Thursday, October 23, 2014

The New Tennessee Equity Crowd Funding Exemption You Didn’t Know About

Southern/alpha
Article by Kelley Boothe.  Published by Southern/alpha

Have you ever looked up the Invest Tennessee Exemption?
If you haven’t, you should, especially if you plan to raise money through angel investments or crowd funding in 2015. Bills can be confusing and TL;DR so I’m going to do my best to relay the main points of the bill in layman’s terms so you can crowd fund your startup efficiently in the new year.
Essentially, the exemption allows equity crowd funding. 
I asked Lawyer Bob Zeglarski of Cutwater Law PLLC, to help me explain how it all works. The firm is hosting a free webinar on October 21st to go over the Invest Tennessee Exemption in detail. According to Zeglarski:
Generally all securities offered for sale must be registered with the Securities and Exchange Commission (SEC) and a state regulatory authority (in this case TN Securities Division).  A company registers its securities by filing a “registration statement” with SEC and/or TNSD before it offers its securities for sale to investors.  A registration statement is a set of documents, including a prospectus, that describes the investment opportunity and most often must include audited financial statements ($$$).  In most cases, the SEC and/or the TNSD can require modifications or deny approval of the registration.
While registration is the rule, there are exceptions.
If a company meets such an exception, it is said to be “exempt from registration.” (i.e., it does not need to register its securities by filing a registration statement).  Caveat—there are numerous rules that must be followed to qualify for any exemption.
One such exemption is found in Section 3(a)(11) of the Securities Act of 1933.  It states that a company is exempt from registration with the SEC if it meets certain conditions (e.g., a company located within a particular state offers its securities for sale to investors within the same state–only one of many conditions).  This exemption from Federal registration is called the Intrastate Offering Exemption.
Today, even if a company qualifies for the Intrastate Offering Exemption, it must register its securities with the TNSD.  Upon its effectiveness in 2015, The Invest Tennessee Exemption (ITE) removes this TN registration requirement.  In other words, if a Tennessee company qualifies for the Federal Intrastate Exemption, it will qualify for the ITE, allowing it to forego the registration process.
Where It Gets Interesting
If you qualify for the Intrastate Offering Exemption (and the ITE), you can use general solicitation methods (television/radio/print/internet) to attract investors.  And according to ITE you can sell investments to anyone, regardless of financial means (with certain limitations).
The Invest Tennessee Exemption has numerous advantages over current and proposed federal regulations (including the JOBS Act of 2012).
Main Points of the Exemption:
•    Neither state nor federal registration of the offering is required.
•    General solicitation of Tennessee investors is permitted.
•    Funds may be raised from any Tennessee investor, regardless of financial means.
1. State/Federal Registration
A company raising money under the Invest Tennessee Exemption does not need to be approved by federal or state regulators via a registration process. However, the offering must qualify by meeting certain conditions.  For example, only Tennessee companies can sell their securities using this exemption, and they can only sell their securities to investors that are residents of Tennessee.
2. Solicitation
You may recall last year when the SEC lifted the ban on general solicitation, allowing startups to raise money online publically.  According to Forbes’s, lifting the ban on general solicitation means you as a founder can now express that you are raising money through the following:
  1. A mass newsletter/email
  2. A public profile on a startup investment platform
  3. A company, personal or third-party website that displays openly that a startup is fundraising
  4. Public speaking engagements, such as conferences, panels, or forums
  5. Social media
  6. Public videos
According to the SEC, general solicitation means offers made pursuant to “advertisements published in newspapers and magazines, public websites, communications broadcasted over television and radio, and seminars where attendees have been invited by general solicitation or general advertising.  In addition, the use of an unrestricted, and therefore publicly available, website constitutes general solicitation.  The solicitation must be an “offer” of securities, but solicitations that condition the market for an offering of securities may be considered to be offers.”
The Invest Tennessee Exemption will allow Tennessee businesses to solicit investments from Tennessee residents using all forms of mass media.  Currently, crowd funding is limited to websites like Kickstarter that only allow entrepreneurs to solicit donations to fund business opportunities. Starting in 2015,  you can generally solicit for securities online.
3. Funding From Unaccredited Investors
“The Invest Tennessee Exemption provides entrepreneurs with a new alternative to bank loans and money supplied by angel and venture capital investors,” said Bob Zeglarski, Founder of Cutwater Law, “For their part, crowd funding investors living in Tennessee will actually have an opportunity to realize a financial return.”
The bill states that “the issuer (Founder, Cofounder, whoever is leading the funding round) may not accept more than $10,000 from an investor unless the investor is an accredited investor pursuant to federal regulations,” meaning that if you as a founder want to add unaccredited investors, they can offer up to 10,000 dollars to a startup starting in 2015.
Things to Consider: 
1. Keep in mind that the unaccredited investor can only invest up to 10,000 per startup.
2. As a founder, you should note that the unaccredited investor is investing for equity, not donation.
3. According to the law, there is nothing that limits unaccredited investors from investing the max (10,000) in as many startups as they’d like as long as they qualify under the exemption.
4. Investors must be Tennessee residents.
“While companies will need to hire a lawyer to do these kinds of offerings, they won’t spend the kind of money required for a successful registration. [The exemption creates] greater access to capital at a lower cost (even lower than what is being proposed under the JOBS Act),” Zeglarski said.
Companies wishing to utilize the Invest Tennessee Exemption will need to follow strict rules set by state and federal regulators that aim to curb fraud.
Cutwater Law PLLC, a Tennessee business law firm, will host a webinar on October 21, 2014 to help local entrepreneurs prepare for the Invest Tennessee Exemption. The new crowd funding law will take effect January 1, 2015.
If you wish to learn more, you can register for the webinar online or via email (info@cutwaterlaw.com).
Southern/alpha is an online news property that tells the story of Southern startups. It provides the startup and technology communities with news and information to ease their navigation of their respective and communal ecosystems.

Bob Zeglarski

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