Friday, April 19, 2013

A Closer Look at the North Carolina JOBS Act

The North Carolina approach to investment crowdfunding has been called “Brilliant!” by prominent national crowdfunding and legal expert William Carleton. His post about the bill is called “5 Ways a North Carolina Bill puts the Crowd back in Crowdfunding” and it is worth reading.

Why is this legislation best-in-breed? The answer lies in the approach that was taken in drafting this bill. In a nutshell, a small but focused team of local entrepreneurs and investors carefully examined the crowdfunding legislation that has been passed in Kansas and Georgia, as well as draft legislation in other states. They then created the NC JOBS Act by selecting the best features of each exemption, while avoiding the problems contained in the stalled and complex federal JOBS Act.
The bill is sponsored by Representatives Tom Murry, Tim D. Moffit, Phil Shepard, and Kelley E. Hastings and has been filed with the North Carolina legislature.

The NC JOBS Act has a number of provisions designed to help small businesses in North Carolina raise money while protecting investors:
  • The issuer must be a North Carolina business.
  • The investor must be a North Carolina resident.
This bill is about helping local companies grow and create jobs. Keeping things local helps create a community of investors and small businesses building the future together. (It is also a requirement of the federal securities law that this North Carolina exemption will fall under.)
  • Fundraising Cap: Within a 12-month period issuers may raise up to $1,000,000 without audited financials, or $2,000,000 with audited financials.
These days a startup can do wonders with well under $1 million, and many small businesses can be launched and achieve profitability with a fundraise of this size. Companies in this stage are unlikely to have any substantial financial history, so requiring them to obtain an external audit (which can easily cost $25,000) is an unreasonable burden for the amount of investor protection it provides. Keep in mind that companies would have to spend this money up front with no guarantee that they will complete their raise. Companies that are somewhat later stage, who need more than $1 million to step on the gas and accelerate growth are likely to have a more substantial financial history, and requiring verification of the accuracy of their financial statements is an appropriate check and balance.
  • Investor Cap: Investors may invest no more than $2000 per issuer, unless they are accredited.
Simple, and allows for the “80/20 rule” whereby a few large investments along with many smaller ones complete a crowdfunding round.

Two points to consider:

First, one of the flaws of the Federal crowdfunding exemption is that the allowed investment amount is dependent on a complex set of rules regarding investor income. In practice this means that startups or portals must ask for and collect very sensitive personal data of all potential investors. What can possibly go wrong, right? The North Carolina cap is much easier to understand and implement for both small investors and small businesses.
Secondly, it is imperative that there is a clean mechanism to allow established accredited investors to participate along with the crowd… many crowdfunded raises will be accomplished with a combination of many small investments and a few large checks.
  • Intermediaries: Issuers may use a professional crowdfunding platform, but it is not required.
While we don’t see a reason to be heavy-handed, complying with securities laws is serious business… there are consequences to making a mistake which renders an exemption null and void; and thus there are good reasons that many small businesses might opt to let someone else shoulder the burden of making sure all the t’s are crossed in any investment crowdfunding offering.
  • Reporting: Quarterly reports must be provided to all investors discussing management compensation, operating results, and financial condition.
  • Solicitation: Issuers and sellers are permitted to promote the offering publicly, after filing notice with the state securities regulatory agency.
  • Communicating Risk: Investors are required to certify in writing by the time of sale that they understand the risks of unregistered securities and may lose their entire investment.
  • Liability: Officers and directors are protected from liability except in the case of fraud or breach of fiduciary duty.
These four items all flow from the same principle: open and complete exchange of information; and then allow small investors to make their own decisions and accept the results.

Clearly companies must provide investors with a full and complete picture of the state of the business and the opportunity they are pursuing. And in exchange, as long as the company raising money provides investors with all of the relevant information, then it is in the best interest of the public for the government to allow these proposed investment transactions… and similarly it is in the interest of business creation and employment growth to protect company founders from personal liability due to honest failure of a venture.

We cannot build tomorrow without pushing the boundaries of today… but if we embark on this journey together – North Carolina investors and entrepreneurs – then we truly can take our great state to a whole new level.

If you have any questions or comments, please email the JOBS NC Crowdfunding Team at or contact Representative Murry’s office at

Support the North Carolina JOBS Act:

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