By Mark Easley and Steve Reaser of
the NC JOBS Act Team
A safe, fair, and easy to implement version of
investment crowdfunding may soon be a reality for North Carolina start-ups and small business.
A new intrastate investment crowdfunding exemption
is moving through the North Carolina Legislature. The NC JOBS Act of 2013
was passed by the NC House Commerce and Jobs Committee with near unanimous
support, and is waiting for action by the House Finance Committee. A full vote
of the NC House and NC Senate will follow, and the goal is to have the Act
signed into law by the Governor by the end of June.
A team of
local entrepreneurs and investors came together and looked closely at
crowdfunding exemptions that have already been implemented in Kansas
and Georgia,
as well as the Federal JOBS Act passed last year. Working together with State
Representative Tom Murry, the
Secretary of State Securities Division regulators, and the State Bar
Association Securities Committee, the team created the North Carolina JOBS Act
of 2013 by selecting the best features of each exemption, while avoiding the
problems associated with the stalled and complex Federal JOBS Act.
Details
about the North Carolina Jump-Start Our Business Start-ups Act (NC JOBS Act)
can be found on the North Carolina JOBS Act of 2013 Blog.
The bill is sponsored by Representatives Tom Murry,
Tim D. Moffit, Phil Shepard, and Kelley E. Hastings.
Start-up
companies and small businesses play a critical role in creating new jobs and
growing the economy. Crowdfunding legislation is one part of Representative
Murry’s commitment to North Carolina
small business and entrepreneurs. “I think this idea is long overdue.
Crowdfunding received bipartisan support in Congress, and I expect it will get
the same here in North Carolina.
I’d like to thank my co-sponsors and look forward to seeing the Governor sign
this into law this session,” said Representative Murry.
“The NC
JOBS Act gets back to the original idea we had in mind at the Federal level”
said North Carolina
entrepreneur Steve Reaser. North Carolina
entrepreneur and attorney Nick Bhargava added “This bill will help start-ups
and small business in North Carolina
get the financing they need.” Both Steve and Nick provided guidance to
lawmakers and regulators about the Federal JOBS act and have applied that
expertise to the NC JOBS Act.
“We have
developed a crowdfunding model that is straightforward and easy to understand
for the start-up and small business community” said local angel investor Mark
Easley. “We have a crowdfunding exemption that is easy to implement, safe, and
fair for both small business and small investors. I would like to thank the
North Carolina Secretary of State Securities Division and the NC Bar
Association Securities Committee for their good work in enhancing and improving
this exemption.”
The NC
JOBS Act has a number of provisions that allow start-ups and small businesses
in North Carolina
to raise money via equity or debt using investment crowdfunding:
•
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 audited financials.
•
Investor
Cap: Investors may invest no more than $2000 per issuer, unless they are
accredited.
•
Intermediaries:
Issuers may use a professional crowdfunding platform compliant with NC JOBS,
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.
•
The
exemption is set to become effective immediately when passed. The state
regulators may pass rules as real-world usage merits.
Let’s
briefly describe what this exemption is, and what it is not.
First, what
it is not. It is NOT a radical change to the North Carolina or Federal securities laws.
Investment
crowdfunding is also NOT like Kickstarter. If it was, investors might think
they will be able to just go up to a crowdfunding website and click on “Buy”
and get some shares in a start-up. That is not the case, far from it.
So what is
it? It is a definition of a new securities law exemption that will make it much
easier for small business in our state to find investors and sell stock or
issue debt in their company using investment crowdfunding. The North Carolina model is
similar to the existing Reg D 506 offerings used by thousands of start-ups and
small businesses every year, but with a couple of new ideas allowed by the
exemption:
- 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.
- 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 services community. The rest of the bill is just describing 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 JOBS crowdfunding team.
4
Reasons the NC JOBS Act of 2013 Crowdfunding Exemption Beats the Federal JOBS
Act Crowdfunding Exemption
#1
- Sooner
Investment
Crowdfunding will be available in North
Carolina well before it is available nationwide. The
regulations for the national crowdfunding exemption are likely to remain
unavailable until at least early 2014, with lots of complex implementation time
required on top of that. In contrast, since NC JOBS is well defined and much
easier to implement, we expect to see companies raising money under NC JOBS as
soon as this summer.
#2
- Cheaper
Raising
money under the national crowdfunding exemption is expected to be rather
expensive; some estimates suggest that as much as 15% of the money raised will
go to “overhead” expenses rather than being used to grow the business.
There
are two ways the NC JOBS Exemption keeps costs down:
First,
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 audited financials is a reasonable
burden to help protect potential investors.)
Secondly,
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 normally 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 a good crowdfunding platform that is compliant
with NC JOBS. But because of standardization, 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 $2,000.
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.
With
NC JOBS issuing companies simply have to make sure to accept only $2,000 or
less from each non-accredited investor.
#4
- Angel-Friendly
Accredited
investors are excluded from this $2,000 cap -- they can invest as much as they
choose.
When
you look at the data from countries where investment crowdfunding is already
legal (it
is a spectacular success in the UK), you find that most successful raises
are accomplished through a combination of many small ($1,000 to $2,500)
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.
Support
the North Carolina
JOBS Act of 2013:
Mark Easley has been advising startups in the Research Triangle
Park area of North
Carolina since 2000 after a 25 year technology career in
engineering, marketing, and sales in Silicon Valley.
Mark has experience in the semiconductor business and related software and
development tool products. In addition to his startup advisor activities, he
has been on the executive board of a Raleigh/Durham area angel investor group
and is a member of the Council for Entrepreneurial Development.
Entrepreneur
and investor, Steve Reaser has been
active in crowdfunding since November 2011. Co-founder of Funding Launchpad --
an equity and rewards crowdfunding platform -- and founding member of the
Crowdfunding Professionals Association (CfPA) and active member of the
CrowdFunding Intermediary Regulatory Advocates (CFIRA). Prior to Funding
Launchpad Steve co-founded an educational technology company, helping grow it
to over one million paid users. Mechanical Engineer, Cornell.
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