation.
Current Crowdfunding Landscape
As I outlined in my Business Capital Basics series, every offer and sale of securities (includes both stock and debt) must be registered with at the federal level with the Securities and Exchange Commission (SEC) and the state level with the applicable state regulators unless there is a registration exemption available. The most common registration exemption is for an offer and sale of securities that does not involve a public offering, and there are several safe harbor rules set forth in Regulation D that describe how an offering can be made without being public, which allows the offering to forego the registration requirements at both the federal and state levels.
However, contrary to the perception of the general public, crowdfunding is currently not a permissible means to raise capital in North Carolina. I think this misconception from the public stems largely from the publicity that surrounded (1) the federal government’s approval of crowdfunding legislation and (2) the SEC’s adoption of rules to eliminate the ban on general solicitation and advertising. What was left largely unexplained in the celebration that surrounded those two events is that the SEC needs to adopt final rules before crowdfunding becomes a federal exemption, and currently only “accredited investors” are allowed to participate in offerings that are solicited or advertised to the general public.
Opportunity for North Carolina
Based on the legal landscape described above, there is a large gap in the ability of a company in North Carolina to raise capital by (1) offering rewards and other souvenirs to the general public through online fundraising campaigns and (2) offering securities to “accredited investors” in the general public. Fortunately, North Carolina has the ability to act now to create a crowdfunding exemption for offers and sales that are limited to residents of North Carolina. By enacting an intrastate exemption under Rule 147, North Carolina can take action rather than continue to wait for the SEC to adopt final rules at the federal level.
Over the past few years, at least eighteen other states have adopted intrastate exemptions, and crowdfunding advocates have attempted to persuade North Carolina lawmakers to do likewise. The latest incarnation of North Carolina-based crowdfunding legislation is the NC PACES Act (Senate Bill S481). The bill is currently working its way through requisite committee hearings and has earned preliminary endorsement from Governor McCrory. As required by the SEC, the NC PACES Act would codify a state-based registration exemption for intrastate offerings.
Under the NC PACES Act, North Carolina companies would be permitted to solicit funding from residents of North Carolina in exchange for equity or debt. Under this exemption, companies could raise up to $1 million in a 12-month period without reviewed financial statements, and up to $2 million during the same period with audited financials. Non-accredited North Carolina investors would be able to invest up to $5,000 annually per issuing company, and accredited North Carolina investors would not have a cap. Lastly, North Carolina companies would be able to promote their offerings to North Carolina residents through online or other methods, as long as certain disclosure and reporting conditions are satisfied.
To maintain North Carolina’s position as a place where small and start-up businesses can thrive, our state leaders need to step up and approve a crowdfunding exemption for businesses to raise capital in North Carolina. I am confident that they see the need for crowdfunded capital, and I’m hopeful that the waiting game (at least at the state level) will end soon.