Small and early-stage North Carolina businesses now have a new way to raise up to $250,000 in funding from investors: Local Public Offerings, or LPOs.
LPOs, which went into effect Thursday, permit companies to appeal directly to a wide range of North Carolina investors for up to a quarter of a million dollars either through a personal sales pitch or via advertising. Those activities were prohibited or restricted until now for offerings that weren’t registered with regulators.
And, unlike other securities offerings stemming from the crowdfunding law that the state legislature passed last year, companies going the LPO route don’t need to use a registered broker/dealer or a “crowdfunding platform,” a registered website where investors can communicate with the company and each other, to raise the funds.
LPOs are designed to be a “relatively simple” way for entrepreneurs to raise money, with the caveat that regulators will still be looking over their shoulder, said attorney Benji Jones of Raleigh’s Smith Anderson.
“You cannot commence your offering, verbally or any other way, until you have completed your filing requirements” and received approval from the N.C. Secretary of State’s office, Jones said. “You also have to file your advertising materials.”
That oversight, which includes a meeting with regulators, is designed to weed out the thieves and fraudsters, said Raleigh attorney Jim Verdonik of Ward and Smith.
LPOs are believed to be a first-of-its-kind way for companies to raise funds, so much so that they’ll only be permitted until April 1, 2020 – unless the Secretary of State’s office renews the regulations authorizing them. When the department issued proposed regulations to create LPOs, it noted that imposing a time limit would enable it “to assess whether it is effective from a business perspective and has provided adequate investor protections.”
Other states, said Secretary of State Elaine Marshall, already “are looking at this as maybe a possible model for them. I’ve got my fingers crossed that it will work out well.”
That said, Marshall pointed to LPOs as the “riskiest” of the new ways for companies to raise funding authorized by the state’s crowdfunding law, in part because it doesn’t incorporate “the wisdom of the crowd” that comes with an online crowdfunding platform.
Marshall said that potential investors need to understand that they can lose their entire investment and that, even though they are purchasing an ownership stake in the business, they won’t really have a say in how the business is run.
Most of all, they need to do their homework.
As with other crowdfunding investments, “people have to be very cautious,” she said. “They gotta check before they write one.”
Marshall anticipates that LPO investors will be mostly investing in “businesses they are already familiar with,” such as their local bakery or brewery or pizza place.
Although other sections of the state’s crowdfunding law went into effect April 1, LPOs were delayed until Thursday to coincide with the effective date of new federal regulations that were critical to implementing them. Those regulations also make it much easier for businesses to raise funding via other types of offerings created by the law, said Jones, the Smith Anderson lawyer.
“Today,” she said Thursday, “the asphalt on the road is finished. What once was a path is now a road.”
The crowdfunding law also permits privately held businesses to raise up to $2 million from average investors, double the $1.1 million cap established by federal regulators. It also exempts companies raising less than $1 million from the federal requirement to provide prospective investors with reviewed or audited financials.
Investors, who must be N.C. residents, can invest regardless of their income. But those who aren’t “accredited investors” with an annual net income that exceeds $200,000 or a net worth in excess of $1 million would be limited to investing $5,000 per company in any 12-month period.
A group of advocates that successfully pushed for passage of the crowdfunding bill also suggested that the regulations for implementing the law should include LPOs.
“The law was written flexibly enough to allow the administrators to do that,” Verdonik said.
Both he and Jones praised the Secretary of State’s office for taking the LPO suggestion and running with it.