This blog provides information and updates on the North Carolina Providing Access to Capital for Entrepreneurs and Small business Act (NC PACES Act) which enables a new way to finance small business in North Carolina using investment crowdfunding. The NC PACES Act was passed unanimously in the North Carolina General Assembly and signed into law by the Governor in July 2016.
Intrastate “Crowdfunding” – Thawing Frozen Capital Markets?
Benji's Blog by Benji Jones
The Deep Freeze. This winter
has been vicious. Never-ending snow and
icy roads leading to school cancellations, missed work and botched conference
calls. Up until very recently we saw the claws of Old
Man Winter scraping to hold out just a few more days against the sunny breezes
and bright skies of spring. This is
unheard of in Raleigh, NC.
It’s been a frustrating winter, to say the least.
years entrepreneurs have faced similar frustrations in the quest to raise
capital. They claim well-established
rules prohibiting the use of “general solicitation” and “general advertising”
freeze them out of much of the market.
People are clamoring for the chance to use the web and social media
outlets to not only promote their companies and ideas, but to raise the money
they need to make those ideas come to life.
Initial excitement surrounding the “crowdfunding” provisions of Title
III of the JOBS Act has waned. It’s
taking too long to get the rules from the
(it’s been two years!) and, weighing in at 500+
pages, describing them as “complicated” is an understatement.
are still icy and school is cancelled (again) -- the deep freeze seems
Thawing Isolated to Local Areas. So, like
winter bunnies, folks have gotten “creative.”
Over the past year or so, companies have begun using the (relatively
unused) “intrastate” offering exemption under Section 3(a)(11) of the
Securities Act of 1933 (and the related Rule 147 “safe harbor”) to “crowdfund”
from residents in a particular state. The number of states that have adopted
(including Kansas, Georgia,
Washington) or are considering adopting (North Carolina, Florida
statutes and regulations permitting “intrastate crowdfunding” is
snowballing. Raising capital locally
through the internet and social media seems to be a real possibility.
with all novel solutions to complex problems, there are some nagging
interpretive questions – spots of “black ice” to watch out for along this
road. For instance, Rule 147 stipulates
that an offering may not be offered or sold to non-residents of the state in
which the issuer resides and is doing business. This begs the question of whether using the
“world-wide” web to promote
investments could ever really be viewed to be so isolated in nature. Even if I’m only going to let people in Georgia invest, have I blown my exemption under
Rule 147 if my tweet also reaches folks in North Carolina
and Virginia (not to mention England or Brazil)?
Roads are Clearing, But Watch Out for Potholes. A few weeks ago, the SEC issued three
compliance and disclosure interpretations (or C&DIs) which have
the effect of clearing the road for using the internet and social media for
intrastate crowdfunding. But has one
hazard been replaced with another?
see, the SEC said that companies can use a third-party internet portal to
promote an intrastateoffering if the portal implements specific
measures to ensure that offers of securities are made only to persons resident
in the relevant state or territory.
These measures include the use of disclaimers and legends to notify
potential investors of the restrictions and actually limiting access to
information about specific investment opportunities to persons who confirm they
are residents of the relevant state.
But, the SEC also cautioned that an issuer’s use of its own existing
website or social media presence to offer securities would likely involve
offers to residents outside the state, making the offering inconsistent with
So, based on this, it seems
companies can hire someone else to help them crowdfund on the intrastate level
but might not be able to do it themselves.
The SEC tells us that whether a company can “go it alone” under Rule 147
will be a “facts and circumstance” test.
That’s a fairly sizable pothole to watch out for. As is the case with crowdfunding under the
JOBS Act, it seems everyone needs a matchmaker . . .
More on that in my next post – in the meantime, if you
have questions or comments, feel free to reach me by email at: email@example.com. Benji Jones is a Partner at Smith Anderson, focusing on corporate and securities work (particularly private offerings). She also teaches at Campbell Law and lives with her family here in Raleigh.