FAQS About North Carolina Crowdfunding Law (NC PACES Act) and SEC Rule 147

By: Jim Verdonik

 Jim Verdonik

Founder of Innovate Capital Law

http://InnovateCapitalLaw.com/

Contact me at:

JimV@InnovateCapitalLaw.com

(919)616-3225

Check me out at www.YouTube.com/eLearnSuccess
I write a column about business and law for American Business Journals http://www.bizjournals.com/triangle/search?q=%22Jim+Verdonik%22&%20title=

You can purchase my book Crowdfunding Opportunities and Challenges at

http://www.amazon.com/Crowdfunding-Opportunities-Challenges-Jim-Verdonik/dp/1483442802 

I recently provided advice to the State of North Carolina about enacting a state Crowdfunding law.

Here are some FAQs that summarize the resulting North Carolina Crowdfunding statute (a/k/a the NC PACES Act) that was enacted in July 2016.

Proposed changes to SEC Rule 147 , which are important to allow more businesses to use state Crowdfunding laws, are also summarized below.

                                                                                                            

FAQs About NC PACES ACT of 2016 North Carolina Crowdfunding
What is the name of North Carolina's Crowdfunding  law?	The North Carolina Providing Access to Capital for Entrepreneurs and Small Business Act a/k/a the NC PACES Act.
What does North Carolina's Crowdfunding law  do?	This law amends Section G.S. 78A-17 to add a new exemption from the registration requirements of GS 78A-24 for any offer or sale of securities that meets the requirements of G. S. 78A-17.1.  Subject to complying with these conditions, you can raise up to $2 million during any rolling 12-month period.
Can I advertise or conduct a general solicitation to sell securities?	Yes.  This exemption does not prohibit advertising or conducting a general solicitation within North Carolina. All advertising and solicitation must comply with normal disclosure rules.  In addition, offers must be limited to North Carolina residents and only North Carolina residents can purchase securities in the offering.
Is there a limit on how many offers I can make or how many people can buy securities?	No, there are no limits on the number of offers or purchasers within North Carolina.
Can I sell securities to non-accredited investors?	Yes, but non-accredited investors cannot invest more than $5,000 during any rolling 12-month period.	Section 78A-17.1 (a) (4)
Is there a limit on how much accredited investors can invest?	No, accredited investors are not subject to any individual dollar maximum.	Section 78A-17.1 (a) (4)
Can I or someone else form an LLC or other entity to purchase securities in my business and use this exemption to sell securities of the LLC?	No, although such investor syndicates have become a common way to conduct Rule 506 (c) offerings, the North Carolina statute does not allow such syndicates to use this Crowdfunding exemption, because they are private investment companies, unless rules to be issued by the Securities Division permit such investor syndicates. Permitting such investor syndicates is one of the primary things we can do to improve this law.	Section 78A-17.1(a) (6)
How much money can I raise without providing GAAP audited or reviewed financial statements?	You can raise up to $1 million during any rolling 12-month period without providing GAAP audited or reviewed financial statements, if you do not already have such financial statements. However, disclosure rules would require you to provide investors with GAAP compliant financial statements, whether they are audited or not, if the information is material.  Consult your lawyer about whether GAAP compliant financial statements are material to your business.	Section 78A-17.1 (a) (3) a
How much money can I raise, if you provide GAAP audited or reviewed financial statements for most recent fiscal year?	You can raise up to $2 million during any rolling 12-month period if you provide GAAP audited or reviewed financial statements for most recent fiscal yea	Section 78A-17.1 (a) (3) b
Can you also raise additional capital above these maximums from company insiders under this exemption?	Yes, amounts sold to Controlling Persons of the issuer (officers, directors, partners and holders of 10% of any class of securities) do not count toward either the $1 million or the $2 million maximums discussed above.  Sales to other insiders would count toward the maximum, unless you have another exemption for such insider sales.	Section 78A-17.1 (d)
Can I raise more money during the same 12-month period by conducting an offering using another offering exemption?	Yes, under some circumstances you can conduct multiple offerings using other Federal or state exemptions. Each offering must fully comply with the all conditions of one or more offering exemptions.  That means you would not have an exemption for all the sales in the offering if some offers or sales comply only with this exemption and other offers or sales only comply with different exemptions.  This would make it difficult to conduct a contemporaneous offering in North Carolina using an exemption from registration that prohibits general solicitations. However, depending on rules issued by the Securities Division, you may be able to raise more money during the same 12-month period (i) in an offering conducted in North Carolina before the offering and (ii) in any offering conducted outside North Carolina, whether before during or after the offering that uses the North Carolina Crowdfunding exemption. What constitutes the same offering or a different offering is a complex legal and factual issue.  Consult your lawyer before trying to raise money in two offerings	Section 78A-17.1 (d)
Is there any restriction on who can purchase securities in the offering?	You must obtain evidence from all purchasers that they are residents of North Carolina. If you want to accept more than $5,000 from any investor during any rolling 12-month period, you must obtain evidence that the purchaser is an accredited investor.	Section 78A-17.1 (a) (9) a
Do I have to report information about my business to anyone after the offering?	Yes.  You must provide quarterly reports to investors and the Securities Division until the securities are no longer outstanding.  For this reason, many state crowdfunding issuers sell debt securities or revenue share interests that terminate after a period of time. Quarterly reports can be posted on a Website.  Quarterly reports must contain executive compensation and an analysis of the issuer's business operations and financial condition, but full financial statements are not required, unless later rules to be issued by the Securities Division require them.	Section 78A-17.1 (c)
