N.C. crowdfunding law would provide new way for companies to raise capital

The crowdfunding bill recently passed by state legislators and awaiting Gov. Pat McCrory’s signature would make it easier for small businesses to raise money from investors, but it isn’t expected to unleash a flood of fundraising deals.

“The people who are following crowdfunding aren’t seeing tons and tons of state offerings” in the more than two dozen other states that have passed crowdfunding laws, said Raleigh attorney Jim Verdonik of Ward and Smith. Verdonick was a proponent of the bill that was passed unanimously by both the House and Senate last month.

A report by the U.S. Securities and Exchange Commission found that from December 2011, when the first state enacted a crowdfunding law, through September 2015, just 118 crowdfunding offerings were filed with state regulators.

Still, Verdonick sees the legislation as a step forward.

“It will help some companies, which is good,” said Verdonick, the author of a book on crowdfunding slated to be published by Thomson Reuters this summer.

The bill, S481, would permit privately held businesses to raise up to $2 million from average investors, double the $1 million cap established by the SEC under rules that went into effect in May. The legislation also would exempt companies raising less than $1 million from the federal requirement to provide prospective investors with reviewed or audited financials.

Investors, who must be North Carolina residents, would be permitted to invest regardless of their income. However, 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.

Under current SEC rules, companies interested in taking advantage of North Carolina’s crowdfunding would have to have 80 percent of their assets within the state. They also must generate 80 percent of their revenue and invest 80 percent of the proceeds from an offering in the state. However, the SEC has proposed lifting that restriction.

“It’s local,” said attorney Benji Jones of Raleigh’s Smith Anderson. “That’s what the (law) is about. It’s about neighbors supporting neighborhood businesses.”

In addition, the federal crowdfunding law requires companies to raise money online through a registered crowdfunding “intermediary,” but the state legislation waives that requirement.

“The process is expected to be more flexible,” Jones said. “This gives new options to companies that couldn’t raise capital previously.”

The state House passed a crowdfunding bill in 2013 with overwhelming support from both parties – just a single dissenting vote was cast – but it stalled in the Senate the following year when unrelated economic development initiatives were tacked onto it.

Mark Easley, a Raleigh investor and adviser to startups who advocated for the law, said that one key to winning approval of the bill this year was the absence of controversial attachments that had nothing to do with crowdfunding.

McCrory supported the bill and is expected to sign it into law. But the Secretary of State’s office must adopt rules for implementing it before it goes into effect.

Secretary of State Elaine Marshall, whose office helped write the bill, issued a statement that said it struck a balance between protecting investors and providing new ways to invest.

David Ranii: 919-829-4877, @dranii