Monday, March 30, 2015

When it Rains, It Pours! The End of the Crowdfunding Regulatory Drought?

Benji's Blog, by Benji T. Jones

Wednesday, March 25, 2015 was a BIG day for crowdfunding in North Carolina.  After months (and years!) of waiting, lawmakers and regulators took steps that may drastically change the way North Carolina companies raise capital.

NC PACES Act:  On Wednesday, the long-awaited North Carolina Providing Access to Capital for Entrepreneurs and Small businesses (NC PACES) Act (SB481) was introduced to the General Assembly by Senators Barringer (R), Hise (R) and Gunn (R).  This new bill, which closely mirrors the NC JOBS Act proposal that easily passed the House in 2013 but stalled in the Senate, would allow North Carolina businesses to access capital locally and flexibly.
Benji T. Jones

Whether sourcing capital from the “crowd” through the use of the internet or through a more traditional “friends-and-family” approach, under the NC PACES Act, a North Carolina company that satisfies certain disclosure and procedural requirements could raise $1 million in a 12-month period ($2 million, if it delivers audited or reviewed financial statements) from any North Carolina resident, irrespective of his or her investment experience or wealth, subject to a $5,000 individual cap.   

Regulation A+:  Also on Wednesday—nearly a year-and-a-half since proposing regulations—the SEC approved final regulations to implement Title IV of the JOBS Act.  Often referred to as Regulation A+, Title IV required the SEC to adopt rules to create a new exemption from registration under the Securities Act of 1933 for offerings of up to $50 million dollars in a 12-month period. 

Generally, Regulation A+ as adopted by the SEC creates a two-tiered exemption:
  •  Tier I covers offerings of up to $20 million in a 12-month period, including no more than $6 million of securities sold on behalf of selling security holders; and
  • Tier II covers offerings of up to $50 million in a 12-month period (an increase from the current $5 million cap), including no more than $15 million of securities sold on behalf of selling security holders.
Tier I and Tier II share many common requirements.  For instance, certain types of companies (e.g., bad actors, investment companies, 1934 Act reporting companies, blank check companies) are ineligible to use Regulation A+.  Companies will be able to use “test the waters” communications under either tier.  In addition, companies will be required to file detailed disclosure documents with the SEC (which will be subject to the SEC Staff’s review and comment) under either Tier I or Tier II.  Although there will be procedures available to make initial filings on a non-public basis, ultimately all filings will be made electronically through EDGAR— the SEC’s electronic database (as compared to the paper-filing requirement under the old Regulation A regime). 

While there are still many details to parse through (the draft adopting release is over 450 pages long), the most significant differences between the Tier I and Tier II are as follows:
  • State Preemption: Tier I offerings are subject to the registration and qualification requirements of state law, while Tier II offerings are not. Practically speaking, this means that companies undertaking Tier I offerings would need to file and submit disclosures for review in each state where an offering takes place. Although there is a relatively new coordinated review system in place that could make this process less arduous than in the past, companies undertaking a Tier I offering would nevertheless become subject to additional procedural and substantive requirements imposed by the states.
  • Audited Financial Statements: Tier II offerings must be accompanied by audited financial statements, a requirement the SEC did not impose on Tier I offerings.
  • Investor Caps: Individual investors who are not accredited investors (as defined under Securities Act Rule 506 for private placements) typically will not be permitted to invest more than 10% of the greater of their annual income or net worth in Tier II offerings. Investors subject to this limitation would be permitted to self-certify to this fact.
  • Ongoing Reporting Requirements: Tier II issuers will be required to file scaled annual, semiannual and current reports through EDGAR.
These are exciting developments in the ever changing world of raising capital.  Although we still await word from the SEC on final rules implementing “crowdfunding” under Title III of the JOBS Act, many crowdfunding supporters believe that Regulation A+ could offer an alternative way to access the “crowd.”  Issuers will be allowed to use “general solicitation” under Regulation A+ and anyone (including non-accredited investors) may invest, subject to certain individual caps.
Absolutely, we need both! 