Can I take money directly from investors?	No.  All investor money must be deposited into an escrow account. Escrow agents must report the receipt of funds to the Securities Division and issuers must provide quarterly reports to investors. The escrow agent must a bank or other depositary institution located in North Carolina or that is approved by the Securities Division.	Section 78A-17.1(a) (10)
Is there a minimum amount you must raise to hold a closing?	The statute does not specify a minimum, but the issuer must disclose a minimum to investors and a date after which investors can withdraw funds from escrow if the issuer fails to meet the minimum.  The issuer must file with the Securities Division a copy of an escrow agreement that requires the escrow agent to hold all funds until the minimum is met and that allows investors to withdraw if the minimum is not met before the date disclosed to investors.	Section 78A-17.1 (a) (5) c
Do I have to offer or sell through an Internet Website?	No.  Use of an Internet Website is optional.  You can advertise or solicit any way you want and you can deal directly with investors, but the money must the held in escrow as described above.  Federal rules about making offers outside the state and the laws of other states may limit your advertising and solicitation activities. Websites that specialize in Crowdfunding offerings are likely to be useful in handling closing logistics even if you solicit investors through other means. For example, such websites will ensure legal compliance by arranging for an escrow agent to accept ad hold investor money and collecting information about investors required to comply with the law, such as residency and whether or not they are accredited investors.	Section 78A-17.1 (a) (9)
If I choose to use an Internet Website, can I choose any Website?	Only Websites that are owned by an entity that is organized under NC law or authorized to do business in North Carolina can conduct offerings.  The Website operator must register with the Securities Division, unless the Website is exempt under Section 78A-17.1 (a) (11) Website operators must maintain offering records and provide access to the Securities Division.	Section 78A-17.1 (a) (12)
Can I pay a commission to people to sell securities in the offering?	Both Federal and state law (G.S. 78A-36) require people who sell securities for compensation to register.  Officers and directors of issuers are exempt from registration, if they do not directly or indirectly receive commissions or other compensation for offering and selling securities. You should consult with your attorney about who you can compensate and the nature of the compensation.	Section 78A-17.1 (a)
Who can use this exemption from registration?	Issuers must be a business entity formed under NC law and/or registered with the NC Secretary of State. This means an entity organized in NC or in Delaware or other state can use the exemption if it is qualified to do business in NC, subject to complying with Section 3 (a) (11 or SEC Rule 147 discussed below. Businesses that have a Covered Person who has committed Bad Actor violations under Federal law cannot use the exemption, unless the Securities Division grants a waiver. Companies that cannot use the exemption include (i) public reporting companies (ii) investment companies, and (iii) companies that are not investment companies because of Section 3 (c) of the Investment Company Act. Unfortunately, this provision about exempt investment companies excludes the use of single purpose vehicles (SPVs) and investor syndicates that are widely used in SEC Rule 506 offerings and that are proposed to be permitted in Section 4 (a) (6) offerings by the Fix Crowdfunding Act.  This limitation is one of the biggest drawbacks of the law. In addition, many businesses are excluded from using the exemption because of Section 3 (a) (11) or SEC Rule 147 as described below.	Section 78A-17.1 (a) (1) Section 78A-17.1(a) (6)
What Federal Exemptions must cover the offering?	The NC statute requires the offering to comply with Section 3 (a) (11) and/or SEC Rule 147. Section 3 (a) (11) is broad but ambiguous: "Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory." Because most issuers were reluctant to risk liability on such an ambiguous exemption, the SEC issued Rule 147 to provide a safe harbor for complying with section 3 (a) (11). Rule 147 is very narrow, which means many businesses do not qualify to use the current version of Rule 147.  The restrictions include that the issuer must be organized in the state, must have its principal office in the state and must satisfy all three 80% tests: -          80% of consolidated revenue are derived from the state -          80% of consolidated assets are located in the state -          80% of offering proceeds will be used in the state SEC has proposed to amend Rule 147 to update it to reflect modern business practices, because today even many small businesses conduct substantial inter-state and international business. See the table below for comparison of existing Rule 147 to the proposed amendment.	Section 78A-17.1(a) (2)
Do to have to file any disclosures with the Securities Division of the NC Secretary of State?	Yes.  At least ten (10) days before you can begin to make any offers or use any publicly available Web site in the offering, you must  file with the Securities Division a $150 filing fee, a notice of claim for the exemption and a disclosure document that includes: -          a description of the business -          names of 10% owners of any class of securities of the business -          names and experience of the management team and directors -          description of the securities being offered, including the percentage ownership and implied valuation -          identity of agents or others who will sell the offering (including any Web sites) and their compensation -          Names URLs and addresses of any Websites that will be used -          description of any litigation or legal proceeding involving the issuer or its management team	Section 78A-17.1 (a) (5) a and b
What other information should disclosure documents contain?	Disclosure documents must include other material information consistent with normal securities disclosure practices (including risk factors) in light of the sophistication level of investors required by G. S. 78A-8 and Federal securities laws.	Section 78A-17.1 (a) (13)
Who has to see the disclosure document?	Disclosure documents must be provided to offerees, purchasers and the Securities Division. Rules issued by the Securities Division about updating disclosure documents will be important to determining offering efficiency.  For example: -          Does the issuer have to file every update before disclosing updates to investors? -          How long do updates have to be provided before closing? -          What are the procedures for investors withdrawing money previously deposited in escrow after an update?

