Most people have heard of crowdfunding — usually through platforms like Kickstarter or GoFundMe. But as of 2017, in North Carolina, crowdfunding is also a way that entrepreneurs and businesses can accrue investments.
In 2015, Forbes predicted that investment crowdfunding would surpass venture capital funding the coming years.“There’s pledge crowdfunding, which is what everybody’s aware of — that’s Kickstarter, Indiegogo, GoFundMe — which can only offer gifts or perks in exchange for a donation,” explained John Panaccione, CEO of LogicBay, a 16-year old software company whose historical focus is powering sales channel growth for business clients. “Investment crowdfunding is the same technique of raising funding from a crowd, but you can offer a financial security to people in exchange for their investment. Selling securities is illegal for pledge crowdfunding, and most people want more than just a T-shirt for investing in a for-profit company.”
LogicBay launched INVESTinNC, an educational program created to inform small business owners and potential investors based in North Carolina about new opportunities to participate in investment crowdfunding under the North Carolina Providing Access to Capital for Entrepreneurs and Small Business Act.
More on Investment Crowdfunding
Before the NC PACES Act went into effect in 2017, only accredited investors could legally invest in private companies.
An accredited investor is typically someone in a top tier income bracket with an individual salary of at least $200,000, a joint household income of at least $300,000 annually, or at least $1 million in total net worth.
“That only represents about 10 percent of the U.S. population,” Panaccione said. “Ten percent of that 10 percent are actively involved in investing in private companies — that’s only 1 percent who have been allowed to actively invest in private companies since the 1934 Securities Exchange Commission law that was put into place after the Great Depression.”
At the federal level, the Jobs Act of 2012 provided for exemptions to the accreditation rule, but PACES now makes it possible for almost anyone who isn’t accredited to invest.
Of course, there are rules and regulations on both sides, but the main stipulations are that both business and investor must be N.C. residents, issuers (businesses and entrepreneurs) may only raise up to $2 million audit-free financials over the course of 12 months, and a non-accredited investor can only shell out up to $5,000 per issuer.
Essentially, investment crowdfunding gives the neighborhood coffee shop a chance to solicit funding from its community, and the guy-next-door the opportunity to invest in his daily caramel macchiato.
What This Means for Business Owners
Small businesses and entrepreneurs no longer have to solely rely on banks, angel investors or venture capital to expand, grow or, in some cases, survive. Investment crowdfunding provides an alternative and additional financing opportunity.
“Many new and small businesses across North Carolina face challenges accessing financial capital to start or expand their ventures,” said N.C. Secretary of State Elaine Marshall. “NC PACES allows companies to solicit main street investors on the Internet and elsewhere, and opens the door for small investors.”
Panaccione also noted the benefit of gatekeeper-free financing.
“Bank lenders have underwriters. They ultimately only fund 2 percent of the businesses that loan officers talk to every year. Same with Angel groups and Venture Capital groups – investors and their committees invest in two companies out of every 100 they talk to. So, it’s tough to get financing,” he said. “With investment crowdfunding, there are no gatekeepers to get through to access capital. As long as you’ve been authorized by the state to be exempt from SEC rules under the PACES ACT, you can seek financing support directly from the North Carolina community. They ultimately will decide if your business is worth funding, not a gatekeeper.”
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