The North Carolina Providing Access to Capital for Entrepreneurs and Small Business Act
NC PACES Act of 2016
North Carolina’s Intrastate Investment Crowdfunding Legislation
Frequently Asked Questions - Key Features and Benefits
July 2016

The NC PACES Act was passed unanimously in the North Carolina General Assembly and signed into law by the Governor in July 2016.

Some additional FAQs about the new law can be found here.

Why is NC PACES needed?

  • Start-up companies and small business play a critical role in creating new jobs and growing the economy. The NC PACES Act crowdfunding legislation enables a new way of financing start-ups and small business in North Carolina.

What is NC PACES?

  • NC PACES is a safe, fair, and easy-to-implement securities law exemption that enables this new type of financing for North Carolina small business and start-ups
  • The North Carolina model is similar to the federal Reg D 506(c) financial offering model which is used by thousands of start-ups and small businesses every year.

What is the Status of NC PACES?
  • The NC PACES Act was passed unanimously in the North Carolina General Assembly and signed into law by the Governor in July 2016.
What is new in NC PACES?

  • The North Carolina model is similar to the existing equity offerings like Reg D 506(C), and allows debt offering such as convertible debt, but with a couple of new ideas allowed by the exemption:
  1. The exemption allows non-accredited North Carolina investors to buy equity or debt offerings from the North Carolina issuer provided the disclosure, reporting, registration, and limits described in the exemption are followed.
  2. The North Carolina issuer is allowed to promote the offering via the web or any other method provided the disclosure, reporting, registration, and limits described in the exemption are followed.
  • That’s it. Very simple, and it’s a model that is well understood by the start-up investment and small business services community.

Where did NC PACES come from?

  • The investment crowdfunding model has been used successfully in the US, UK, Australia and elsewhere for the last 5+ years.
  • As of today thirty states have intrastate crowdfunding exemptions in place, and seven other states including North Carolina are in various stages of considering the idea.
  • NC PACES was created by the Secretary of State Securities Division regulators working together with state legislature sponsors, the North Carolina Commerce Department, an expert team of local entrepreneurs, investors and legal experts, and the State Bar Association Securities Committee.
Who Supports NC PACES?

  • The start-up and small business community in North Carolina will benefit greatly from this new form of financing.

  • North Carolina investors see this as a great way to create and grow North Carolina companies and create jobs.
  • For the first time, small investors in North Carolina will have the opportunity to participate in the economic growth of their communities by investing limited amounts in start-ups and small business.

Key Features of NC PACES

  • The issuer must be a North Carolina business.
  • The investor must be a North Carolina resident.
  • Fundraising Cap: Within a 12-month period issuers may raise up to $1M without audited financials, or $2M with reviewed or audited financials.
  • Investor Cap: Small investors may invest no more than $5000 per issuer, unless they are accredited.
  • Intermediaries: Issuers may use a professional crowdfunding platform compliant with NC PACES, but it is not required.
  • Reporting: Quarterly reports must be provided to all investors discussing management compensation, operating results, and financial condition.
  • Solicitation: Issuers are permitted to promote the offering publicly, after filing notice with the state securities regulatory agency.
  • Communicating Risk: Issuers are required to communicate in writing the business plan, financials, use of funds, and risk factors of the offering. 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.
  • Timing: The exemption is set to become effective immediately when passed. The state regulators may pass rules as real-world usage merits. 

What NC PACES is not:

  • NC PACES is NOT a radical change to the North Carolina or Federal securities laws. It is similar to the very well understood and popular federal Reg D 506 offering method.
  • Investment crowdfunding is also NOT like Kickstarter. Companies that raise money via investment crowdfunding will have to thoroughly document their business model, financial targets, offering terms, how the investment may see a return, and more. Investors will choose whether or not to participate based on this and other information that is made publicly available during the fundraising process, providing for a high degree of transparency and accountability.
  • NC PACES is NOT an expensive state government program. It is simply an exemption to allow a new type of securities offering which is regulated by the NC Secretary of State Securities Division as part of their normal activities. NC PACES does not require any funding from North Carolina taxpayers. 


  • Yes! The rest of the bill describes the disclosure requirements, reporting requirements, registration requirements, and limits that will make this exemption safe and fair for both North Carolina small business and North Carolina small investors.

  • These protection requirements have been reviewed and enhanced by the North Carolina Secretary of State's Securities Division, the NC Bar Association Securities Committee, and crowdfunding industry experts including the NC PACES crowdfunding team.

  • Experience in the UK and with accredited investment crowdfunding sites in the US over the last 5 years show very limited fraud potential with these kinds of safeguards. Having the crowd examine the offerings actually creates a powerful barrier to fraud.

Won’t our senior citizens and low income individuals lose all their money?

