Editor’s note: Serial investor and crowdfunding advocate Mark Easley offers a “Crowdfunding 101” guide in a three-part series written for WRAL TechWire. Part one focuses on creating an investment crowdfunding offering based on crowdfunding legislation passed in North Carolina in 2016. The state recently set final rules. Easley was one of the key supporters lobbying the General Assembly for passage of the NC PACES Act legislation.

Part I: Creating an Investment Crowdfunding Offering

The NC PACES Act crowdfunding rules have been finalized, and the act is in effect as of April 1 2017. The NC Secretary of State web site has the rules, forms, instructions and FAQs that startups and small businesses need to start using this new type of intrastate investment crowdfunding financing.

(See: http://www.sosnc.gov/sec/Crowdfunding.aspx )

There is more good news today.

An excellent established investment crowdfunding website with experience doing intrastate offerings will be supporting the NC PACES Act on their platform. Localstake (www.localstake.com), with headquarters in Indianapolis, has been helping companies make successful intrastate offerings in Indiana, Michigan, and Colorado and they will now bring that expertise to businesses and investors here in North Carolina. Small businesses and startups have used Localstake to raise millions of dollars using the intrastate exemptions and other offering types since 2013.

An investment platform like Localstake provides many useful services to help make your fundraising job easier. They will help with planning your offering, track dollar limits and residency for investors, help develop a target investor outreach program, and handle the investment process procedures like document reviews and signatures, funds transfer, and reporting.

How do I put an offering together?

The first step in putting together an offering is to do some research on how others have done it. Localstake.com has many good examples, including companies with products and services in categories like Retail/Wholesale, Food/Beverage, Business Services, Healthcare/Biotech, Manufacturing, Software/Technology, and more.

[Note: Most North Carolina businesses can use the new law, but your business must satisfy certain requirements for having connections to the state of North Carolina and not be on a short list of excluded types of businesses. See the Issuer FAQS for more info. You must also have a Federal exemption for your offering – SEC Rules 147 or 147A. Check both Federal and state eligibility requirements before you start planning your offering.]

We can see from the offerings on www.localstake.com what is needed to create a good offering. Issuer companies create an offering page which includes a summary description, often a short introductory video about the company, a business plan section describing the product or service, target customers, development process, marketing strategy, management team, competition, and other relevant information for investors.

They can also include financial information if they have been in business long enough to have them, or their financial projections if they haven’t. Both historical financial statements and financial projections must satisfy the anti-fraud rules of securities laws. Avoid telling partial truths. What you omit can create liability if it misleads investors.  Be careful to be reasonable in what you assume when you create projections and tell investors your assumptions so they can determine reasonableness for themselves.

The issuer should also include info about the use of funds, and the actual investment documentation for investors to review. All of this information is referred to as the company profile, and this is what you will use to attract investors to your offering.

What are the rules?

You can build a company profile on a platform like Localstake, or make a website yourself if you prefer. But the platform or your website has to be compliant with the PACES law and the rules on the NC Secretary of State website, so you should get familiar with those too. Read the FAQs first, then the rules to get a good idea how this all works.

Businesses ranging from brand new to mature can make use of the new law for financing. North Carolina based startups and small businesses that want to raise money using the NC PACES Act crowdfunding law (referred to as issuers of an investment offering) will follow the registration, reporting, escrow management, record keeping, promotion, and procedure rules of the PACES Act on the Secretary of State website.

Once an offering filing is approved by state regulators, businesses can start raising money using equity or debt offerings to raise up to $2M if they have reviewed or audited financials, and up to $1M if they do not. North Carolina accredited investors can invest an unlimited amount, and North Carolina retail unaccredited investors can invest up to $5000 per offering.

Sizes of offerings

PACES allows three different sizes of offerings depending on the amount of money you want to raise, and the rules are slightly different for each.

  • Local Public Offering (LPO) – you can raise up to $250k, and promote the offering in a variety of ways including social media, advertising, and events. You do not have to use the internet to promote or list your offering, but if you do you must have a PACES compliant platform. You will still need to follow all the PACES rules, except where the LPO rules provide you with a better alternative that override the normal PACES rules.
  • NC PACES Offering (NCPO, up to $1M, also called the Invest NC Exemption) – you can raise up to $1M without audited or reviewed financial statements as long as you give investors financial information required by anti-fraud rules. In this case, you must have a PACES compliant platform, and you cannot publicly promote the offering other than with a limited tombstone type description that links to the offering website.
  • NC PACES Offering (NCPO, up to $2M, also called the Invest NC Exemption) – you can raise up to $2M if you have GAAP compliant financial statements that have been reviewed or audited by a CPA. Your financial statements must cover the longer of 12 months or the period required by GAAP. In this case, you must have a PACES compliant platform, and you cannot publicly promote the offering outside the platform other than with a limited tombstone type description that links to the offering website.

[Note: Check with your securities attorney whether non-GAAP financial information you give investors will satisfy anti-fraud rules. All the dollar limits mentioned above are for rolling 12- month periods. Talk to your securities attorney about how you can raise more money than the dollar limits in the law by selling to corporate insiders or conducting an offering using a Federal exemption that pre-empts state law.]

What type of offering should I do?

NC PACES allows equity or debt offerings of various types, and three popular ones for startups and small businesses are revenue share loans, preferred equity, or convertible note offerings. Whichever type you choose, you will need to work with a securities attorney to help you put together things like disclosure documents, subscription agreements, term sheets, and the state filing forms you will need to do to set up your offering, get it approved, and make sure you are in compliance with the NC PACES securities law rules. If you decide to use Localstake, they will help you analyze and build the right type of offering for your company.

Putting standard documentation together is the easier part. Determining whether what you tell investors or decide not to tell investors in your documents complies with the anti-fraud rules of securities laws is often more complex. Each business is different and what you say about your business is not standard.

A key decision here is your goal for how much will you raise, and what is the minimum amount you need that will help your business achieve your objectives. PACES requires that any funds collected from investors to be kept in an escrow account until the minimum amount is reached. PACES requires that the minimum for an NCPO must be at least 20% of your goal and for an LPO at least 25% of your goal. You can read the issuer and escrow account FAQs for more information.

What’s next?

  • Part II will cover finding investors for your offering.
  • Part III will discuss investing in NC PACES Act offerings.

Note: This is just a brief overview of the NC PACES Act process, and is not intended to be legal, financial or investment advice. You should review all the information on the Secretary of State crowdfunding website, and work with a good business attorney to put your securities offering together. If you need a business attorney that is very knowledgeable about the PACES Act and crowdfunding in general you may contact Benji Jones or Jim Verdonik at Ward and Smith in Raleigh. If you need help building a profile and putting an online offering together on a crowdfunding platform you may contact Ryan Flynn at Localstake.com. If you need help putting together a crowdfunding marketing campaign to reach investors you may contact Roy Morejon at Enventys Partners. If you need help with putting together your financial statements you may contact Brooks Malone at HPG. To stay informed about NC PACES and crowdfunding please visit and follow www.jobsnc.blogspot.com.