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.
The Campaign Finance Institute , which advocates some public financing of political campaigns, has done a state-by-state review of political contributions to races for governor and state legislature seats, ranking states in order of the percentage of population that made donations.
The review used the years 2006 and 2010, which CFI says were years in which most states had both gubernatorial elections and legislative campaigns. There were 33 such states in 2006 and 35 in 2010. (In Tennessee, where we have legislative elections every two years, 2006 was incumbent Gov. Phil Bredesen’s reelection year 2010 was the open-seat election won by Gov. Bill Haslam.)
The review shows Tennessee ranked 30th of the 33 states in 2006, with 0.67 percent of the state’s voting age population making donations to political campaigns. In 2010, Tennessee ranked 23rd out of the 35 surveyed states, with 0.89 percent of voting age population making donations.
The highest percentages were in Vermont and Rhode Island, which alternated as No. 1 in the two years surveyed. Both states have systems where public funding matches small donations from individuals. In 2010, Vermont was tops at 5.86 percent of adults donating to campaigns.
The lowest percentages were in states with higher populations – Florida, New York and California. In 2010, Florida had the lowest percentage, 0.22 percent.
Bills calling for some sort of public finances system have occasionally been introduced in Tennessee, though not in the last couple of legislative sessions. Those introduced previously all died in committee without a vote.
The CFI study, including the state-by-state table, can be seen by clicking on this link: 20121220_StateDonorParticipation-2006-V-2010.pdf
State Comptroller Justin Wilson writes in an op-ed piece: Early in the session and with little fanfare, lawmakers approved legislation that has the potential to create many new jobs in communities throughout our state. It’s called the Uniformity in Tax Increment Financing Act of 2012, a measure that gives economic development officials in our cities and counties an attractive incentive to offer businesses.
Tax increment financing — or TIF, as it is frequently called — is a method for paying for community improvements with future tax revenues. For example, consider what happens when a government decides to invest in new roads, street lights, water and sewer lines or other infrastructure improvements in a neighborhood.
Typically, the value of the property in that neighborhood will increase, which means tax collections from the area should also increase. TIF uses the extra tax revenues collected after the property value rises to recoup the costs of the government’s infrastructure investments.
In other words, it’s a way to allow growth to pay for itself. While we had laws on the books allowing for TIF before this year’s legislative session, they were confusing and sometimes contradictory.
News release from Senate Republican Caucus:
(NASHVILLE, TN) – Senate Finance Committee Chairman Randy McNally (R-Oak Ridge) said today he has great concern regarding the $2.1 billion recommendation to fund capital improvements and capital maintenance made by the Tennessee Higher Education Commission (THEC) on Tuesday.
McNally said the recommendation is overly ambitious given Tennessee’s current finances, and that he would be very concerned about some of the alternative financing methods which have been discussed in conjunction with the plan.
“Tennessee must continue to employ the prudent fiscal practices which have helped us remain one of the best financially managed states in the nation,” said McNally. “I am very concerned about any plan that could endanger our bond rating. We have been very careful in the way Tennessee handles debt and the bond rating companies recognize this fact. This is not the time to depart from those conservative financial practices that have helped us navigate through one of the toughest recessions in our nation’s history.”
Tennessee has one of the lowest per capita debts in the country. The THEC proposal could more than double the state’s current debt. Earlier this month, Moody’s Investor Services removed the negative outlook placed earlier this year on Tennessee’s Aaa (Triple-A) General Obligation Bond Rating. Moody’s said the outlook was revised from negative to stable in order to reflect the relatively lower level of risk posed by federal downsizing and U.S. spending cuts in Tennessee.
McNally said he does not favor the state borrowing for capital maintenance, which is normally paid for on a yearly basis. In addition, McNally said he would oppose any plan that finances the bond issuance beyond the customary 20 years, an 11 percent rate generally paid on capital outlay projects, and a level principal amortization.
Payment installments under a level payment amortization plan as opposed to a level principal amortization are apportioned unequally between interest and principal, with the early years going almost entirely towards payment of the interest. It is only in later years, when most of the interest has been paid off, that the principal balance is reduced significantly.
“We have capital project and maintenance needs in our colleges and universities. However, we cannot resort to any financing plan that could endanger our bond rating or our ability to keep the state on good financial footing.”