WILMINGTON – Up until 2017, the crowdfunding movement in North Carolina had been treading water in a struggle to catch up with the momentum happening on a national level. But with the much-anticipated NC PACES Act in effect for a year, the equity crowdfunding process isfinally being made cheaper and simpler.

Part of what the Act allows is intrastate crowdfunding portals, a provision that had not been seized until now—two coastal companies have received approval from the Secretary of State’s Office to launch the first authorized intrastate crowdfunding portal of its kind for North Carolina.

Wilmington-based LogicBay has designed the portal, called FundingStack, to provide a gateway for North Carolina-based startups and small businesses to pursue public crowdfunding in compliance with the NC PACES Act.

John Panaccione, president and CEO of LogicBay, says that issuers do not just get access to the portal itself; they also receive access to the individual steps involved in the process. “We’ve broken it down into five stages,” he added, “That’s what’s vital to doing this in cost-efficient and time-efficient manner.”

Panaccione is working alongside fellow Wilmington entrepreneur Clem Seifert, CEO and founding partner of Cardinal Crowdfund Solutions, to overcome two overarching hurdles that may prevent crowdfunding in North Carolina from being as successful as it could be—the complexity and necessary infrastructure involved with the process.

John Panaccione of LogicBay (left) and Clem Seifert of Cardinal Crowdfunding Solutions (right)

Cardinal Crowdfunding Solutions wants to address the first problem with standardization, by offering “bundled services” for planning, access to legal legal documents, post-funding reporting and compliance, and marketing to attract potential investors.

The infrastructure component requires state authorization, a hurdle LogicBay has now passed after getting approval from North Carolina Secretary of State Elaine Marshall. In a press release, Marshall pointed out: “[The portal] should give small business people across our state a solid pathway where they can now see themselves participating in crowdfunding as a way to grow their companies and build our economy.”

In line with the launch of FundingStack, LogicBay and Cardinal Crowdfunding Solutions have also launched InvestinNC.com, a public resource package for interested investors and potential issuers. They will also be holding a series of seminars throughout North Carolina’s regions to help spark awareness of the new option.

“There are other ways [business owners] can crowdfund, but we believe our process is the only one today,” Seifert says.

Breaking down process into stages

According to the rules established in the NC PACES Act, intrastate funding portals like FundingStack are required to institute procedures to ensure necessary risk protection for investors.

The Act defines an intrastate funding portal as an entity that “is not a registered dealer or salesman pursuant to G.S. 78A-36” and is “acting as an intermediary in transactions involving the offer or sale of securities for or on behalf of an issuer pursuant to the exemption.”

FundingStack guides issuers through a multi-step process: Potential issuers must first determine if crowdfunding can be an effective strategy for them. Then they must meet the state’s requirements to be exempt from Securities and Exchange Commision rules and, if they are, they must pay a fee.

Next is the pre-funding phase, which happens after approval. In this phase, they must establish actionable requirements for transparency and reporting information. They must also pass “the real-world challenge,” as Panaccione puts it, of assembling a crowd of interested funders. This involves developing a compelling story for a target audience and pushing marketing content to show the company’s appeal.

The fifth and final stage is the maintenance and compliance stage, which lasts through the years after funding.

No matter what industry the entrepreneur’s company represents, Seifert says that the platform “enables everyone to do same thing, but do it in their own style.”

Panaccione and Seifert said that the target investor is someone who could be interested in supporting North Carolina-based companies—whether regional or local. Investors could be interested in a number of industries, and they could have a range of objectives for why may they want to participate.

Crowdfunding: The back story

The national crowdfunding movement is built off of nearly a decade of reckoning in response to the 2008 global financial crisis and subsequent Dodd-Frank regulations establishing strict federal oversight of large institutions in an effort to curtail the risks for economic crisis should one arise.

This time was formative for the tech economy as the need to reposition the funding landscape became steadily more apparent. Innovative strategies needed to be used to test new fundraising methods and ultimately increase access to capital for emerging tech companies.

That need was recognized by the federal government in the 2012 Jumpstart Our Business Startups (JOBS) Act, supporting smaller businesses seeking capital as the economy began to recover in the early 2010s. Title III of the JOBS Act paved the way for crowdfunding as a viable option for growing startups as it offered the necessary exemptions to existing securities laws.

But North Carolina wasn’t able to fully glean the advantages of the new regulations without an intrastate crowdfunding exemption, which would offset the financial and practical burdens associated with the national crowdfunding rules. It would also allow state citizens to participate in crowdfunding even if they don’t satisfy the federal accredited investor requirements.

The NC PACES Act would effectively tackle these hurdles, while also addressing other factors in the process. With the NC PACES Act workaround, as long as a company and its investors are based in the state, intrastate equity crowdfunding is an option.

The legislation went through more than a year of consideration before it was signed into law in 2016 and went into effect last April. According to the North American Securities Administrators Association, North Carolina is one of 35 other states to adopt intrastate crowdfunding rules.

The NC PACES Act governs the limits of capital formation for both issuers and investors. For issuers, capital formation limits are $1 million for a 12 month period or $2 million if they provide audited or reviewed financial statements to the Secretary of State’s Office and to investors.

The limit is $5,000 per year for non-accredited individual investors, thus lowering the risks for investors that do not meet the income and net worth conditions set forth by the Securities and Exchange Commission. (Accredited investors, according to the SEC, are those that earn an income of $200,000 or more in the last two years or have a net worth of over $1 million. They can invest as much as they choose.)

City of Raleigh Innovation and Entrepreneurship Manager Derrick Minor notes that this factor is a key advantage of the crowdfunding option, especially since federal laws do not take into account the wide variation of income or net worth in one state over another. The NC PACES Act addresses this with options for non-accredited investors.

Minor added that a platform like FundingStack could have a positive impact on the startup ecosystem if it can make the process easier for investors to throw in capital and companies to receive it.

Though it may take time and a beta run for this to come to fruition, Minor says “opening up any and all available options is always a positive thing.”