Invest Tennessee Exemption Rules Take Effect in December

Thursday, October 22, 2015 | 10:02am

NASHVILLE – Tennessee’s rules guiding business owners who may be seeking alternative ways of raising capital – a practice commonly known as intrastate “crowdfunding” – have gained final approval.

The new rules offer guidance for small business owners and could prompt greater development among Tennessee start-ups and fledgling companies while helping protect investors.

“The new rules are vital because they provide clear guidelines regarding the requirements of offering or selling a security pursuant to the Invest Tennessee Exemption,” said Frank Borger-Gilligan, Assistant Commissioner for the Securities Division of Tennessee Department of Commerce & Insurance (TDCI).  “Moreover, the rules provide necessary protections for Tennessee investors while providing small businesses and start-ups the opportunity to raise capital in a manner which was previously unavailable.”

The “Invest Tennessee Exemption” (ITE) became effective on January 1, 2015 while the rules addressing the specific requirements of the exemption will take effect on Dec. 16, 2015.

Under the ITE exemption, securities offerings that meet the following requirements are exempt from registration in the state: 

The sale of the securities shall meet the requirements of the federal intrastate exemption as defined in Section 3(a)(11) of the Securities Act of 1933;
The sum of all cash and consideration received for the security shall not exceed $1 million, less the aggregate amount received by the issuer within 12 months before the first sale;
The issuer shall not accept more than $10,000 from any unaccredited investor;
All funds received from the sale of the security must be deposited in a bank or depository institution authorized to do business in the state, and shall be used in a manner consistent with written representations made to investors;
Before offering to sell the security, the issuer must provide notice to the Commissioner in writing specifying that the issuer will offer or has sold the security in reliance upon the exemption.  The notice shall include the names and addressed of the following:

The issuer; Those offering or selling the security; The bank or depository institution in which proceeds will be deposited;

The issuer must not be an investment company, as defined by the Investment Company Act of 1940, either before or after the offering;

The issuer shall inform all investors prior to the sale that the security is exempt from the registration requirements pursuant to this exemption;

The exemption is unavailable to any issuer, nor any of its affiliates, directors, officers, general partners, beneficial owners of 10% or more of the security, nor any promoters, underwriters, nor any partners of such, who is the subject of a disqualifying event as defined in the statute. 

In addition to the notice requirement set forth in the statute, the rules will require an issuer to:

File a Form U-2 Consent to Service of Process;
If the issuer is a corporation, file a Form U-2A Uniform Code of Corporate Resolution;
Provide the Division a copy of the fully executed escrow agreement between the issuer and the bank or depository in which the issuer states that it will deposit all of the investor funds, the target offering amount to be raised, and the time by which the target offering must be reached;
Provide the Division with a signed acknowledgement requiring the issuer to notify the commissioner immediately upon the issuance of any stop order, denial, show cause order, suspension, revocation order, injunction, restraining order, or similar orders entered or issued by any regulatory authority or court, concerning the securities covered by the notice or any other securities offered by the issuer, or any order, judgment, decree or conviction as listed in the statute;
Provide the Division with a signed statement of whether or not the issuer, a director, officer, partner or trustee of the issuer, or any individual occupying similar status, has even been the subject of any order described in this rule, or any judgment, decree or conviction listed in the statute;
Pay a non-refundable $100 filing fee;
Promptly provide any additional information requested by the Division.

Furthermore, the rule states that an issuer shall not use the Internet to solicit sales of the exempt security unless access to the issuer’s website where the offering may be viewed is available only to Tennessee residents.   

Business owners or investors who have specific questions about the Invest Tennessee Exemption, should contact TDCI’s Securities Division Registration Section at (615) 741-3187.