NC PACES and Regulation A+ provide companies with more flexibility.  There are significant differences between the two regulations, not only in the amount of funds that can be raised but in the cost and amount of time involved in completing a transaction.  Pursuing a Regulation A+ offering would not make sense economically for companies looking to raise smaller amounts (in terms of hundreds of thousands of dollars as opposed to tens of millions of dollars).  We would expect to see significant efficiencies in dealing with one local regulator, rather than with the SEC and the regulators of other states scattered throughout the country. 

NC PACES is, by design, targeted for the smaller local company, looking to raise a lower threshold of capital quickly and efficiently each year. 

There is room and the need for both Regulation A+ and NC PACES.  These regulations share a common spirit.  They both recognize that smaller businesses are, in Wednesday’s words of SEC Chairman White, “essential to the livelihood of millions of Americans, fueling economic growth and creating jobs.”  And they share a common purpose: to smooth the way for smaller companies to access capital so they can grow their businesses, while providing strong investor protections. 

Look soon for more on each of these developments.

If you have questions or comments, feel free to contact me by email at:

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Wednesday, March 25, 2015

NC PACES Act Crowdfunding Bill Filed in NC Senate Today

The North Carolina Providing Access to Capital for Entrepreneurs and Small Business Act (S481, the NC PACES Act) was filed today in the North Carolina Senate. The primary sponsors of the bill are Senator Barringer, Senator Hise, and Senator Gunn. The NC PACES Act is a state securties law exemption that enables a new way to finance start-ups and small businesses in our state known as investment crowdfunding.

Senate Bill S481 is the stand alone version of the NC JOBS/PACES Act that our working group reviewed and recommended back in January, and that the Governor and Commerce Secretary Skvarla have been promoting. The working group consists of the NC JOBS/PACES Act private sector team of attorneys and crowdfunding business experts, the NC Secretary of State Securities Division, and the NC Commerce Department. This bill is based on the original NC JOBS Act, with some enhancements recommended by the working group.
Commerce Secretary John Skvarla

The North Carolina model allows startups and small business to raise capital as debt or equity, but with a couple of new ideas allowed by the exemption. Some key features of the exemption:

  • The exemption allows accredited or non-accredited North Carolina resident investors to invest in equity or debt offerings from a North Carolina company provided the disclosure, reporting, registration, and limits described in the exemption are followed.
  • A North Carolina company is allowed to promote the offering to North Carolina residents via the web or any other method provided the disclosure, reporting, registration, and limits described in the exemption are followed.
  • A North Carolina company may raise up to $1M with non-reviewed financials, or up the $2M with reviewed or audited financials.
  • Accredited North Carolina investors may invest any amount up to the offering limit, and non-accredited North Carolina investors may invest up to $5,000 annually per issuing company.

This is a financial investment model that is well understood by the start-up investment and small business services community. The NC PACES Act is also compatible with crowdfunding initiatives at the Federal level and with those being implemented in other states. Please see the FAQs for additional information about the bill. You can also see the text of the bill and follow the progress of S481.

Please contact your State Senator and express your support for S481, the NC PACES Act investment crowdfunding exemption.

Monday, March 9, 2015

2015 Can Be the Year for Intrastate Investment Crowdfunding in North Carolina

Investment crowdfunding is expanding at an explosive pace.

Let's take a look at a few of the investment crowdfunding sites. AngelList has just announced their 2014 results, where 243 startups raised $104M from 2,673 investors. On you can see over 130 crowdfunding projects listed just in the biotech-pharma-healthcare segment. And that is just one of the market segments, and an important one for North Carolina. Another site,, already has over 83,000 investors, over 20,000 companies raising funds, and over $150M in funds raised so far. And investment fundraising is not just for tech startups, it works well for small business too, as shown here on where a whole variety of small businesses have raised over $30M so far. That means small business and startups in market segments all across North Carolina can benefit from investment crowdfunding.
Crowdfunding Advocate Mark Easley

The North Carolina JOBS Act whch was passed in the NC House last session is the basis for a new bill coming to the legislature this year. The new bill is called Providing Access to Capital for Entrepreneurs and Small business Act (NC JOBS/PACES Act) and enables a new way of funding startups and small business in our state known as investment crowdfunding. This new version of the bill was reviewed and approved by the NC Secretary of State Securities Division, the NC Commerce Department, and the NC JOBS/PACES Act business team, and is now awaiting action by the General Assembly. The FAQs and other posts on the NC JOBS/PACES Act blog  provide details and analysis of what the bill does and how it will work. The NC JOBS Act legislation (H680) passed the NC House by an almost unheard of bipartisan vote of 103 to 1 in the 2013 long session. Unfortunately it got bogged down in the horse trading politics at the end of 2014’s short session, and was passed as part of two different larger bills, but was not brought up in the Senate as a stand alone bill before they adjourned. So we will have to try again in 2015, but if everything goes as expected, this year will be the year that intrastate investment crowdfunding will become a reality in North Carolina.

