This story was written for WRAL TechWire Innovator partner INVESTinNC.
Most people have heard of crowdfunding — usually through platforms like Kickstarter or GoFundMe. But as of 2017, in North Carolina, crowdfunding is also a way that entrepreneurs and businesses can accrue investments.
In 2015, Forbes predicted that investment crowdfunding would surpass venture capital funding the coming years.
“There’s pledge crowdfunding, which is what everybody’s aware of — that’s Kickstarter, Indiegogo, GoFundMe — which can only offer gifts or perks in exchange for a donation,” explained John Panaccione, CEO of LogicBay, a 16-year old software company whose historical focus is powering sales channel growth for business clients. “Investment crowdfunding is the same technique of raising funding from a crowd, but you can offer a financial security to people in exchange for their investment. Selling securities is illegal for pledge crowdfunding, and most people want more than just a T-shirt for investing in a for-profit company.”
LogicBay launched INVESTinNC, an educational program created to inform small business owners and potential investors based in North Carolina about new opportunities to participate in investment crowdfunding under the North Carolina Providing Access to Capital for Entrepreneurs and Small Business Act.
More on Investment Crowdfunding
Before the NC PACES Act went into effect in 2017, only accredited investors could legally invest in private companies.
An accredited investor is typically someone in a top tier income bracket with an individual salary of at least $200,000, a joint household income of at least $300,000 annually, or at least $1 million in total net worth.
“That only represents about 10 percent of the U.S. population,” Panaccione said. “Ten percent of that 10 percent are actively involved in investing in private companies — that’s only 1 percent who have been allowed to actively invest in private companies since the 1934 Securities Exchange Commission law that was put into place after the Great Depression.”
At the federal level, the Jobs Act of 2012 provided for exemptions to the accreditation rule, but PACES now makes it possible for almost anyone who isn’t accredited to invest.
Of course, there are rules and regulations on both sides, but the main stipulations are that both business and investor must be N.C. residents, issuers (businesses and entrepreneurs) may only raise up to $2 million audit-free financials over the course of 12 months, and a non-accredited investor can only shell out up to $5,000 per issuer.
Essentially, investment crowdfunding gives the neighborhood coffee shop a chance to solicit funding from its community, and the guy-next-door the opportunity to invest in his daily caramel macchiato.
What This Means for Business Owners
Small businesses and entrepreneurs no longer have to solely rely on banks, angel investors or venture capital to expand, grow or, in some cases, survive. Investment crowdfunding provides an alternative and additional financing opportunity.
“Many new and small businesses across North Carolina face challenges accessing financial capital to start or expand their ventures,” said N.C. Secretary of State Elaine Marshall. “NC PACES allows companies to solicit main street investors on the Internet and elsewhere, and opens the door for small investors.”
Panaccione also noted the benefit of gatekeeper-free financing.
“Bank lenders have underwriters. They ultimately only fund 2 percent of the businesses that loan officers talk to every year. Same with Angel groups and Venture Capital groups – investors and their committees invest in two companies out of every 100 they talk to. So, it’s tough to get financing,” he said. “With investment crowdfunding, there are no gatekeepers to get through to access capital. As long as you’ve been authorized by the state to be exempt from SEC rules under the PACES ACT, you can seek financing support directly from the North Carolina community. They ultimately will decide if your business is worth funding, not a gatekeeper.”
In compliance with NC PACES rules, issuers are also able draft up their own set of terms and conditions. Conversely, banks, and Angel and Venture Capital investors require the business accept their terms to receive their money.
The terms also include requirements for control and special rights for the investor, even if they don’t own a majority stake in the business.
Panaccione noted this practice is referred to as the “democratization of capital” given that the community is deciding to invest in the financial terms that the businesses is offering, or not.
With investment crowdfunding, Panaccione said entrepreneurs are saying, “This is who I am. This is my business, and if you believe in me and my business, you can go ahead and invest in it.”
What This Means for Investors
There are plenty of ways for people invest their money — 401Ks and retirement funds, stocks and bonds, and in classic cars that will only appreciate over the years as an example.
Investment crowdfunding is a way for someone who is not part of the 10 percent accredited investor group and income bracket to put their hard-earned dollars in a venture they believe in.
“This is basically the opportunity for the ordinary person to invest in entrepreneurial deals that are appealing to them, and yet the amount that they can invest is limited enough where hopefully it will not destroy their life and their family,” said John Skvarla, a senior government relations advisor at Nexsen Pruet, who contributed to the NC PACES Act.
Investment crowdfunding under the PACES Act provides some protections for the investor.
Aside from investment caps per issuer, an investor’s money is returned to him from escrow if the campaign goal is not met. The nature of investment crowdfunding also allows for diversification in the market and community support of local businesses. However, no business in the state so far has taken full advantage of investment crowdfunding — yet.
Early adopters, like the toddler sleep aid product company Hush Buddy, have tried but failed to successfully get off the ground with investment crowdfunding.
Panaccione believes awareness is key, noting that when Uber began, people were leery of it.
“No one’s succeeded yet in North Carolina, and I think we ought to face that fact. That’s the pink elephant in the room, right?,” he said. “It’s a paradigm shift. ‘What is it? I don’t get it. Sounds a little fishy to me.’ You know all those things you had with your first Uber ride. And then it hit a tipping point, and now it’s a verb and everybody does it — it’s changing transportation.”
Panaccione added, “I believe that investment crowdfunding falls in that same category. People don’t get it. They don’t understand how it stacks up against other ways of using their money, but once they start seeing other people do it, how it works and seeing local businesses flourish, I think they’ll say, ‘Hey, I want to participate in that.'”
This story was written for WRAL TechWire Innovator partner INVESTinNC.