The North Carolina legislature is currently debating allowing equity crowdfunding in North Carolina. It would be great for North Carolina as it would allow North Carolina-based startups to avoid some of the registration problems, lack of clarity and delays of current federal crowdfunding legislation.
Equity crowdfunding would give startups an additional source of funding that can bridge the gap until they are ready for larger investors or to be self sufficient.
At the start of 2015, 14 other states have laws that allow state level crowdfunding. One of those states is Georgia, and North Carolina lost the high profile startup GROUNDFLOOR to Georgia at least partially because of the two states different approaches to crowdfunding.
Equity crowdfunding is different than crowdfunding as most of us know it via Indiegogo and Kickstarter, where a person pledges contributions and receive some sort of product or benefit in return.
Instead, the new equity crowdfunding legislation would allow unaccredited investors to invest anywhere from $2,000 to $5,000 in equity ownership investment in a company. Unaccredited investors are those with less than $1 million in assets (excluding their primary residence) or below $200,000 in income in two most recent years ($300,000 for a joint income situation). Currently, those individuals cannot legally invest in privately held companies.
Expanding the pool of potential investors would give North Carolina-based startups a boost. While startup investing is not for everyone, there is a certainly a subsection of people, myself included, that are interested in doing so but who do not currently meet the accredited investor status.
Passing the legislation would also be another market signal that North Carolina is going to stay on the cutting edge of innovation and the startup scene. North Carolina needs to focus on this sector of the economy for future job growth and success instead of the strategy of recruiting large companies that are in the state relocation incentives game.
Are there any downsides to the proposed legislation? You could get investors that have no business investing in startups. Entrepreneurs will need to screen closely for them. Hopefully, a reasonable dollar limit and adequate disclosures will prevent people from losing their life savings on investments that can be extremely risky. With additional investors, entrepreneurs may have a little heavier burden for record keeping and reporting purposes.
I believe the benefits of this legislation outweigh any risks. North Carolina needs to continue to position itself as a startup and entrepreneurial state so that we can continue to incubate companies with private money companies that generate jobs and provide better opportunities for people within the state.
We can be a leader at the state level and really send a signal that North Carolina is serious about transitioning from an agricultural state to one of innovation.
Adam Shay is the owner of the CPA firm Adam Shay CPA, PLLC in Wilmington.
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