COMPARISON OF SEC RULE 147 ISSUED IN 1974 AND PROPOSED NEW RULE 147 (Proposed October 30, 2015)
ISSUE	1974 RULE 147	2015 PROPOSED RULE 147
Relationship to Section 3 (a) (11)	Constitutes a safe harbor for compliance with Section 3 (a) (11)[1]	Creates a new exemption under Sections 28 of the 1933 Act and does not rely on Section 3 (a) (11).
Limits on Amount Raised	Issuers can raise unlimited amounts.	No limit on amounts issuers raise, if the offering is registered in the state where the offering is made.[2]  If the offering is not registered, issuers can only use proposed Rule 147, if they comply with a state exemption from registration that (i) limits sales to $5 million in any 12-month period and (ii) limits the amount each investor can invest in such exempt offerings.[3]
Offers	Offers must be confined to one state, which creates issues about Internet and other advertising.[4]	Only sales must be confined to one state.  The proposed rule specifically authorizes advertising and general solicitations and leaves the issue of where offers occur to state laws,[5] but requires issuers to use legends that notify investors that sales will be to residents of the issuer's state.[6]
Issuer Incorporation	Requires that issuers be organized in the state where the offering is being conducted.	Permits issuers to be organized in any state.[7]
Principal Office or Principal Place of Business	Requires that the issuer's principal office be in the state where the offering is being conducted, but does not define principal office.[8]	Requires that the issuer's principal place of business be in the state where the offering is being conducted.  The principal place of business is in the state in which the "officers, partners or managers of the issuer primarily direct, control and coordinate the activities of the issuer."[9]
Conducting Business in the State	Requires issuers to conduct business in the state where the offering is being conducted.	Requires issuers to conduct business in the state where the offering is being conducted, but has a more flexible definition of what constitutes doing business in the state,[10]
Test for Conducting Business.	Three-part test based on 80% of consolidated, revenue, assets and uses of offering proceeds.  Issuer must satisfy all three parts of the test: -          80% of consolidated revenue are derived from the state -          80% of consolidated assets are located in the state -          80% of offering proceeds to be used in the state	Four-part test that adds the location of a majority of the issuer's employees to the 80% of consolidated revenue, assets and uses of offering proceeds tests.  Issuer only needs to satisfy one of the four criteria of the test.  [11]
Ability to Change States	Would have to reincorporate, move the principle office and change where satisfy all three 80% tests for doing business.	Some issuers will be able to satisfy the doing business test in more than one state and could do offerings in different states if they change the location of the principle place of business.  The proposed rule would prohibit issuers who change the state where their principal place of business is located from doing a Rule 147 offering in their new state until nine months after the last sale in the Rule 147 offering conducted in their prior state.[12]
Preempt State Registration Laws	No	No
Integration	No special integration rule, except that offerings separated by six months will not be integrated.[13]	Safe harbor excludes integration with (i) any prior offerings, (ii) Regulation A offerings, (iii) Regulation Crowdfunding offerings made under Section 4 (a) (6), (iv) employee benefit plans and Regulation S offerings and (v) offerings made six months after completion of the Rule 147 offering.  Also relaxes integration for certain registered offerings.[14]  Issuers can conduct contemporaneous offerings using other exemptions, if each offering complies with its own exemption.
Investor Residence	Requires all investors to be residents of the state where the offering is made and requires issuers to obtain written representations from investor about residency.[15]	Issuers must have a "reasonable belief" each investor resides in the state where the offering is being made.[16]  No requirement to obtain written investor representations about residency, but reasonable belief may require more than investor representations.
Re-sale Restriction Period for Investors	9-month holding period for re-sales outside the state begins when the issuer completes the offering.[17]  Creates problem that investor often does not always know when the issuer completes the offering.	9-month holding period for resales outside the state starts when the investor purchases the securities,[18] which is in the investor's knowledge and control.
Legend Requirements	Yes[19]	Yes[20]
Stop Transfer Instructions	Yes[21]	Yes[22]
Disclosure of Transfer Restrictions Required	Yes[23]	Yes[24]

