Friday, November 3, 2017

Crowdfunding 101A: Create an Offering

Part I: Creating an Investment Crowdfunding Offering
(Using the NC PACES Act exemption as an example)

By Mark Easley

The NC PACES Act crowdfunding rules have been finalized, and the act is in effect as of April 1st 2017. The NC Secretary of State web site has the rules, forms, instructions and FAQs that startups and small businesses need to start using this new type of intrastate investment crowdfunding financing.
Mark Easley

There is more good news today. An excellent established investment crowdfunding website with experience doing intrastate offerings is supporting the NC PACES Act and other types of investment crowdfunding offerings on their new North Carolina platform. Localstake NC, with headquarters in Indianapolis, has been helping companies make successful intrastate offerings in Indiana, Michigan, and Colorado and they have now brought that expertise to businesses and investors here in North Carolina. Small businesses and startups have used Localstake to raise millions of dollars using the intrastate exemptions and other offering types since 2013. Localstake NC has been certified as a Broker/Dealer in North Carolina and is now open for business to do investment crowdfunding campaigns here. 

An investment platform like Localstake NC provides many useful services to help make your fundraising job easier. They will help with planning your offering, track dollar limits and residency for investors, help develop a target investor outreach program, and handle the investment process procedures like document reviews and signatures, escrow managment, funds transfer, and closing. And after a successful campaign, they will assist with any  reporting required to investors and with payment processing of debt offerings.
How do I put an offering together? 

The first step in putting together an offering is to do some research on how others have done it. The Indiana version of has many good examples of how this works, including companies with products and services in categories like Retail/Wholesale, Food/Beverage, Business Services, Healthcare/Biotech, Manufacturing, Software/Technology, and more.

We can see from the offerings on what is needed to create a good offering. Issuer companies create an offering page which includes a summary description, often a short introductory video about the company, a business plan section describing the product or service, target customers, development process, marketing strategy, management team, competition, and other relevant information for investors. They can also include financial information if they have been in business long enough to have them, or their financial projections if they haven’t.  The issuer should also include info about the use of funds, and the actual investment documentation for investors to review. All of this information is referred to as the company profile, and this is what you will use to attract investors to your offering.

Which exemption should I use? What are the rules?

You can choose an NC PACES exemption, a Reg D 506(b), 506(c), or 504, or Regulation Crowdfunding, or Reg A+ exemption, but keep in mind the rules are different for each of the exemptions. Your attorney and advisors can help you understand the requirements of each.

Let’s look at NC PACES as an example.

If you are using an NC PACES offering, you can build a company profile on Localstake NC for what is called a North Carolina Paces offering (NCPO), or make a website yourself if you prefer to use a smaller offering type called a Local Public Offering (LPO). But the platform or your website has to be compliant with the PACES law and the rules on the NC Secretary of State website, so you should get familiar with those too. Read the FAQs first, then the PACES Act rules to get a good idea how this all works.

Businesses ranging from brand new to mature can make use of the new law for financing. North Carolina based startups and small businesses that want to raise money using the NC PACES Act crowdfunding law (referred to as issuers of an investment offering) will follow the registration, reporting, escrow management, record keeping, promotion, and procedure rules of the PACES Act on the Secretary of State website. Once an offering filing is approved by state regulators, businesses can start raising money using equity or debt offerings to raise up to $2M if they have reviewed or audited financials, and up to $1M if they do not. North Carolina accredited angel investors can invest an unlimited amount, and North Carolina unaccredited retail investors can invest up to $5000 per offering.

PACES allows three different sizes of offerings depending on the amount of money you want to raise, and the rules are slightly different for each.

  • Local Public Offering (LPO) – you can raise up to $250k, and promote the offering in a variety of ways including social media, advertising, and events. You do not have to use the internet to promote or list your offering, but if you do you must have a PACES compliant website. You will still need to follow all the PACES rules, except where the LPO rules provide you with a better alternative that override the normal PACES rules. This is a "do-it-yourself" offering that under the current rules cannot use a registered funding platform or broker/dealer to host the offering. You will create and register the offering and submit the offering docs and marketing plan to the NC Securities Division, and meet with them to get the offering approved before you can launch.

