Two crowdfunding bills were introduced early this year in the N.C. House. Some provisions differ between the two bills, but the intent is the same: to create a legal framework allowing North Carolina startups to attract a broad array of investors within the state. 

One, H.B. 14, is a slight rewrite of the legislation introduced in last year’s short session that garnered support but ultimately failed because of politics, according to an article by Crowd Valley Inc., part of the Grow VC Group, a global firm that pioneers crowd-based investment models.

The measure, which targets startups or other early-stage firms, allows companies to raise up to $2 million from accredited and non-accredited North Carolina investors. So-called non-accredited investors – individuals that do not have the required threshold level of wealth – would be limited to a yearly investment maximum of $2,000 per company.

The company seeking funding must produce a quarterly report for investors containing specified information on the company’s management, must register its business with the state and must keep records of the offers and sales made through its website, under the bill.

A second measure, H.B. 63, co-sponsored by Rep. Chris Millis (R-Pender), proposes fewer limitations and requirements.

Non-accredited investors may invest up to $5,000 in a single offering. There is no cap on the amount of money it can raise through the crowdfunding initiative, and there
is no requirement that a private company divulge its data.

If a crowdfunding bill does emerge from the General Assembly’s session this year, North Carolina would join 15 other states that have such legislation, according to attorney Anthony Zeoli, who follows crowdfunding legislation for Cleveland, Ohio-based Crowdfund Insider, a news andinformation website covering the alternative finance movement.

By Zeoli’s count, another 17 states – including North Carolina – are considering bills.
States are crafting their own laws because there is as yet no federal platform, since the SEC has not finalized rules governing the crowdfunding provisions in Title III of the federal JOBS Act of 2012.

“In looking at the bill submitted by Chris Millis, I do find it interesting he’s looking at [a company] raising unlimited capital,” said Andrew Dix, Crowdfund Insider CEO and founder. “I think it’s fine, and I see a cap as somewhat arbitrary, but Title III instituted it under the guise of investor protection. The UK has no established cap, but most [U.S.] states have set a cap.”

The N.C. Department of Commerce Office of Science, Technology & Innovation is not
taking a position on either bill but wants some measure to pass, said its executive director John Hardin.

“We are definitely supportive of crowdfunding in North Carolina and so is [state commerce secretary John] Skvarla,” Hardin said. “With the lack of early-stage capital available, especially for technology, crowdfunding is one way of increasing that capital.”

Hardin explained that one reason for the relative lack of technology venture capital in Wilmington, as in the rest of the state, is that investors are becoming much more risk averse.

“They go where the deals are plentiful, which is usually Silicon Valley and Boston,” he said. “Crowdfunding can help those companies in the early stage of the process, which will then attract venture capital and draw more venture capital to the state.”

Venture capitalists want to see that a company has been vetted, Hardin said, “and crowdfunding does that vetting.”

The concept of crowdfunding is hardly new. Online platforms such as Kickstarter and Indiegogo have helped small companies and creative projects get essential backing. There’s a fundamental difference, however, between these concepts and the kind of crowdfunding that state legislatures are legalizing: the return on investment.

“Kickstarter backers are not investors, and the model is more akin to pre-ordering a product that has yet to exist,” said Alejandro Canosa, lead software engineer of Wilmington-based Three Minds Software.

Through Kickstarter, his company raised $26,823 – three times its goal – from 724 backers to develop its Other World Mapper software, which is prepping for alpha testing.

For a “pledge” – Canosa’s term – of $25, his backers got a copy of the fantasy mapping software that will likely sell for twice that once it hits the market. That’s it: no profit sharing, no shares of the company and no formal ongoing relationship.

But the value of the Kickstarter campaign far exceeded the capital it brought in, Canosa said.

“We got a lot of ideas from our backers; we learned what was important,” he said, adding that the interaction between the company staffers and their funders means
“you are actively creating a product with your investors.”

Kickstarter, Indiegogo and other such platforms are also a great way to create a community, said Dan Brawley, executive director of the Cucalorus Film Festival, which conducts a Kickstarter campaign every year.

“Kickstarter has been a great partner. The great thing about Kickstarter for us is that it immediately connects us to a network of filmmakers online, and it’s a well-built pathway to reaching people who love Cucalorus and have been affected by it in some way,” he said.

The platform has helped create community and funding support for Freaker USA as well, said company co-founder Lauren Krakauskas.

“Community is a huge part of our branding, especially in Wilmington,” said Krakauskas, who has managed the Wilmington company’s Kickstarter campaigns, including a recent successful effort in support of the company’s newest product, Freaker Feet socks. “Crowdfunding is changing the world. It’s a different world – kind of like the wild, wild west, for sure.”

Crowdfunding spreads the risk of backing a young company among more investors, whether their return is several pairs of socks or a stake in the company if it becomes successful. The Kickstarter model has enabled small investors – often friends and family of the entrepreneurs – to pitch in, said Hardin, adding that the same thing would happen if state crowdfunding legislation is approved.

“There are a lot of people who would like to invest but can’t now because they are non-accredited. Crowdfunding opens the door but keeps capital outlays low, so people don’t lose their shirts,” he said.

Shirts, maybe not, but an investor could always get zero return.

“These are risky investments; nobody’s saying they’re not risky,” Dix said. “That’s part of the deal.

A lot of these companies will fail, but small businesses create all the jobs; they are the engine of economic growth. Simply the fact that you are advocating for capital formation for small businesses, that’s a good thing.”