---

[1] 230 C.F. R. § 147 (a)

[2] Proposed Rule 147(a) (1)

[3] Proposed Rule 147(a) (2)

[4] 230 C.F. R. § 147 (a)

[5] Proposed Rule 147(b)

[6] Proposed Rule 147(f)  (3)  "The proposed amendments would eliminate the current restriction on offers, while continuing to require that sales be made only to residents of the issuer's state or territory."  Proposed Rule Amendments to Facilitate Intrastate and Regional Securities Offerings SEC Release No 33-9973 (October 30, 2015) (80 Fed.  Reg. 69,785) between fn 10 and fn 11

[7] Proposed Rule 147(c) (1) and Proposed Rule Amendments to Facilitate Intrastate and Regional Securities Offerings SEC Release No 33-9973 (October 30, 2015) (80 Fed.  Reg. 69,785) at fn 44

[8] 230 C. F. R. § 147 (c) (1) (i)

[9] Proposed Rule 147(c) (1)

[10] Proposed Rule 147(c) (2)

[11] Proposed Rule 147(c) (2) (iv)

[12] Note 1 to Proposed Rule 147(c) (1)

[13] 230 C.F. R. § 147 (a) (a) (2)

[14] Proposed Rule 147(g)

[15] 230 C.F. R. § 147 (f) (1) (iii)

[16] Proposed Rule 147(d)

[17] 230 C.F. R. § 147 (e)

[18] Proposed Rule 147(e)

[19] 230 C.F. R. § 147 (f) (1) (i)

[20] Proposed Rule 147(f) (1) (i)

[21] 230 C.F. R. § 147 (f) (1) (ii)

[22] Proposed Rule 147(f) (1) (ii)

[23] 147(f) (3) (230 C.F. R. § 147 (f) (3))

[24] Proposed Rule 147(f) (3)

Pursuing Happiness Below the Rim

By: Jim Verdonik

Jim Verdonik

Founder of Innovate Capital Law

http://InnovateCapitalLaw.com/

Contact me at:

JimV@InnovateCapitalLaw.com

(919)616-3225

Check me out at www.YouTube.com/eLearnSuccess
I write a column about business and law for American Business Journals http://www.bizjournals.com/triangle/search?q=%22Jim+Verdonik%22&%20title=

You can purchase my book Crowdfunding Opportunities and Challenges at http://www.amazon.com/Crowdfunding-Opportunities-Challenges-Jim-Verdonik/dp/1483442802 

(The post is from as article that was first published on July 1, 2016 by Triangle Business Journal)

As we enter the height of the Political Tension Season (PTS) (sounds like a disease doesn't it?), I like to remind myself and others that what seems so very important today often turns out to be insignificant in the grand scheme of things.

