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PACES Act Means Big Changes for Crowdfunding in North Carolina

Posted | by Matthew A. Cordell Matthew A. Cordell

Just days ago--on June 29--the North Carolina General Assembly passed a crowdfunding bill, which the Governor is expected to sign shortly.  What does this mean for North Carolina businesses and North Carolina investors?
 

(If the crowdfunding concept is new to you, first read my overview "Crowdfunding Law Made Simple" here.)  

The North Carolina General Assembly approved the Providing Access to Capital for Entrepreneurs and Small Business Act (PACES Act), which is similar to crowdfunding statutes adopted in other states.  The PACES Act was one of two leading crowdfunding bills that cleared the House in 2014, though the other, the JOBS Act, was unable to get a vote in the Senate during that session of the General Assembly.  Although the prospects of getting a crowdfunding bill through in the short session of the General Assembly seemed slim, the PACES Act made it over the finish line during the final week of the session.  

The PACES Act will allow North Carolina companies to raise up to $1,000,000 in any 12-month period from investors who are North Carolina residents.  Companies will be required to provide a business plan, financial information, and a description of risks.  The limit will be increased to $2,000,000 if the company provides audited or "reviewed" financial statements to investors.

Companies will be permitted to publicly advertise the offering through a website, marketing materials or a third-party portal, after filing a notice and disclosures with the N.C. Secretary of State and paying a very small fee.  

Non-accredited investors are limited to investing a maximum of $5,000 in any one company's offering (during a 12-month time period).  Accredited investors may invest as much as they wish.  (Accredited investors are essentially those who have $1,000,000 in assets, excluding equity in their primary residences, or $200,000 in annual individual income. Congress and the SEC think that accredited investors are less vulnerable to fraud.)  Companies that raise money via crowdfunding will still have to disclose the business model, financial targets, offering terms and projected returns to investors.  Funds will be held by an escrow agent until the offering is complete.  

North Carolina's crowdfunding statute is an alternative to federal crowdfunding.  The federal JOBS Act (Jumpstart Our Business Startups Act), enacted on April 5, 2012, required the SEC to write regulations to implement many of its various provisions.  It took the SEC more than three years to finalize rules to implement Title III of the JOBS Act, known as the "crowdfunding" section of the law.  (Those rules were published in October 2015.)  Largely due to frustration over the SEC's laggardly pace, some states enacted crowdfunding laws to permit limited offerings to investors within those states.  After the SEC's crowdfunding rules became effective, some speculated that state crowdfunding rules would no longer be needed.  North Carolina's PACES Act, however, continued to advance through the legislative process, and will become law in a matter of days.  (Credit goes to Mark Easley, Benji Jones, and others for pushing it through.)

Companies have multiple options for raising investment dollars from "the crowd," and those options should be carefully considered in order to maximize the benefits and minimize the effects of the various restrictions.  Often, federal crowdfunding or Rule 506(c) offerings will be advantageous, but state crowdfunding may also have its place.  A knowledgeable securities lawyer can help you make the right decision.

For more information, see an overview of crowdfunding options here, as well as my law partner Jim Verdonik's blog, Entrepreneur Intersection.

This post is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this post without obtaining the advice of an attorney. If you have questions concerning this post, please contact Matt Cordell at mac@wardandsmith.com.

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