Crowdfunding for Business, Part II: North Carolina’s PACES Act

November 22, 2016
CLARK.LAW

This article is a continuation of a recent entry: “Crowdfunding: The Newest Way to Fund Your Business Venture, Part I
We recently introduced you to the JOBS Act, which, among other things, allows crowdfunding for companies through the Internet using donors who are not accredited investors. Despite the JOBS Act being adopted in 2012, it was not until very recently that the Securities and Exchange Commission (SEC) finalized its rules implementing the Act. Due in part to the SEC taking so long to create and publish this guidance, many states decided to implement crowdfunding statutes to benefit their residents. North Carolina’s act, the Providing Access to Capital for Entrepreneurs and Small Business Act (PACES), is one such collection of laws.
The PACES Act is similar to the JOBS Act with respect to limits on funding and reporting requirements. At its heart, though, it is meant to be an alternative to the JOBS Act, not a supplement. Right now given the relative novelty of the JOBS Act rules and the PACES Act (which doesn’t even have rules yet) it ‘s hard to predict how North Carolina entrepreneurs will approach crowdfunding in the near future.
Under PACES, North Carolina companies can raise up to $1 million from North Carolina resident investors in a 12-month period. That level is increased to $2 million for North Carolina companies who offer financial statements that have been reviewed or audited. Regardless of which limit is pursued, the North Carolina company must provide the potential investor with a business plan, financials on the enterprise, and a declaration of risk. These limits are lower than those authorized by the federal JOBS Act.
Companies that choose to offer equity via PACES will be allowed to advertise their offerings publicly through websites, as well as traditional marketing materials or third parties upon filing notice and disclosures with the North Carolina Secretary of State’s Office. They must also pay a small fee.
Individual investors do not need to be accredited to participate; however, they must be North Carolina residents. Non-accredited investors are capped at an investment of $5,000 per company per 12-month period. Accredited investors have no such limits. Also, investors must certify in writing at the time of the sale that they understand that there are risks associated with unregistered securities, including loss of their entire investment.  
The most notable differences between JOBS and PACES are the amounts that can be raised and the limits on both accredited and non-accredited investors. Companies can raise more money through JOBS, but investors are also more limited in their maximum investments. Under PACES, companies cannot raise as much, but accredited investors are not bound by any limits on investing.
Crowdfunding offers an exciting opportunity for new businesses.  In a future article, we will provide some guidance to help new companies determine how much money to raise, and when.

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