This article is my attempt to take a deep breath and try to live my life with some balance and perspective based on common values that stand up over time.

Every July 4th I write about incorporating American values into our businesses.  Usually, I start with something from the Declaration of Independence or the Constitution.  But are these old documents still relevant to American values?

I recently rafted the Grand Canyon to find out.

What better way to learn whether Americans still value the unalienable rights that Nature and Nature's God endowed us with and that were self-evident to Jefferson's generation of Americans than spending a week with thirty follow Americans and a Swiss ferryboat captain on two insignificant pieces of rubber running the rapids that carved 277 miles of canyon through mile-deep rock? 

Let’s talk about our entrepreneurial river guides (Greg, Andy, Sally and Cowboy) who shared their grand home with 28 Greenhorns.  Because they had a simple business plan (go down the river), they didn’t waste time on meetings about strategic direction.  Rafts can't go up rapids and can't climb canyon walls.  Starting the journey was a 277 mile commitment.  America started with commitments by the people who signed the Declaration of Independence, who faced hangman's nooses if they lost the War for Independence.

Like America's Founders, our guides gave us few rules: maintain basic sanitation practices, load and unload the rafts and don’t block their vision when running rapids.  Except for these basic rules, we were free to pursue our happiness any way we wanted. 

So, what happens when modern Americans are given this much Freedom?  Is it chaos or paradise?  Who knows what someone else might do, but here’s how one group of Americans used their Freedom to pursue their happiness.

• GAKs.  People inflicted Gratuitous Acts of Kindness on one another too numerous to count.
• Volunteering.  Twice each day we lined up to load and unload rafts handing bags and other items from person to person.  More people volunteered for bag line duty than were needed.  One happy camper declared that the bag line was her favorite part of the trip.

• Group Culture and Acceptance.  One large family and their friends constituted most of our group.  The family adopted the rest of us and their family culture became the prevailing culture of the expedition.

• Adventure Creates Happiness.  Running rapids, walking under waterfalls and hiking up canyon trails provided the challenges we miss in our day jobs.

• Sophistication is Skin Deep.  Despite having no children on the trip, we held massive shadow puppet shows on the canyon walls, taught a Swiss ferryboat captain how to play Simon Says and held races assembling and disassembling camping equipment.  (Beer helps)
• Nature and Nature's God Makes Politics Insignificant.  Watching planets and stars in the night sky from a mile deep canyon stimulated the closest thing to political debate when we vowed to “Make Pluto Great Again.”

Of course, when we emerge from the canyon and rejoin life “Above the Rim,” we find a more complicated world.  But we can improve that world, if we apply the lessons we learn about how Americans behaved in 1776 and still do today when given the opportunity.

If Sally, Cowboy, Andy and Greg can pursue their happiness every day "Below the Rim," we have only ourselves to blame if we don’t promote the pursuit of happiness by ourselves and the people we live and work with. 

What is stopping you from making your business GRAND like the Canyon?

Happy July 4^th to us all, including the Swiss Ferryboat captain!

Why Are State Crowdfunding Laws Still Useful After Federal Crowdfunding?

By: Jim Verdonik

Jim Verdonik

Founder of Innovate Capital Law

http://InnovateCapitalLaw.com/

Contact me at:

JimV@InnovateCapitalLaw.com

(919)616-3225

Check me out at www.YouTube.com/eLearnSuccess
I write a column about business and law for American Business Journals http://www.bizjournals.com/triangle/search?q=%22Jim+Verdonik%22&%20title=

You can purchase my book Crowdfunding Opportunities and Challenges at http://www.amazon.com/Crowdfunding-Opportunities-Challenges-Jim-Verdonik/dp/1483442802 

The SEC's Regulation Crowdfunding became effective on May 16, 2016.  Unaccredited investors can now invest in offerings on investment platforms.  There are now four new Federal Crowdfunding exemptions that allow you to advertise offerings.

