Monday, June 17, 2013

North Carolina’s Intrastate Investment Crowdfunding Legislation

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 North Carolina approach to investment crowdfunding has been called “Brilliant!” and “worthy of support” 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” The NC JOBS Act is also supported by NC Congressman Patrick McHenry, the original sponsor of the Federal JOBS Act.

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

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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