We’ve all heard stories about “rich folks” that got even richer by getting in on an early-stage investment. These types of investments have been a federally regulated monopoly for decades, made only available to “accredited” investors. Accredited investors are those with a net worth of over $1MM, excluding the value of one's primary residence, or have income of at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to earn the same amount again.
However, the opportunity to invest in early-stage companies for those that do not qualify as accredited has fundamentally changed.
When the Securities and Exchange Commission adopted the equity crowdfunding rules under Title III of the JOBS Act on May 26, 2016, what was once considered the domain of the wealthy suddenly opened to unaccredited or non-accredited investors as well.
Specifically in North Carolina, the NC PACES Act was adopted on April 1, 2017 and was designed to help small businesses in the State raise up to $2MM from North Carolina residents. While business owners were previously relegated to bank loans and grants or playing in the higher stakes world of venture capitalists and angel investors, they are now able to tap into a new pool of funding worth tens of millions of dollars represented by potential non-accredited investors across the state. We refer to these potential investors as “everyday” investors.
So what does equity crowdfunding mean for the everyday investor?
Under the PACES Act it means that if you live in North Carolina, you can invest up to $5,000 per company, per year using a registered funding portal. These portals are regulated, online websites in which you can learn about companies and the terms of their offerings, review their disclosure documents and financials, and securely send your potential investment to an escrow agent to be held until minimums are met and the funds are made available to the issuing business owners.
The terms are structured by the issuing business owner and can include equity in exchange for an investment, a debt-structured offering that repays an investment as a loan plus an agreed upon interest rate, or a convertible note that functions as a hybrid of both. Companies may also include perk-based incentives as an additional way to sweeten the deal for investors. For example, a microbrewery might offer one free beer per week to anyone that supports their crowdfunding raise with a minimum investment of $500.
While the risks in early-stage investments is usually high, the rewards can be high as well. Downside risk is mitigated by the limitations on the amount of money a non-accredited investor can invest in any one company. However, the opportunity for everyday investors to take advantage of this new investment crowdfunding movement is powerful! From portfolio diversification to supporting affinity groups that investors find meaningful (veteran-owned, minority-owned, women-owned, local, etc.), the new regulations allow investors – no matter how much their net worth – to support any company seeking to raise money this way.
While investment crowdfunding is still relatively new in North Carolina, programs like INVESTinNC.com are helping educate entrepreneurs, existing small business owners and investors. Please be sure to sign up for updates related to new issuers coming onto the INVESTinNC crowdfunding portal in the coming weeks to assess for yourself the companies trying to tap into this exciting new movement in local funding.