  • These are high risk investments and any investor could lose their money. However NC PACES has provisions to prevent excessive losses. Investors are limited to a $5000 max investment in an offering. Information about all offerings must be filed with state regulators. There will be a written contract between the issuer and the investor specifying all the terms and risks, and an escrow account that will allow the investment to be returned in case the minimum offering amount is not raised. Investors must explicitly confirm in writing that they understand the high risk nature of these investments. 

  • NC PACES allows any offering to attract both accredited investors to invest larger amounts, and non-accredited investors to invest up to $5000. Existing data from successful crowdfunding campaigns shows that most offerings have both types of investors.

How does the NC PACES Act compare to and beat the Federal Jobs Act?

#1 - Easier
  • Intrastate investment crowdfunding using NC PACES will be much easier for startups and small businesses to actually implement. The regulations on Federal Title III Crowdfunding that the SEC issued in 2015 are 865 pages long. The NC PACES Act contains virtually all the necessary state regulations in a 10 page bill.
  • In contrast to Federal crowdfunding, since NC PACES is well defined and much easier to implement, companies could be raising money under NC PACES in the second half of 2016.

#2 - Cheaper
  • Raising money under the Federal JOBS Act national crowdfunding exemption is expected to be very expensive; some estimates suggest that as much as 15% to 20% of the money raised will go to “overhead” expenses rather than being used to grow the business.

There are several ways the NC PACES Exemption keeps costs down:
  • Audited financials -- which can be very expensive to produce -- are not required if the issuing company is raising $1,000,000 or less. A company raising between $1,000,000 and $2,000,000 will typically have more operational history, and in these cases the cost of reviewed or audited financials is a reasonable burden.
  • Crowdfunding website portals using the national exemption will face extensive costs to comply with FINRA regulation -- and those costs will be certainly be passed along to the companies that are fundraising.
  • A North Carolina start-up or small business that wants to create an offering will still want to retain the services of a good North Carolina securities attorney to help implement the offering terms and documentation, a good accountant to help generate financial statements, a North Carolina bank to handle the offering escrow, and in many cases a good crowdfunding platform that is compliant with NC PACES. But because of standardization and simplicity, the cost of raising money should be in line with or even less than the cost of Reg D 506 type offerings. 

#3 - Simpler
  • The amount that can be invested by any non-accredited person is a flat $5,000.
  • This is much more straightforward and safer than the national version which uses a sliding scale based on investor income or net worth -- which could lead to a situation where startup companies are forced to handle highly sensitive financial information of potential investors in order to ensure that they do not lose their exemption.

#4 - Angel-Friendly
  • Accredited investors are excluded from this $5,000 cap -- they can invest as much as they choose.
  • By looking at the data from places where investment crowdfunding is already legal the data shows that most successful raises are accomplished through a combination of many small ($1,000 to $5,000) investments along with a few more substantial sums ($25,000 to $100,000).
  • In order to support this “80/20 rule” effect, a crowdfunding exemption must support both smaller non-accredited investors as well as more experienced “angel” investors. 
  • A company raising money should benefit from a mix of smaller and larger investors as well -- your “team” has just grown to a whole new level as you can tap into a crowd of passionate supporters as well as some more experienced and connected investors.
  • Having experienced lead investors participating in an offering is another form of protection for non-accredited investors. They can invest right along side of much more experienced investors.

How big is the investment crowdfunding opportunity?
How will Crowdfunding Platforms support the NC PACES Act?

  • When the NC PACES Act becomes law, internet investment crowdfunding platforms, known as portals, are expected to announce that they will support investment crowdfunding campaigns under this new legal exemption. These portals can be North Carolina based platforms, or national platforms that are compliant with NC PACES and are registered to do business in North Carolina.

  • The platforms want issuers to succeed in their fundraising, and will provide tools and information to help increase the chances of success. The best portals provide in-depth guidance and education based on industry best practices.

  • Issuers can expect portals to help ensure compliance with all requirements of the new law, including the dollar limits (per-investor and aggregate), the registration and disclosure requirements, and the rules limiting what businesses may use this exemption.

But many portals will go further, by helping to take care of compliance rules for issuers.

  • Issuers must ensure that each investor is a resident of North Carolina. Verification is necessary to ensure that the issuer is in compliance.

  • Each investor is required to certify in writing that they understand the risks and restrictions inherent in privately issued securities. This documentation must be collected, validated for completeness, and preserved for any future inquiries.

  • After a successful fundraise it will be necessary to keep investors informed of the progress of the business on an ongoing basis. Portals are expected to help with this process, keeping track of the “mailing list” so that entrepreneurs simply post their latest update and it is distributed to all who need it, and remains archived for their future reference.

  • Crowdfunding portals may have other unique features designed to help issuers raise money and help investors find appropriate investments. It is important, though, to make sure that the portal an issuer decides to partner with has taken appropriate steps to ensure compliance with all aspects of the NC JOBS/PACES Act.

