May 27, 2013 in Crowdfunding State legislators in North Carolina continue to work on an investment crowdfunding bill. (For context, see this earlier post about the North Carolina initiative.)
You can find the text of both the original and a more recent substitute bill here.
I didn't see a redline or any committee report summarizing the changes that had been made to the original bill, so I ran a redline myself and posted it here on AWS.
I'm not going to say that the changes are going in the wrong direction because I'm just not sure and would probably need to spend more time with the text. But you can most definitely see that the bill is starting to sound more legalistic, like a securities law.
For instance, note what happened to the mandatory disclaimer from the orginal bill (which I think was borrowed from language my friend Joe Wallin had developed and blogged). The idea is to require the crowdfunding issuer to warn investors that they are as likely to lose their investment as Kickstarter backers are to never actually see a copy of the finished film they backed.
Joe's language, in the original bill:
"I acknowledge that I am investing in a high-risk, speculative business venture, that I may lose all of my investment, and that I can afford the loss of my investment. I understand this offering has not been reviewed by the State, and no authority has expressed an opinion on the merits of this offering."
The new language in the substitute bill, somewhat harder to understand but friendlier to lawyers:
"IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED BY SUBSECTION (E) OF SEC RULE 147, 17 C.F.R. ß 230.147(E) AS PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME."
Also stripped out ó unless it has been placed elsewhere and I've missed it ó is the entrepreneur protection of insulating issuers from suits except in the case of fraud or breach of fiduciary duty. (Hopefully that deletion is not a sign that the North Carolina legislators will tack back to the assumption that an issuer is just another name for a likely scam artist.)
On the other hand, there are signs in the substitute bill that the legislators know they are experimenting. At the bottom of the substitute bill, a simple sentence is tucked in that reads, "This act is effective when it becomes law and expires on July 1, 2017." That's good. It should take the pressure off to get everything right, remove the fear that the exemption doesn't work like all the rest.
It shouldn't work like existing exemptions. Something needs to be ventured to see if investment crowdfunding might work for non-accredited investors.