Having so many new Federal capital-raising alternatives raises the question:  Do we still need state crowdfunding laws?

Let's answer that question from three perspectives:

• Investors
• Securities regulators
• Businesses Raising Capital
  People and Communities are the Biggest Reason for State Crowdfunding
  State Crowdfunding laws are needed for reasons that have little to do with technical legal rules.

• People like the idea of investing in their neighbors' businesses.
• People like reinvesting in their own communities.
  This should come as no surprise.  People like to buy fresh locally grown fruits and vegetables.  People like to drink local craft beers.  People like to root for their local high school or college team even though professional athletes are bigger, faster and stronger.  People like local live concerts by musicians who don't have a national audience.
  Collectively, we call these things our local culture.  Laws that make it difficult to create a healthy local culture are bad, but that is what securities laws have been doing for decades.  Securities laws divert money away from local communities to international money centers.
  State Crowdfunding laws that legalize platforms that are limited to local businesses simply help investors find the local investment opportunities they want.
  State Crowdfunding laws are the equivalent of state run farmers markets.  They bring together local buyers and sellers in an identified safe place.
  Isn't it foolish for state government to get in the way of people building and investing in their local communities?
  Why should it be easier to invest in a business that is halfway around the world than one that is in the next town?
  Market Opportunity for States to Get Back Into the Game
  State securities regulators have been underutilized for the past two decades, because most securities offerings use Federal exemptions that preempt state laws that require offerings to be reviewed by state securities administrators. 
  The old state regulatory system is so antiquated that people almost always choose to avoid it, if they can.
  The surprising thing about state Crowdfunding laws is that the biggest proponents of state Crowdfunding laws should be people who want to increase state regulation of securities offerings, because state Crowdfunding offerings are reviewed by state securities regulators before businesses can sell securities.
  Why would anyone think that regulators reviewing securities offerings would put investors at risk? 
  Of course, modern state securities regulation requires both carrots and sticks.  The old saying is that: "You can lead a horse to water, but you can't make it drink."
  That's the way securities modern laws work.  You have to have carrots to entice businesses to use the state system.  These carrots primarily involve offering alternatives to some of the imperfections of the Federal Crowdfunding laws we discussed below. 
  Imperfections of Federal Laws for Businesses Raising Capital
  If the four new Federal Crowdfunding laws were perfect, then most business would refuse to enter the state crowdfunding system.
  But who ever heard of a perfect law?
  Each of the Federal Crowdfunding laws lacks some attributes that are useful to some types of issuers: 

• Rule 506(c) does not allow sales to non-accredited investors.
• SEC rules and review processes for both Tier 1 and Tier 2 Regulation A offerings are both expensive and time consuming.
•  Tier 2 of Regulation A and Regulation Crowdfunding impose ongoing reporting requirements on issuers that are expensive and may harm their ability to compete by making public information their competitors can use against them.
• Tier 1 of Regulation A does not pre-empt state registration laws.
• Regulation Crowdfunding allows you to raise only $1 million per year.
• Regulation A and Regulation Crowdfunding have expensive financial statements requirements beyond the normal securities rules about disclosing material facts.
  Virtues of State Crowdfunding laws
  Luckily, we have a Federal system of government where the states have the power to experiment with new laws.  State Crowdfunding laws are imperfect, but they offer some advantages to some businesses:

• Allow unaccredited investors to invest, unlike SEC Rule 506 (c).
• Are much cheaper to comply with than SEC Regulation A.
• Allow businesses to raise more than $1 million, unlike Regulation Crowdfunding.
• Allow businesses to make greater sales efforts outside a technology platform to attract investors to their offering, unlike Regulation Crowdfunding.
• Have greater flexibility than Regulation A or Regulation Crowdfunding for businesses to give investors the types of financial statements that smaller businesses actually prepare to use to run the businesses. 
  In summary, most businesses will use the Federal Crowdfunding exemptions, but there are good reasons to add state Crowdfunding to the list of capital-raising choices.
  