Why should a startup or small business choose crowdfunding?

Here are four reasons more powerful than money, according to the founder of the very successful crowdfunding platform Indiegogo.com, Slava Rubin:
  1. Market validation. A successful crowdfunding campaign is proof that a market exists for your product or service. That, in turn, can help you get funding from VCs, angels, even banks, because you've just removed some of the risk from the equation.

  2. Testing your marketing. If you're going to launch, you're going to have to sell, and a crowdfunding campaign is a cheap way for you to exercise your marketing chops.

  3. Extra Promotion, interesting crowdfunding campaigns get written about, and sites like Indiegogo also go out of their way to promote campaigns, adding a multiplier to the marketing you try out.

  4. Data capture. You cut out the middle man between yourself and your market when you crowdfund, and reap the reward not just in dollars, but in access to information like your fans' contact information, giving you the opportunity to build a long-term relationship with the people who fund you.
Rubin said those reasons, along with the money, make a powerful case for crowdfunding. And that case is likely to get more powerful with time.

"This will go down as the decade of crowdfunding," he said. "By the end of this decade, people won't talk about crowdfunding…it will just be layered into the fabric of funding."

Here is a very interesting video where the Indiegogo founder discusses best practices for crowdfunding called “How to Raise $1M in 30 Days or Less”: http://www.youtube.com/watch?v=3YNLB85UIFA

How will a North Carolina start-up or small business create and execute an investment crowdfunding campaign offering using NC PACES?

A North Carolina business that wants to issue equity, debt, or convertible debt securities will need to go through a number of steps to prepare for the offering. Typically they will discuss their business idea one-on-one with one or more advisors who can help them understand how to value and promote their offering. These advisors may be NC securities attorneys, startup community members, experienced entrepreneurs or potential investors. Entrepreneurs can also study online educational tools and get references available from crowdfunding platforms. It is a good practice to have at least some investors who are ready to invest before the crowdfunding campaign is begun.
Then the issuer will need to get ready for the crowdfunding offering:

·       Choose a crowdfunding platform partner if desired. It must be a platform registered o do business in North Carolina and be compliant with NC PACES.
·       Choose a North Carolina securities attorney to help prepare offering documents. In many cases we expect these to be based on open source documents compliant with NC PACES.
·       Prepare a business valuation and the offering size and limits.
·       Prepare business disclosure documentation as required by NC PACES
·       Get background checks on officers/owners as required by NC PACES
·       Prepare documents to file with Secretary of State for PACES exemption
·       Set up an escrow account at a North Carolina bank or escrow service
·       Plan the Crowdfunding campaign marketing strategy and length

Once everything is ready, the NC PACES exemption compliant securities offering paperwork is submitted to Secretary of State. When the Crowdfunding offering campaign is launched and marketing efforts begin, potential North Carolina investors are qualified by the platform or the issuer, and qualified potential NC investors examine the opportunity on the platform or from the issuer’s documentation.

Interested NC Investors sign a commitment and move money to escrow. If the campaign goal (minimum offering size) is reached:

  • NC Investors reconfirm and sign offering docs
  • NC Issuer receives the funds from escrow
  • NC Investors receive countersigned offering docs and stock or debt instrument
  • NC Issuer provides on-going reports and communication to investors and regulators as required by NC JOBS/PACES

If the campaign goal is not reached:

  • All investor funds are returned to them from escrow.

What is the exit strategy for these offerings?

This question is not directly related to NC PACES, but can be part of the business plan for offerings. Businesses might have a list of potential exit strategies, but most don’t know what it will look like at the early stages of financing. Investors who buy securities or debt with these offerings could see a number of different exits (return on or loss of investment) such as:

  • The business could fail to raise the minimum offering amount – the investment is returned from escrow.
  • The business could fail to become profitable and go out of business – the investment is lost. NC PACES requires very clear warnings on issuer documentation and an acknowledgement in writing from the investor that they understand that these investments are high risk and that all of the investment may be lost.

  • For debt offerings, the business would make debt payments to investors as specified in the terms until the investment is repaid or the debt is converted to equity.
  • The business could share profits with the shareholders in the form of dividends.
  • The business could be acquired or merge with another company and the investor receives cash or equity in the new company.
  • The business could be bought out by a large investor who pays cash to the existing shareholders based on the valuation of the business. This may result in a gain or a loss depending on valuation.
  • The business could become very successful and have an Initial Public Offering (IPO). Investors may then sell their shares on the open market.

Other scenarios are possible. Keep in mind it could take many years to achieve any return. The investment crowdfunding websites have lots of investor education available on this topic.

Where can I get more information?

Please visit www.jobsnc.blogspot.com for more information, links to the legislation, links to resources, and contact information.

If you have any questions or comments, email the NC PACES Crowdfunding Team at jobsnc@nc.rr.com 

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