In many states, including North Carolina, up until a couple of years ago, it used to be that you would have to meet hefty income or net-worth requirements to become a private investor. The NC PACES Act changed all of that in 2017.
The North Carolina Providing Access to Capital for Entrepreneurs and Small business Act is a state law that allows small businesses and startups to accrue capital through investment crowdfunding. The General Assembly unanimously passed the act in 2016 and it went into effect in April 2017.
“NC PACES has been recognized as one of the best state crowdfunding laws in the nation because it carefully balances expanding opportunities for entrepreneurs with protecting investors,” said North Carolina Secretary of State Elaine Marshall. “It sets strong limits, including a $5,000 limit for a single investor who is not accredited to invest in any 12-month period, as well as the establishment of an escrow agreement that assures that the issuer can’t access investors’ funds until the target amount needed is reached.”
As Marshall noted, any North Carolina resident can invest in a N.C. small business or startup that creates a PACES-compliant debt or equity offering. PACES allows non-accredited investors to buy equity or debt offerings from North Carolina issuers (given that they are compliant with all rules and regulations) up to $5,000 per issuer.
While these types of investments are protected in an escrow account until the minimum offering is raised, these types of investments are considered high-risk and investors must agree to the high-risk nature of these investments.
PACES means that investing is no longer just for those who make hundreds of thousands of dollars a year or boast a total net worth of at least $1 million, as is required of accredited financiers like angel investors and venture capitalists.
Ultimately, though, it’s an opportunity for the Average Joe or Jane to put their money into a community venture or business that they believe in.
HOW INVESTORS CAN BENEFIT
John Skvarla, a senior government relations advisor at Nexsen Pruet, who contributed to the NC PACES Act, said it took roughly two years to get all the regulations in place and now is the time to get the word out so people can take advantage of the opportunity that investment crowdfunding provides.
He pointed out the fact that most people before NC PACES did not have enough capital to privately invest, but now they can.
“It basically becomes an opportunity for people to say, ‘Look, I like this. I like entrepreneurial investing and I can make a return on my money.’ This is really the essence of America, because all the big companies started out as small companies,” Skvarla said, noting the humble beginnings of UPS as a parcel delivery service via bicycle.
Amy Bogie, the executive director of the National Coalition for Community Capital, alluded NC PACES allows for the fostering of ideation, creation and community collaboration.
“If there’s a project that you have always wished would get built, you can be a part of making that happen. If you live in a community that doesn’t have a specific resource and you want to bring it there, it may not make sense to a more traditional financial institution who might be looking for higher returns,” she explained “[This] gives an opportunity for communities to basically self-finance projects for their own community development.”
Ted Coughlin, a Wilmington-based angel investor and entrepreneur, and owner of Ironclad Brewery, said investment crowdfunding is also a means by which a person can diversify their financial portfolio.
“Investing opportunities, even at a smaller $1,000 level, is a way to diversify their portfolio. Obviously a person’s goal is grow their portfolio, their nest egg retirement, etcetera over time. Investment opportunities provide that,” he said.
Coughlin is of the opinion there is a lack of investors in North Carolina and hopes PACES will be an enabler for folks to “get into the game.”
THINGS INVESTORS SHOULD KEEP IN MIND
Bogie admitted investors are not used to crowdfunded investing due to its illegality in the past.
After the Great Depression, protections were put in place at the federal level to protect investors from fraud, especially for lower net worth individuals. She said a lot of education needs to take place before investors financially commit to something.
“A basic level question for an investor is, is this business going to be successful that you’re investing in? Does it make sense? You can ask all the same questions that a venture capitalist might ask — you should, because in this case, there’s no third party,” Bogie advised. “It’s not like buying a stock or a mutual fund, because no one else is necessarily vetting these investment opportunities.”
While negotiating the terms of a financial agreement sans third-party can be an appealing aspect of investment crowdfunding to both issuer and investor, it’s important that both sides know exactly what they’re doing so that things don’t get hairy down the road.
Coughlin said investors always need to be thinking long term.
Added Bogie, “I think [investment crowdfunding] increases connectivity in a community in a really unique way — something that’s been missing from our financial system for a long time.”
“There have always been additional opportunities available for high net worth or accredited investors that were not on the table at all for folks with lower net worth, and that’s basically what’s changing now,” she said. “Everyday investors are having the opportunity to invest in businesses and in projects in their communities in a way that was never available to them before. Banks could invest, angel investors could invest, venture capital firms could invest; but individuals were legally prohibited.”
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