  

Crowdfunding: Closing the Capital Raising Gender Gap without Really Trying

By: Jim Verdonik

Jim Verdonik

Founder of Innovate Capital Law

http://InnovateCapitalLaw.com/

Contact me at:

JimV@InnovateCapitalLaw.com

(919)616-3225

Check me out at www.YouTube.com/eLearnSuccess
I write a column about business and law for American Business Journals http://www.bizjournals.com/triangle/search?q=%22Jim+Verdonik%22&%20title=

You can purchase my book Crowdfunding Opportunities and Challenges at http://www.amazon.com/Crowdfunding-Opportunities-Challenges-Jim-Verdonik/dp/1483442802 

(this article is based on my article that was first published by Triangle Business Journal on May 5, 2016)

I've always been fascinated by the unintended consequences of tools.  Toolmakers often start out trying to achieve a specific goal, but when people start using the tool they sometimes find that its useful for many other purposes.

Crowdfunding illustrates this point.  Designed as a capital-raising tool, we are just beginning to see some of the many socio-economic effects.

In researching my book Crowdfunding Opportunities and Challenges (Thompson Reuters), I found early statistics showing that Crowdfunding makes it easier for women entrepreneurs to raise money. 

 Early statistics were startling.  Women led businesses get:

• 4% of SBA loans
• 7% of venture capital investments
• 34% of online capital

The Crowdfunding success rate of 52% for women was higher than the 39% success rate for men.  Women were also getting higher valuations.  But the men also benefitted.  Crowdfunding success rates and valuations are higher for both men and women compared to traditional capital-raising.  So, Crowdfunding is a rare win-win solution. I note these Crowdfunding statistics were based on only one large Crowdfunding platform – CircleUp.  But even assuming the statistics are not representative of all platforms, something startling seems to be going on in the Crowdfunding world. 

Crowdfunding's designers probably didn't know they were unleashing a force that could close the capital-raising gender gap, but that may be just one of the  big unintended consequences.

 So, what's going on Online?  Why is this happening?

One thing is that CircleUp attracts a lot of consumer products entrepreneurs and investors.  It has very few technology plays dominated by engineers and Silicon Valley nerds.  Maybe Crowdfunding is like the investor version of Home Shopping Network.  Will Home Shopping Network seize the opportunity to become an investment marketplace too?

Successful Crowdfunding offerings use videos and social media to generate investor interest.  Seeing the actual product and how consumers use it is probably a better selling tool than trying to describe a new software product or medical device.

Each investor in Crowdfunding deals usually invests a smaller amount per investor than traditional capital raising deals.  The Crowd seems to love giving small amounts to women entrepreneurs.  The beauty of Crowdfunding is that small amounts from lots of people can create big wads of cash for entrepreneurs.

It will be interesting to see whether the same holds true for minority entrepreneurs.

Wouldn't it be amazing if one of the unintended consequences of this new Crowdfunding tool achieved what all the conferences, articles and laws that focus on closing the gender gap couldn't to?  Just think of all the time and money spent going in the wrong direction.  When you are lost in the forest, having a good sense of direction matters more than having good intentions.

This raises a question:  Why has it taken so long for Crowdfunding to come?  Neither the technology nor the business model is really new.  Crowdfunding is just selling something on the Internet.  People have been doing that for decades.  Why didn't we close the gender gap twenty years ago?

The answer, of course, is that securities laws made Crowdfunding illegal until recently.  So, we have the strange situation that the same Government that promotes gender equality made it illegal to use a tool that may outperform all Government programs designed to create equality.

This brings us to my home state - North Carolina.  More than 30 states have legalized Crowdfunding, but North Carolina is still sitting on the sidelines watching.  It's time to pass the NC PACES ACT that will legalize state Crowdfunding in North Carolina.

Bob Dylan said: "Get out of the way if you can’t lend a hand."  That's a good motto for Government to live by every day.
Ronald Regan said:  "Mr. Gorbachev tear down that wall."
The times won’t be changing if we don't tear down the walls Government builds.
If two very different leaders like Dylan and Reagan both agree, then why does North Carolina still have a legal wall between entrepreneurs and investors?   

Mother's  Day is a few days away.  So, for Mother's  Day 2016, how about giving the Mothers of North Carolina what they really need:  Crowdfunding to grow their businesses.  Your Mom would be so proud of you if you do.  Who knew your Mom would turn out to be such a free market Libertarian?