Putting North Carolina Through the PACES: Bringing Intrastate Crowdfunding to North Carolina Through the NC PACES Act

Campbell Law Review, Aug 2016

The nationwide increase in the number of small businesses over the past several years has led to more small businesses, startups, and entrepreneurs seeking capital investments from the general public in order to build and grow their businesses. In an effort to attract investors, businesses have taken an interest in securities crowdfunding, a method for raising capital whereby businesses offer stock in their companies in exchange for capital from investors. While an offering of securities generally must be registered with the United States Securities and Exchange Commission, companies can circumvent the registration requirement by utilizing one of the available exemptions provided by federal statute. This Comment focuses primarily on the intrastate exemption, which allows businesses to sell securities if the offering is wholly contained within a single state, but only if that state has given businesses the option to use that exemption. Since 2011, over half of the states have passed legislation permitting businesses within those states to take advantage of the intrastate exemption. North Carolina, through the NC PACES Act, is considering passing such legislation, yet that bill has been stalled in the North Carolina General Assembly since April of 2015. This Comment highlights the benefits that North Carolina can enjoy by allowing intrastate securities crowdfunding and ultimately calls for the General Assembly to pass the NC PACES Act.

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Putting North Carolina Through the PACES: Bringing Intrastate Crowdfunding to North Carolina Through the NC PACES Act

Putting North Carolina Thr ough the PACES: Bringing Intrastate Crowdfunding to North Carolina Thr ough the NC PACES Act C. Marshall Horsman III 0 0 Thi s Comme nt is brought to you for free and open access by Scholarly Repository @ Camp bell University School of Law. It has been accepted for inclusion in Camp bell Law Review by an authorized admini strator of Scholarly Repository @ Camp bell University School of Law Recomme nded Citation C. Marshall Horsm an III, Putting North Carolina Th rough the PACES: Bringing Intrastate Crowdfunding to North Carolina Th rough the NC PACES Act, 38 Campbell L. Rev. 425 (2016). - Article 5 Follow this and additional works at: http://scholarship.law.camp bell.edu/clr Putting North Carolina Through the PACES: Bringing Intrastate Crowdfunding to North Carolina Through the NC PACES Act The nationwide increase in the number of small businesses over the past severalyears has led to more small businesses, startups, and entrepreneurs seeking capital investments from the general public in order to build and grow their businesses. In an effort to attract investors, businesses have taken an interest in securities crowdfunding, a methodfor raising capital whereby businesses offer stock in their companies in exchange for capital from investors. While an offering of securitiesgenerally must be registered with the United States Securities and Exchange Commission, companies can circumvent the registration requirement by utilizing one of the available exemptions provided by federal statute. This Comment focuses primarily on the intrastate exemption, which allows businesses to sell securities if the offering is wholly containedwithin a single state, but only if that state has given businesses the option to use that exemption. Since 2011, over half of the states have passed legislationpermittingbusinesses within those states to take advantage of the intrastate exemption. North Carolina, through the NC PACES Act, is considering passing such legislation, yet that bill has been stalled in the North Carolina General Assembly since April of 2015. This Comment highlights the benefits that North Carolinacan enjoy by allowing intrastatesecurities crowdfunding andultimately callsfor the GeneralAssembly to pass the NC PA CES Act. INTRODUCTION ......................................... ......... 426 I. UNDERSTANDING THE CURRENT SECURITIES CROWDFUNDING LANDSCAPE..............................................428 A. BackgroundandDefinitions ................. ...... 428 B. Intrastate Crowdfunding ............................... 430 C. Role of the Securities andExchange Commission...................432 D. The JumpstartOur Business Startups (JOBS) Act .................. 432 II. THE DEBATE OVER SECURITIES CROWDFUNDING ........ ...... 437 A. Tensions Within Securities Crowdfunding.... .......... 437 425 426 [Vol. 38:425 INTRODUCTION In late 2009, a small rural town nestled in the southwestern corner of Kansas found itself with a serious problem few Americans have ever fathomed: the residents of Minneola, Kansas had nowhere to buy groceries.' When the town's only grocery store unexpectedly shut down, the community of around 800 residentS 2 felt compelled to take action. 3 A group of community leaders began exploring the town's options to bring a grocery store back to Minneola and eventually discovered the Invest Kansas Exemption (IKE).4 The Invest Kansas Exemption is a piece of legislation that, upon its passage in August 2011, became the first intrastate equity crowdfunding exemption to be adopted by any state.s Through IKE, the residents of Minneola were able to form a corporation and begin selling shares of stock to members of the community. 6 In all, 4,000 shares were sold, netting $200,000 to be used for the re-opening of the town's grocery store.7 As the number of shares sold grew, so did Minneola's sense of 2016] 427 ownership. A few months later, thanks to the capital raised and the volunteer labor of several dozen community members, Hometown Market opened its doors on March 7, 2012.9 Minneola's Hometown Market is the story of one of the first successful utilizations of intrastate crowdfunding. As this small, rural grocery store continues to thrive, so does national interest in using crowdfunding to offer and sell equity securities. On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act'o became law." Despite having not yet gone fully into effect, this law has, over the past three years, slowly progressed toward its purpose of making several types of federal securities crowdfunding a reality. Along with this effort to introduce securities crowdfunding at the national level a reality, over two dozen different states have followed Kansas's lead and enacted intrastate crowdfunding exemptions of their own.' 2 While states continue to adopt these exemptions, the debate over the benefits and risks associated with securities crowdfunding persists. As the North Carolina Providing Ac (...truncated)


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C. Marshall Horsman III. Putting North Carolina Through the PACES: Bringing Intrastate Crowdfunding to North Carolina Through the NC PACES Act, Campbell Law Review, 2016, Volume 38, Issue 3,