Business

Crowdfunding could become reality for N.C. businesses, but questions remain

Dan Roselli, co-founder of Packard Place and QC FinTech, Packard Place's 12-week startup incubator and accelerator program. QC FinTech is currently raising $300,000 from accredited investors. If ordinary investors were allowed to chip in, nine startups at QC FinTech could raise $50,000 to $100,000 more from the public, said Roselli.
Dan Roselli, co-founder of Packard Place and QC FinTech, Packard Place's 12-week startup incubator and accelerator program. QC FinTech is currently raising $300,000 from accredited investors. If ordinary investors were allowed to chip in, nine startups at QC FinTech could raise $50,000 to $100,000 more from the public, said Roselli. dtfoster@charlotteobserver.com

Average citizens in North Carolina soon could buy shares in local businesses the way wealthy investors do now – if one of the competing bills on “equity crowdfunding” becomes law.

Supporters say the state would be more attractive to startups: Such regulations could lower fundraising costs by letting businesses advertise offerings online and to everyday people, not just accredited investors with high incomes or net worth.

Still, equity crowdfunding in North Carolina has a long way to go: First the state has to pass one of at least three proposals in the legislature. Then it will take time, experts say, for the public and businesses to learn about the investing method before they get comfortable enough to participate.

N.C. House Speaker Tim Moore told the Observer he expects the state legislature to pass an equity crowdfunding bill before the end of September.

“We believe crowdfunding is a viable way to raise capital for businesses in North Carolina, and I think by the end of this session you will see some legislation that does it,” Moore said.

State Commerce Secretary John Skvarla said the need for such law is urgent.

“Let’s all get on our knees and pray that it happens,” he told the Observer. “We need crowdfunding ... the longer we wait, the more opportunities we are going to potentially miss.”

As of June, 23 states and Washington, D.C. had passed laws allowing small companies to advertise and sell shares to people in their state, according to Anthony Zeoli, attorney at Chicago-based Ginsberg Jacobs LLC and secretary of crowdfunding Professional Association.

Devin Bosch, a Charlotte investor, said he knows at least three technology startups that have left the state for a better chance to raise capital in areas like Silicon Valley and New York City.

Those places with higher costs of living naturally house more accredited investors, Bosch said, but an equity crowdfunding law could level the field for Charlotte. Dan Roselli, co-founder of a local incubator program, QC FinTech, has an example.

Were the public allowed to chip in, nine startups at QC FinTech could raise $50,000 to $100,000 more from the public, said Roselli. The program is currently raising $300,000 from accredited investors.

“I think it will change how people look at Charlotte. I think we will leapfrog dozens of communities in terms of really cool places for startups to come,” he said.

Equity crowdfunding might soon be open to everyone, but investing in a small business is extremely risky – half of all the startups are expected to close in two years, Roselli said. The trick for seasoned investors is to pick the one or two companies that make it big and generate all the returns for the entire portfolio. That could be harder for those new to investing in small businesses.

Two models

At least four bills have called for equity crowdfunding in the state, including one that languished in the last legislative session. The three bills this session follow two different models.

Senate Bill 481 would allow businesses to raise up to $1 million per year from the general public, disclosing internally prepared financial statements that comply with generally accepted accounting principles. Or a company could issue reviewed or audited statements and raise $2 million.

One investor could buy up to $5,000 worth of shares of a company, which has to have at least 80 percent of its assets, 80 percent of its revenues and 80 percent of its operations in North Carolina under federal law.

The bill was filed in March and has been in the Committee on Finance since April. That should be its last stop before being voted on the Senate floor and heading out to the House, where it will go through another cycle of vetting and voting, said Senator Tamara Barringer, R-Wake, one of the bill’s primary sponsors.

“I don’t have any anxiety ... It’s going through the usual legislative process,” Barringer said.

In the House, Bill 14 is very similar. But House Bill 63 takes a different route – allowing crowdfunders to raise unlimited amounts of money. Both bills haven’t progressed since February, according to state records.

Tom Vass, CEO of The Private Capital Market Inc., a Wilmington-based crowdfunding consulting firm, said “no CEO in the right mind” would crowdfund under the Senate proposal or House Bill 14 if passed, he said. He believes those two are too restrictive.

Security laws are intentionally broad to protect investors from false and incomplete disclosures, said David Massey, the state’s deputy securities administrator who helped write the two similar bills.

Will it work?

Equity crowdfunding is only slowly gaining popularity in most states that have passed laws allowing the practice. Existing platforms like EquityEats in Texas and D.C., Hatch Oregon, SterlingFunder in Georgia, and CraftFund in Wisconsin each have had just no more than a handful of successful campaigns.

Since the site launched in October, CraftFund has put out three listings. Two reached their goals, each raising $70,000 and $20,000, Founder David Dupee told the Observer. Similar to KickStarter, companies on the platform get nothing if they fail to reach the target.

SterlingFunder stopped listing new companies after two years and only one successful campaign, co-founder David Lilenfeld said. One of the problems is investors in the platform’s target group lack awareness of equity crowdfunding.

Businesses can be cautious with the new fundraising tool – although it’s cheaper than having to register with the SEC to list offerings publicly, it’s not free. Platforms typically charge $500 to $1,500 per listing, Dupee said. Reviewed financial statements can easily cost $10,000, and audited statements even more, said certified public accountant Tom Fagley at Raleigh-based Hughes Pittman & Gupton LLP.

Companies can cut costs by preparing those statements internally, but “it creates potential disclosure liability issues for businesses that try save money by winging it,” said Jim Verdonik, securities lawyer at Raleigh-based Ward and Smith P.A.

Crowdfunders are also limited because state laws only allow advertising to residents within their state, making it tricky for businesses to campaign on social media, Dupee said. He is “hopeful” that the SEC will soon finish writing up national rules, three years after the JOBS Act tasked it to do so.

Meanwhile in North Carolina, crowdfunding enthusiasts have built multiple platforms – but most are either “just sitting there,” like the one Investor Devin Bosch created, or open to accredited investors only, like Malartu, where QC FinTech launched its $300,000 campaign.

Malartu co-founder Jon Spinney said a North Carolina crowdfunding law could help local businesses and investors.

“You start to see crowdfunding in its truest form ... local folks investing in local businesses,” he said.

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What is equity-based crowdfunding?

Like Kickstarter, where a group of people contribute to a funding campaign and get gifts, products or “thank you” emails, equity-based crowdfunding is a way of raising money for small businesses from a group of people who buy shares of the company’s ownership.

Who’s allowed to invest now?

Accredited investors include individuals making at least $200,000 a year, $300,000 with spouse, or worth at least $1 million.

What do the proposed laws change?

An equity-based crowdfunding law would allow businesses in North Carolina to advertise their offerings online to the general public, not just accredited investors.

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