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How to Navigate North Carolina Equity Crowdfunding

The North Carolina PACES Act was signed into law on July 22, 2016 and became effective April 1, 2017, making it possible for startups and small business owners to raise up to $2,000,000 through equity crowdfunding. This new financing option was designed to foster the support of North Carolina companies by North Carolina investors. While the text of the law itself is only 7 pages long, the rules and regulations written for compliant execution encompasses more than 27 pages. Prior to embarking on an equity fundraising campaign, it is important that you become familiar with these rules.  For a small business owner that spends most of his time running his business, this can be a daunting task.

There are several ways that a business desiring to raise funds using the NC PACES Act exemption (issuer) can facilitate the process. They can do it alone, use a broker-dealer, or use a registered funding portal.  Each of these paths require that the issuer be held responsible for complying with the law.  

In addition to developing or refining your business plan and creating a compelling story, the issuer must create a marketing plan to build its base of potential investors, known as the “crowd.” The issuer must create disclosure documents, decide what type of securities offering it will use, and choose a provider for its platform and escrow agreement.  They may also need to hire a securities attorney, a marketing firm, an accountant to review or audit their financial statements, someone to conduct post fundraising reporting requirements, and perhaps other professionals.  Not only does this make the fundraise more complicated, but it may add significant costs as well.  Oftentimes, a broker-dealer or funding portal will provide some of these services, but the burden of compliance and the bulk of the work falls on the issuer.  As an alternative to an “a la carte” method of putting together your fundraising campaign, there are crowdfunding consultants that will provide most, if not all, of these services for you at a bundled price.

Equity crowdfunding was designed to provide an alternative for small businesses to gain access to the capital they need to grow and prosper.  But it’s not an easy process.  Prior to embarking on this new method of financing, it is important that you become aware of the rules and regulations and do your homework. Equity crowdfunding in North Carolina is new.  This is an exciting time for small businesses in North Carolina and the NC PACES Act exemption is a viable alternative to financing your business but issuers and investors must both do their own due diligence to make sure it is right for them.

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