TN ‘crowdfunding’ law takes effect Jan. 1

A new state law, taking effect Jan. 1, sets up rules for “crowdfunding” in Tennessee that are similar to those already in place in some other states, including Georgia, reports the Tennesseean, adding that no big changes in startup financing are expected soon.

The “Invest Tennessee Exemption” was signed into law in May, touted as a boost to small businesses and startups by providing more funding options. But given the tepid response in states that have already implemented the exemption, it is unlikely that the new law will have a meaningful impact in the short term. The law has potential to help Tennessee companies, and it is certainly a step in the right direction, but much of its overall success will depend on helping businesses and investors navigate the legal complexities and making them aware of its potential benefits.

Under current law, companies seeking private investment are limited to capital provided by accredited investors — those who meet six-digit income thresholds or with more than $1 million in assets, not including their home. The rule is meant to protect less wealthy individuals from losing money in risky investments, but it poses a challenge for companies lacking a network of affluent investors, in addition to shutting out everyday people from startup investment opportunities. While non-accredited investors can donate to a Kickstarter campaign, they are not able to make financial gains when a company is successful.

That changes Jan. 1, as Tennessee joins at least 11 other states with similar crowdfunding exemptions. Tennessee companies will be allowed to raise as much as $1 million from in-state investors and investors can contribute as much as $10,000 to capital raises.

Nashville securities attorney Bob Zeglarski has begun educating local entrepreneurs about the law, describing it as a more affordable funding option for small businesses, but his expectations for how many companies will pursue this route are tempered. “It’s just the starting point of an opportunity, but an opportunity, nonetheless,” he said.