The process of crowdfunding is often misunderstood. People are using this term loosely; as a result, there is a fair amount of confusion surrounding this capital-raising technique.
Many recognize the Kickstarter.com or Indiegogo.com websites, as they have received a great deal of publicity for the many worthy causes that they have supported. While Kickstarter and sites like it raise funds for worthy causes, they don't involve a promise of a return. In other words, no equity or debt position is being offered by the "sponsor" to the capital provider for his/her "investment."
True crowdfunding involves an offering (i.e. a sale of a security) to the "crowd" (e.g. private investors), which includes both accredited and non-accredited investors. The addition of non-accredited investors is an important development, because until recently sponsors were only allowed to raise investment dollars (in the form of equity or debt) from accredited investors. U.S. federal law limited the universe of potential investors to those individuals with at least $1 million in assets, excluding the equity held in their primary residence, or $200,000 in annual (individual) income.
This new development, to include non-accredited investors, came about as a result of the JOBS Act (Jumpstart Our Business Startups) of 2012. The Securities and Exchange Commission has been extraordinarily slow to finalize the guidelines for this new program; as a result, many states, including North Carolina, have elected to enact crowdfunding laws to permit limited offerings to investors. On June 29, 2016, the North Carolina legislature passed the NC PACES Act (Providing Access to Capital for Entrepreneurs and Small Business Act), which allows non-accredited investors to invest in startup companies or businesses (including real estate partnerships) in the same way that accredited investors have been able to do so for years. Governor Pat McCrory signed the bill into law on July 22, 2016.
The new law does place a number of restrictions on the non-accredited investor. For example, the non-accredited investor is limited to a maximum of $5,000 per offering in any 12-month period, and all information on the offering circular must be filed with state and federal regulators. The offering must contain all of the relevant risk disclosures and certifications, and it must also define the business model for the investment, including financial targets and projected returns. Furthermore, companies will be limited to raising $1 million in any 12-month period from non-accredited investors – unless they are willing to have their financials audited annually and available to investors.
We at Avison Young believe that crowdfunding will play an important role in stimulating additional real estate investment in North Carolina. Individuals who have historically been shut out of opportunities to invest in real estate will embrace this new investment vehicle as they seek to diversify the impact of their limited investment dollars. For more detailed information on crowdfunding, please refer to “Crowdfunding Law Made Simple” on the North Carolina Business and Banking Law Blog or view the U.S. Securities and Exchange Commission news release dated November 30, 2015.
The above article is for informational and educational purposes only and should not be construed as professional, legal or financial advice.
(Gary Lyons is a Senior Vice-President, specializing in Capital Markets, in Avison Young’s Raleigh, North Carolina office.)