Crowdfunding is a relatively new capital raising tool, which was generally used in the past as a financing method for such ventures as films and music recordings. To date, crowdfunding has not been a popular method for offering and selling securities because offering a share of financial returns or profits from business activities would subject the transaction to federal and state securities laws, requiring certain registrations with the Securities and Exchange Commission (SEC) and state securities regulators. U.S. Securities and Exchange Commission, SEC Issues Proposal on Crowdfunding (October 23, 2013).
In 2012, Congress passed the JOBS Act (Jumpstart Our Business Startups Act). The JOBS Act, among other things, added a new section, 4(a)(6), to the Securities Act of 1933, creating a new exemption for certain crowdfunding offerings from SEC and state law registration requirements. However, before the law can become effective the SEC must promulgate and implement rules regulating the exemption. For further information on the JOBS Act, please see The JOBS Act—An Overview and Some Recent Developments, written by Michael E. Slipsky and David R. Krosner.
As of this summer, the SEC has proposed rules for crowdfunding, but those rules are not final. A dozen states are making an effort to join Georgia, Kansas, Michigan, Alabama, Maine, Washington, Wisconsin, and Indiana by developing their own regulations allowing crowdfunding within the states. States are growing frustrated and tired of waiting for the SEC to adopt federal regulations. See Posting of Bill Meagher to TheDeal.com, States make own crowdfunding rules, rather than wait for SEC (May 5, 2014, 15:03 EST).
In response to the federal delay, Representative Tom Murry of Wake County sponsored state legislation attempting to allow and regulate crowdfunding in North Carolina, filing House Bill 680, the JOBS Act, on April 9, 2013. House Bill 680 did not pass the Senate and was not eligible for consideration in the 2014 short session. For that reason, in June the House added the crowdfunding provisions, titled, “Jump-Start Our Business Start-Ups Act,” to the 32 page fifth edition of Senate Bill 734, Regulatory Reform Act of 2014.
When compromise discussions between the House and Senate on Senate Bill 734 stalled, the Senate added to House Bill 1224 various provisions regarding modifications to the local government sales and use tax rate as well as other provisions including the crowdfunding provisions. House Bill 1224 had been filed at the beginning of the short session as a bill modifying the Job Maintenance and Capital Development Fund. The House rejected the Senate’s modifications of House Bill 1224. As a result, the House and Senate appointed a conference committee, and the committee made its report on July 31, 2014. The Proposed Conference Committee Substitute was passed by the Senate, however it failed in the House.
The final version of House Bill 1224, the Proposed Conference Committee Substitute, would have allowed North Carolina residents to invest up to only $2,000 per purchaser – unless the purchaser is an accredited investor as defined by rule 501 of SEC regulation D, 17 C.F.R. § 230.501 – in new in-state ventures through the crowdfunding mechanism. It would have allowed most companies to raise up to $1 million in capital through unregistered securities without a financial audit and up to $2 million in capital if the issuer has undergone and made available to each prospective investor and the Secretary of State the documentation resulting from a financial audit. Essentially companies would have been able to sell securities directly to the North Carolina public without having to incur the expense of conducting a registered securities offering. The NC Secretary of State would have been tasked with the regulation of these types of transactions and would have collected quarterly reports. See Posting of Mark Binker to WRAL TechWire, Crowdfunding bill clears N.C. Senate Committee, (July 16, 2014 14:08 EST).
The General Assembly has adjourned sine die. Although crowdfunding provision had an opportunity to become law during the 2014 short session in either Senate Bill 734 or the Proposed Conference Committee Substitute of House Bill 1224, the General Assembly did not pass the crowdfunding provision. House Bill 1224 failed in the House and the compromise finally reached for Senate Bill 734 in the ratified bill excluded the crowdfunding provision. There is a possibility the crowdfunding provision could again be considered before the 2015 session, scheduled for late January, if three-fifths of all members of the Senate and three-fifths of all members of the House vote to do so, as provided in Section 11(2) of Article II of the North Carolina Constitution. However, the more likely scenario for the General Assembly to return would be for a “special session” by call of the Governor. As provided in Section 5(7) of Article 3 of North Carolina Constitution, “[t]he Governor may, on extraordinary occasions, by and with the advice of the Council of State, convene the General Assembly in extra session by his proclamation, stating therein the purpose or purposes for which they are thus convened.”
