North Carolina just passed its crowdfunding statute, and is currently drafting regulations to implement it. The “Providing Access to Capital for Entrepreneurs and Small Business” Act – PACES – is a N.C. law that allows N.C. businesses to raise capital from N.C. investors.
If you didn’t catch that, the PACES Act applies strictly to North Carolina businesses and residents/investors. Here’s some other facts about the PACES Act:
Contrary to some of the fanfare, it does not create a free-for-all arena for small businesses to raise capital, nor for investors to provide capital. There are limits on who may invest and how much; on how much capital a business can raise and when; and it will certainly *not* be easier for businesses to solicit capital than before the PACES Act. The impression that a business merely has to login to a crowdfunding portal, upload some pretty pictures and ask for money does not reflect the reality.
Crowdfunding: What Businesses are Eligible
In fact, very small businesses will likely not be eligible for crowdfunding because the initial and ongoing reporting requirements will be too consuming to make it worthwhile. For example:
• First, the business must make sure it meets an exemption from the Federal intrastate securities offering legislation.
• A business seeking capital – an “issuer” of equity or debt – can only raise $1,000,000 in a single year with un-audited financial statements; or up to $2,000,000 a year with audited financials.
• Issuers may go through an internet portal that has been approved by the N.C. S.O.S. Securities Division; this will add to the cost of the offering, as these portals usually take a percentage of the invested capital.
• Unaccredited investors may invest in “crowdfunded” offerings, in N.C. the limit for unaccredited investors will be up to $5,000 per year.
• Issuers will be required to disclose multiple items (that they may not wish the public to know) such as the target offering amount; the identity of all persons holding more than 10% of the securities of the business; its business plan; a statement of how it intends to use the raised capital; the identities of all officers or persons with significant authority to direct and control the operations; terms and conditions for the securities being offered, the percentage ownership of the business the offered securities represent; a description of any litigation involving the business or management, the list goes on.
• Issuers will have to provide quarterly reports of executive compensation and financial condition.
• All payments from investors will first go to an intermediary bank or trust, adding to the cost of the offering.
• The “crowdfunded” offering does not need to go through a special web site or portal, but it must comply with all the requirements of the statute.
So you can see that in North Carolina crowdfunding can be a useful way for businesses to raise a significant amount of capital. However, doing so will still not be easy or simple. This is just a summary of the new PACES Act; there’s a lot more to it, and crowdfunding may not be the best or most efficient way for your business to raise capital.
Contact me if you have any questions on business transactions. In western North Carolina, Asheville, Waynesville, Hendersonville at (312) 671-6453.
Email me at: palermo@palermolaw.com.
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