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Why Small Businesses Should Take Advantage of Investment Crowdfunding

North Carolina is home to more than 890,000 small businesses according to the latest statistics reported by the N.C. Small Business Administration. These may look like a local ice cream shop or a vintage boutique, or even a charming inn or a mom-and-pop eatery. It seems like everywhere you turn there’s a small business.

But it’s no secret launching and sustaining a small business is tough and it’s usually due to capital, or lack thereof. While venture capitalists and accredited angel investors have the big bucks, the competition for their dollars is fierce.

Investment crowdfunding paves an alternate pathway for small businesses and entrepreneurs to launch a venture, stay afloat, or grow and expand.

Investment crowdfunding allows small businesses and entrepreneurs (issuers) to source money for their venture from several backers (a crowd) who are each contributing a relatively small amount.

Before the 2017 implementation of the North Carolina Providing Access to Capital for Entrepreneurs (N.C. PACES) Act, this type of financial sourcing was illegal. N.C. PACES legitimized the practice of crowdfunding from non-accredited investors.

“In a nutshell, it’s the ability for small companies to raise capital in rational quantities from investors that are not able to play in angel funds, which is generally fairly wealthy people who’ve made some money who band together to invest in deals — or venture capital,” explained John Skvarla, a senior government relations advisor at Nexsen Pruet who contributed to the N.C. PACES Act.

Of course there are rules and regulations that N.C. PACES lays out for both issuer and investor, but generally speaking, under a N.C. PACES Act offering (NCPO), the business must be North Carolina based and there are fundraising caps of $1 million (without audited financials) or $2 million (with reviewed or audited financials) over a 12 month period.

Another option, the Local Public Offering is capped at $250,000. Issuers are permitted to promote the offering publicly after filing notice with the state securities regulatory agency. A non-accredited investor is limited to a $5,000 investment for a single issuer.

If this investment cap seems “too low,” let’s not forget Sara Blakely, founder of women’s intimate apparel company Spanx, started her business with just $5,000. Reported Spanx sales from 2014 were more than $400 million.

“The Local Public Offering option – designed for those who need to raise no more than $250,000 – is designed to make it easier for ‘mom and pop’ businesses to use crowdfunding to raise capital. I believe that it could be an incredible tool in helping grow small businesses, local economies and rural communities all across North Carolina,” added N.C. Secretary of State Elaine Marshall.

Aside from financial opportunity, investment crowdfunding through N.C. PACES mitigates the use of a gatekeeper (like a bank underwriter) who is oftentimes the thing that stands in the way of an issuer’s access to capital. Issuers must be compliant with all laws and regulations, but investment crowdfunding gives small business owners autonomy over their finances and the terms of the agreement with the investor.

It’s also a great way for small businesses to generate awareness of their brand or company in the local community.

Amy Bogie, executive director of the National Coalition for Community Capital, works to bring together people who are interested in driving investment to the local economy. She said one of the advantages of investment crowdfunding is a business’ ability to “market what they’re doing and already have a customer base up and running by marketing their offering before they even open up the doors.”

“A lot of food and beverage businesses have put up offerings around the country so far. That’s partly because a lot of banks won’t lend to food and beverage businesses because they’re viewed as high risk. Investment crowdfunding is another vehicle for them to get access to capital,” Bogie continued. “Investment crowdfunding is going to be best suited for a business that already has some history of success or validation that their concept works.”

Skvarla believes a person can have the “greatest idea in the world” but if they don’t have access to capital, it’s not going to work out. He said investment crowdfunding is the opportunity many small businesses have been looking for.

You can find the original version of this article on WRAL TechWire. Click here to view.

AUTHOR Clem Seifert
Program Director, INVESTinNC
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