Editor’s note: This is Part II of a series on using the NC PACES Act investment crowdfunding law written for WRAL TechWire by serial investor and crowdfunding advocate Mark Easley.
Part one of the series is available online.
RESEARCH TRIANGLE PARK – Once you have put together the offering docs, your company profile, and gotten approval from the state regulators, you are ready to launch your funding campaign.
You will need to have a marketing strategy for this effort. What kind of investors are you looking for, accredited, non-accredited, both? Where can you find them?
How can you get the word out about your offering to bring people to your offering page? How long should the campaign be?
And remember that for PACES all investors need to be North Carolina residents. One way to look at it is you are expanding your potential investor pool from ‘friends and family’ to ‘friends, family, customers, partners, and community’. So think about which of those groups you want to reach and how to reach them.
The platforms like localstake.com can be of help with this as they grow their investor database in North Carolina, but you should be prepared to do this part on your own or with help from a marketing service provider. It will be like any other marketing campaign, requiring a social media and promotion strategy, information updates, answers to potential investor questions, and other follow up, so budget plenty of time for those activities while the campaign is active. All of these communications with investors must satisfy the anti-fraud rules of securities laws. If you need some help, www.enventyspartners.com in Charlotte is a very good and experienced crowdfunding marketing service here in North Carolina that is ready to support NC PACES offerings.
- ABC Pizza ( Hypothetical PACES LPO Offering):
ABC Pizza has a couple of successful shops in the Triangle, and the owner wants to open some new locations. It costs about $125k for him to outfit a new location, so he decides to use the PACES LPO and raise $250k to open two new shops. He expects the shops will begin generating revenue soon after opening, so he decides to sell revenue share loans, which do not have fixed repayment installments, but allow him to pay installments based on a percentage of his revenue with a balloon payment at the end of 3 years for an unpaid remainder. If he raises the LPO minimum of $125k he can open one new shop, and if he raises the LPO maximum goal of $250k, he can open two new shops. He creates a company profile and puts the revenue share offering he worked out with his securities attorney on localstake.com, he sets the minimum investment size at $500 per investor, and plans a campaign to last 90 days. He puts together a promotion plan to find investors in the Triangle and North Carolina. He meets with the securities administrator and files his disclosure and other offering information with the state regulators and gets approved for the offering. Once the campaign is launched, he starts with his existing customer email list of over 5,000 regulars, and promotes the offering on Facebook, Twitter, and Instagram as allowed by the LPO, puts some flyers on the checkout stand at his restaurants, and places an ad on a local business website. He does other PR and updates as the campaign progresses, and answers investor questions on the offering web page. If material facts change after his offering is approved by the securities administrator or if he discovers material mistakes or misleading omissions after his offering is approved, he stops the offering and refiles updated information and waits until his updated offering is re-approved. If ABC Pizza raises the minimum amount of $125k, the money is transferred from escrow and the revenue share loan goes into effect for investors. If not, the money is returned to the investors from escrow. If the campaign is successful, as a bonus perk, when he sends his quarterly report to his investors he will include a coupon for a free large pizza.
- QRS Startup Co. (Hypothetical PACES NCPO up to $1M)
QRS Startup Co. is a new startup currently operating out of an accelerator program in the Triangle. The founder is seeking seed stage money to complete a production ready version of their first product and to validate the business model and market for the product, which she believes will be a very popular consumer product idea. Since they don’t have any financial history, she decides to use the PACES NCPO to raise a minimum of $300k and a maximum of $500k using a convertible note with a term of 8% interest and 24 month conversion to equity. She creates a company profile and puts the convertible note offering she worked out with her securities attorney on localstake.com, she sets the minimum investment size at $5000 per investor, and plans a campaign to last 90 days. She puts together a promotion plan to find accredited and non-accredited investors in the Triangle and North Carolina. She files this information with the state regulators and gets approved for the offering. Once the campaign is launched, she puts a tombstone style ‘Advertising Notice’ as defined by the NCPO rules on her company website, starts emailing her list of contacts, and promotes the offering on Facebook and Twitter using the ‘Advertising Notice’ which directs everyone to the offering site on Localstake.com. She does updates as the campaign progresses, and answers investor questions on the offering web page. If QRS Startup Co. raises the minimum amount of $300k, the money is transferred from escrow and the convertible note goes into effect for investors. If not, the money is returned to the investors from escrow. The same updating and correction rules apply as described in the LPO example.
- XYZ Tech Co. (Hypothetical NCPO up to $2M)
XYZ Tech Co. is a mature 4 year old tech company in North Carolina that has developed a very good subscription based business model for their services and has achieved profitability in their current markets in Raleigh and Charlotte. They are now in the process of opening new markets, and need additional funding to support this growth. Rather than selling more equity and diluting the existing shareholders as they have done in the past, the founders decide to borrow money in the form of a revenue share loan using the NC PACES NCPO. It cost them about $300k each time to develop the Raleigh and Charlotte markets to profitability, so they would like to raise another $1.5M to open 5 new markets. They set the offering minimum at $600k so they can open at least 2 new markets in the next 12 months. They create a company profile and put the revenue share offering they worked out with their securities attorney on localstake, they set the minimum investment size at $5000 per investor, and they work together with Enventys Partners to plan a campaign to last 90 days. They put together a promotion plan to find investors in the Triangle and North Carolina. They file this information with the state regulators and get approved for the offering. Once the campaign is launched, they put a tombstone style ‘Advertising Notice’ as defined by the NCPO rules on the company website, start emailing their list of contacts, and promote the offering on Facebook and Twitter using the ‘Advertising Notice’ which directs everyone to the offering site on Localstake. They do updates as the campaign progresses, and answer investor questions on the offering web page. If XYZ Tech Co. raises the minimum amount of $600k, the money is transferred from escrow and the revenue share loan goes into effect for investors. If not, the money is returned to the investors from escrow. The same updating and correction rules apply as described in the LPO example.
Note: In all three examples, what happens if the disclosure documents provided by the companies do not satisfy the Anti-Fraud provisions of Securities Laws? Can they rely on the approval of the securities administrator to protect them from liability to investors? The answer is no. The review of the securities administrator is required to get an exemption from registration, but does it not protect you from liability for failing to comply with anti-fraud rules.
What happens after I raise the money?
PACES requires that issuers provide a quarterly report to all investors in the offering, with updates to the offering progress, and after it is completed, progress of the company. These reports are required until the securities are no longer outstanding, for example until a revenue share loan is paid off. If you sell convertible notes or stock, the reporting stays in effect until the stock is sold or exchanged for another type of security such as in an acquisition. This reporting service and follow up can be managed by a platform like localstake.
You will want to do these brief reports and keep your investors informed, because you may want to do this again in the future. NC PACES allows you to make an offering every 12 months.
Do your research, put together a company profile, your offering docs, a crowdfunding campaign promotion plan, and start crowdfunding!
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
If you have general questions about the NC PACES Act law and rules for the state regulators, you may contact Leo John by email email@example.com or phone 919-807-2249. To stay informed about NC PACES and crowdfunding please visit and follow www.jobsnc.blogspot.com and contact us by email firstname.lastname@example.org.