Over the last two years here in the U.S., there have been a number of important developments in the investment crowdfunding exemption story. Many states are following in the footsteps of Kansas and Georgia, who were the first to implement in-state investment crowdfunding exemptions by regulation, and North Carolina, where we were the first to introduce an exemption by legislation.

As of today fourteen states have intrastate crowdfunding exemptions in place, and several other states are in various stages of considering the idea. Here is the list along with their maximum allowed fundraising cap and maximum allowed non-accredited investor cap.

Georgia ($1M, $10,000)
Kansas ($1M, $1,000)
Michigan ($1M, $10,000)
Wisconsin ($1M, $10,000)
Indiana ($2M, $5,000)
Alabama ($1M, $5,000)
Colorado ($1M)
Idaho ($1M, $5,000)
Maine ($1M, $5,000)
Maryland ($100k, $100)
Oregon ($250K, $2,500)
Washington ($1M, $2,000)
Tennessee ($1M, $10,000)
Texas ($1M, $5,000) has a nice comparison chart of these intrastate crowdfunding exemptions.

Many more states are expected to join the intrastate investment crowdfunding movement because it grows the economy from the ground up and creates jobs locally. And North Carolina Congressman Patrick McHenry, the original creator and sponsor of the the Federal JOBS Act, supports state based solutions like the NC JOBS/PACES Act.

In the startup community, which is so important for North Carolina in both the technology and life sciences markets, a report in Entrepreneur Magazine says that crowdfunding is the fastest growing source of funding for startups. In addition, accredited investor crowdfunding sites like AngelList and FundersClub have proven how effective they can be in providing funding for high growth startups

So what else has changed since last year?

Crowdfunding in general, and investment crowdfunding in particular have been growing very rapidly in the US and around the world. The biggest donation and rewards based site Kickstarter just announced that they surpassed $1B in pledges to crowdfunding campaigns hosted on their site.  Entrepreneur Magazine calls the growth of crowdfunding ‘epic’ and says the crowdfunding economy has tripled in 3 years and was over $5.1B in 2013. They also expect crowdfunding to provide a $65B boost to the world wide economy in 2014.

In the United Kingdom, where investment crowdfunding has been legal for over 3 years, the investment site CrowdCube has announced their stats on their 3rd birthday in 2014:
“The platform has raised £19.9 million (around $33 million) for 103 businesses, which Crowdcube anticipates will add 1900 jobs over the next three years. Darren Westlake, the company’s cofounder and CEO also mentioned that the company grew by 562 percent on the year before, and it sees over 100 applications per month. The company has 60,000 registered members.”

And that is just one of the many investment crowdfunding platforms operating in the UK, other parts of Europe, and in Australia and Japan.

Meanwhile, several types of investment crowdfunding have taken off like rockets in 2013 and 2014. One is investment crowdfunding in startups for accredited investors on sites like AngelList, another one is called Peer-to-Peer (P2P) lending, where people get personal loans from the crowd on sites like LendingClub and Prosper, and a third is real estate crowdfunding, where local real estate development projects are funded by the community crowd on sites like Realty Mogul and our own Triangle startup Groundfloor.

Many more market segments are just beginning to use investment crowdfunding as a financing method. And venture capitalists are making major investments in a wide variety of crowdfunding platforms and services around the nation, because they see this as a major growth industry in the financial sector coming down the road.  A report by has more details on these trends.

So what does all this mean to North Carolina?

It means we can benefit from these trends by helping our small businesses and startups to participate. We can make it much easier for them to find funding. And that funding will help them grow and create jobs. The NC PACES Act investment crowdfunding exemption will be an important part of making it happen.

We ask you to support the NC JOBS/PACES Act when it comes up in the new session in 2015.

Support the North Carolina JOBS/PACES Act: