The Securities Division of the North Carolina Secretary of State (the “Division”) announced significant revisions to rules that implement the NC PACES Act. NC PACES permits North Carolina companies to offer and sell up to $1M ($2M with reviewed or audited financials) of securities in 12 months to an unlimited number of North Carolina residents (including non-accredited investors), subject an investment cap of $5K per offering for non-accredited investors. The NC PACES Act, which was signed into law in July 2016, tasked the Division to adopt rules to establish how these offerings could actually work.
Sometimes things get done right.
After a month-long comment period on initial rules published in early February, the Division recently proposed revisions that could significantly alter the playing field for North Carolina companies looking to raise capital through small local offerings. You can access a copy of the rules here. The newly proposed rules create two distinct paths for North Carolina companies: On-Platform Offerings (the traditional “investment crowdfunding” model) or Local Public Offerings (providing a more flexible path for North Carolina companies wanting to raise small offering amounts).
On-Platform Offerings: This traditional “investment crowdfunding” approach requires offerings to be conducted through an internet “platform.” The rules require pre-clearance of disclosure materials and other filings through the Division, create minimum and maximum offering requirements, require the use of an escrow agent (which can include a North Carolina law firm) to hold investor funds and establish strict regulation of off-platform advertising – all of which closely mirrors procedures adopted for “federal crowdfunding” offerings under Section 4(a)(6) of the Securities Act of 1933 and Title III of the JOBS Act and in other states that have enacted intrastate offering exemptions similar to NC PACES.
But, unlike Title III federal crowdfunding and most other states, North Carolina issuers are not required to use a funding portal or a registered broker-dealer to conduct the offering. Instead, a North Carolina company can elect to “go it alone” and use its own internet website to create the “platform” for the offering. This flexibility could reduce costs and eliminate many barriers to entry for North Carolina companies wanting to raise upward of $250,000 to $2,000,000 from North Carolina residents.
Local Public Offerings: This is where the Division truly breaks new ground. This novel approach permits the broad use of advertising (including but not limited to the use of the internet) for offerings of no more than $250,000 in 12 months. Issuers conducting these small “local public offerings” will be required to file the same types of materials with the Division and must establish an escrow and minimum and maximum offering thresholds. However, issuers conducting a Local Public Offering will also need to pre-clear advertising materials with the Division and, generally, be more involved with the Division during the offering process. For instance, issuers are required to meet with representatives of the Division prior to commencing the offering and to provide notice of any pre-scheduled public meeting about the offering.
Note also that the Local Public Offering exemption is not available for all types of companies (the rules specifically prohibit use by companies involved in gas, mining and other extraction industries, issuers of asset-backed securities, REITs and marketplace lenders, among others). In addition, the exemption only applies to offerings of equity, debt and royalty stream instruments.
Irrespective of these limitations, the Local Public Offering exemption should nevertheless offer a new and much needed path for many North Carolina companies to raise small amounts of capital from friends, family, customers and neighbors in North Carolina.
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It’s not possible to fully summarize the rules here, so it is important for companies and investors to learn more about the limitations and requirements imposed by the rules. The Division will host an open hearing on the rules on Friday, March 17, 2017 at 10:00 am at its offices on Atlantic Avenue in Raleigh. The comment period on these most recent rules begins on March 10 and will continue through March 30. The rules are expected to go into effect on April 1, 2017; however, due to reliance on certain federal regulations, Local Public Offerings may not commence until April 20, 2017. The Local Public Offering rules are scheduled to sunset in three years unless otherwise extended by the Division.
The Division’s efforts on these new rules should be commended. The Division has worked diligently to create rules that balance investor protection and the prevention of securities fraud with the flexibility necessary for North Carolina businesses to be able to utilize the NC PACES Act to raise capital within North Carolina. The changes as currently proposed not only facilitate crowdfunding in North Carolina, but are a major step forward from what the federal government and other states are doing for small businesses. The Division’s commitment to making NC PACES work and getting it right should set North Carolina apart and should have a positive impact on the growth of small businesses and the creation of a more innovative and robust economy across the State.
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© Benji T. Jones 2017