Steve Reaser, co-founder of Funding Launchpad, had told us some weeks back that folks in North Carolina were working on an investment crowdfunding bill, one that would not – hopefully – repeat the mistakes made by the US Congress when they gutted Rep. Patrick McHenry's successful (in the U.S. House, that is) and White House-endorsed crowdfunding bill.
Well, Steve now tells us that North Carolina state legislator Tom Murray, with other co-sponsors, has introduced a crowdfunding bil l in the current session of the North Carolina General Assembly.
If passed, it would establish an exemption for small offerings by North Carolina businesses to North Carolina residents.
The bill is brilliant. It's as if the sponsors deconstructed all the problems of the federal crowdfunding exemption under Title III of the JOBS Act, determined not to throw all caution to the wind, but indeed to give crowdfunding a fair chance as a means by which startups and small businesses might raise investment capital.
Features of the North Carolina bill that make the exemption workable and thus worthy of support as a promising experiment:
1. No sliding scale and no need to inquire as to a non-accredited investor's net worth, income, etc. Instead, there is a flat $2000 investment limit for non-accredited investors, per issuer. The bill thereby not only bypasses the inordinate confusion around Title III's individual investment limitations, it also keeps issuers and portals out of unnecessary trafficking with sensitive personal financial information of every investor. Brilliant (and much simpler than my Individual Crowdfunding Account proposal).
2. Audited financials are not required to raise up to $1 million. If an issuer has audited financials, the limit is $2 million, not $1 million.
3. The bill proposes to expressly protect issuers and entrepreneurs from lawsuits, except in the case of fraud. This is exactly the right call and absolutely essential in order to give an investment crowdfunding exemption a fair chance to prove it can work.
4. Regulators are given the authority to promulgate regulations that would construe the law, but regulators are not required to actually write regulations before the law would be effective. This is very smart. It means the bill, if passed, would become law and go into immediate effect, and would permit regulators to shape rules after the fact, and over time, in light of ongoing experience with actual use of the exemption.
5. There is no pre-filing notice requirement. Brilliant. Instead, notice is required once a 25th investor has signed on, or before general solicitation occurs, whichever is earlier. This appears to be designed to permit issuers to experiment, or quietly "test the waters." (That said, the bill would require websites raising money in reliance on the exemption to declare themselves to the state's securities regulators in advance.)
Like the crowdfunding bill introduced in Washington State, the North Carolina bill is designed to fit within a federal exemption for intrastate offerings. Note the theme we are developing here this week - the big, $100 million note offering from an affiliate of Solar Mosaic is predicated on a California law, also built within the federal intrastate exemption.
State by state is the way to go. Bills have been introduced in other state legislatures, and we should try to identify those bills and compare them here on The JOBS Act blog at VCExperts.
By capping how much an issuer may raise from a particular individual, by keeping that amount modest, a state legislature would in effect be saying, "let's see if the wisdom of the crowd may not actually be the very best, most effective, and most practical investor protection."
It's worth trying. Ditch the "grab bag" approach of the federal law and come up with something that leverages the crowdsourced aspects of crowdfunding.