To incur debt or to give equity? For craft beverage producers entering an increasingly sophisticated and maturing market, that is indeed the ultimate question. Cutting in a partner and leveraging collateral have been the longstanding roads entrepreneurs have had to decide between when faced with mashing in capital for their business ventures. Behind emerging technological growth and a sustained consumer focus on Local, crowdfunding as a method for sourcing startup capital has begun to shift the traditional debt-equity paradigm.
Until recent years, business owners were limited largely to banks and angel investors for purposes of access to capital. “Blue sky” laws, as they are known in the securities realm, are well-grounded in the notion that companies offering some variety of stock to the public should shoulder the burden of providing their suitors with adequate disclosure about various components of the business. The development of the crowdfunding model, however, has shown proof-of-concept notable enough for federal and state governments to more pragmatically accommodate investment crowdfunding. Most recently, we’ve seen this type of movement respectively with the federal JOBS Act and the North Carolina PACES (“Providing Access to Capital for Entrepreneurs and Small Business”) Act.
The passing of these acts now allows investors so inclined to take true ownership interests in their target breweries, cideries, distilleries and wineries, instead of relying on a “free” glass or opening event access to quell their desire to stabilize a startup’s growth. North Carolina passed PACES this past July. Through what is formally a qualifying exemption from traditional securities registration, motivated individuals may now stand alongside banks, angel and accredited investors in supplying startup capital in exchange for a company’s equity. Prior to PACES, a business’s move to issue its stock to outside investors triggered compliance with the Securities Act of 1933, which obligates a business to certain, very costly financial audits and disclosures absent an exemption.
Our colleagues around the state have done a bangup job of curating all of JOBS and PACES fine details through various blogs and publications. In the interest of avoiding redundancy, we’ll simply link to some of those resources here, here and here. If you’re looking to drink straight from the barrel, however, we’ve tapped the highpoints below.
- The North Carolina PACES Act exemption allows a startup to raise funds from private, “unaccredited” investors.
- Unaccredited investors are those with a net worth of less than $1 million, or an income below $200,000 for each of the last two years (below $300,000 combined for married couples).
- Unaccredited investors may invest up to $5,000 in a single business annually.
- The unaccredited investor must be a resident of North Carolina.
- The business giving equity, the “issuer,” must be incorporated in North Carolina.
- Based on its accounting practices, a startup may raise up to $1 million or $2 million through the exemption annually.
So, how do we “count our PACES” within the craft beverage industry framework? North Carolina has already seen successful execution of crowdfunding campaigns from the likes of Mystery Brewing, Regulator Brewing and Sanctuary Brewing. These campaigns, however, predate the new securities exemption. It is tough to thus categorize the success of those funding efforts as indicators of future success within the bona fide craft beverage investment space. And although the new exemption presumably raises the ceiling on local investment by extending the opportunity to unaccredited individuals, we simply lack the data to support that proposition (and will stop just short of declaring its certainty).
What we can do is speak directly to some of the overlapping securities and alcoholic beverage regulations that will inevitably impact the design of investment funding within the industry. Here are a few things to keep in mind when putting your equity arrangement(s) together.
In North Carolina, when applying for an ABC permit, a producer must list any individual or entity that has a 25% or greater ownership interest in the permitted operations. Therefore, it is incumbent upon the issuer (the brewery, cidery, distillery or winery) to thoroughly vet prospective investors to ensure they meet the ABC permitting requirements. For example, is the investor of majority age? Is the investor a North Carolina resident? Has the investor been convicted of a felony within the last three years? You get the point. If any of these requirements were to lapse, so would the business’s permitting scheme.
2. Approved Portal Use and Advertising
Most of our professional world today exists in some capacity online. If an issuer utilizes the internet for investment funding, PACES mandates that the web host must be organized under North Carolina law, or at least be operating under the appropriate certificate of authority. To be clear, mainstream crowdfunding websites, like Kickstarter, do not offer an “equity investment” functionality and cannot be used for this variety of transaction.
With respect to advertising, there are attendant disclosure requirements that must accompany any publicity surrounding an investment opportunity. Be wary of social media, too.
PACES also sets out an array of ongoing compliance protocol concerning investment funding with unaccredited investors that is both complex and time-sensitive. The standards are a bit robust to catalogue here. However, if sourcing local capital for your business is on the horizon, please reach out to a competent attorney to guide your path.
We’re optimistic that PACES will activate an investor base previously unavailable to our quickly developing craft beverage market. With consumer emphasis squarely on innovative products and local dollars, this exemption may poise North Carolina for development of its small business networks like never before. Of course, this blog merely scratches the surface of attendant law and regulation. But hopefully this glimpse gives you hope, too, if not an inclination to more directly invest in your community.
As always, we’re available on every platform for cool discourse, questions and concerns. Just reach out.
Until next week. Cheers!