  • NC PACES Offering (NCPO, up to $1M, also called the Invest NC Exemption)  – you can raise up to $1M without audited or reviewed financial statements as long as you give investors financial information required by anti-fraud rules. In this case, you must use a PACES compliant crowdfunding platform like Localstake NC, and you cannot publicly promote the offering other than with a limited tombstone type description that links to the offering website. With this type of offering, the platform will provide the tools and assistance to put the offering together, get it registered with the state regulators, manage the offering campaign, and make sure everything is compliant. In many cases this will be easier and more effective for issuers even if they are raising $250K or less.

  • NC PACES Offering (NCPO, up to $2M, also called the Invest NC Exemption) – you can raise up to $2M if you have GAAP compliant financial statements that have been reviewed or audited by a CPA. Your financial statements must cover the longer of 12 months or the period required by GAAP. In this case, you must have a PACES compliant platform, and you cannot publicly promote the offering outside the platform other than with a limited tombstone type description that links to the offering website.
What type of offering should I do?

NC PACES allows equity or debt offerings of various types, and three popular ones for startups and small businesses are revenue share loans, preferred equity, or convertible note offerings. Whichever type you choose, you will need to work with a securities attorney to help you put together things like disclosure documents, subscription agreements, term sheets, and the state filing forms you will need to do to set up your offering, get it approved, and make sure you are in compliance with the NC PACES securities law rules. If you decide to use Localstake NC, they will help you analyze and build the right type of offering for your company.

A key decision here is your goal for how much will you raise, and what is the minimum amount you need that will help your business achieve your objectives. PACES requires that any funds collected from investors to be kept in an escrow account until the minimum amount is reached. PACES requires that the minimum for an NCPO must be at least 20% of your goal and for an LPO at least 25% of your goal. You can read the issuer and escrow accountFAQs for more information.

You should also make sure your company meets at least one of the requirements in Rule 147A for using an intrastate exemption. The company must establish that it has a meaningful presence within the state by satisfying at least ONE of the following FOUR “doing business” requirements:

·       80% of its revenues come from within the state, or
·       80% of its assets are located in the state, or
·       80% of the funds raised are to be used to fund operations in the state, or
·       a majority of the company’s employees are based in the state.

What’s next?

Part II will cover finding investors for your offering. Part III will discuss investing in private offerings.

Note: Both historical financial statements and financial projections must satisfy the anti-fraud rules of securities laws.  Avoid telling partial truths.  What you omit can create liability if it misleads investors.  Be careful to be reasonable in what you assume when you create projections and tell investors your assumptions so they can determine reasonableness for themselves.

Note: Most North Carolina businesses can use the new law, but your business must satisfy certain requirements for having connections to the state of North Carolina and not be on a short list of excluded types of businesses. See the Issuer FAQS for more info. You must also have a Federal exemption for your offering - SEC Rules 147 or 147A.  Check both Federal and state eligibility requirements before you start planning your offering.

Note: Check with your securities attorney whether non-GAAP financial information you give investors will satisfy anti-fraud rules. All the dollar limits mentioned above are for rolling 12- month periods.

Note: This is just a brief overview of the NC PACES Act process, and is not intended to be legal, financial or investment advice. You should review all the information on the Secretary of State crowdfunding website, and work with a good business attorney to put your securities offering together. If you need help building a profile and putting an online offering together on the crowdfunding platform you may contact Ryan Flynn at Localstake NC. If you need help putting together a crowdfunding campaign such as legal, marketing, accounting, video production, technical product support, and more, please see our Services and Resources tabs on If you have general questions about the NC PACES Act law and rules for the state regulators, you may contact John Maron by email . To stay informed about NC PACES and crowdfunding please subscribe on the upper right to and contact us by email