Cutwater Law Letter Invest Tennessee Exemption

Robert Zeglarski, Esq.
(615) 933-3545
April 9, 2015

Sent via Email
Sarah Branch, Esq.
Assistant General Counsel for Securities
Department of Commerce and Insurance
500 James Robertson Parkway, 8th Floor
Nashville, TN 37243

NEW RULE NUMBER 0780-04-02-.17 ("New Rule")

Dear Ms. Branch,

Please accept this letter in support of the New Rule. I welcome the opportunity to share my viewpoint with the public at the Rulemaking Hearing on April 22, 2015. This letter represents my own views as a Tennessee securities lawyer who advises private and public emerging growth companies.

During the past 10 years, I have primarily helped businesses leverage capital to grow. In my experience, scarcity of capital is the greatest challenge faced by emerging growth companies, particularly those with total annual gross revenues of less than $10 Million. As a result, I have become an advocate for responsible deregulation of securities laws that facilitate small capital formation.

I support the New Rule because it codifies best practices for compliance with the intrastate exemption from federal securities registration requirements, a rarely utilized exemption that has numerous pitfalls. By establishing rules that require a conservative approach, issuers will be more likely to avoid such pitfalls. The New Rule will, therefore, protect our new marketplace, helping to keep transaction and capital costs low for Tennessee companies that use the Invest Tennessee Exemption to raise capital.

The Invest Tennessee Exemption will help most emerging growth companies in Tennessee access the capital they need to succeed. While late stage emerging growth companies can absorb the large transaction costs required to access capital in a national securities market, most emerging growth companies cannot. Instead, they must navigate a private marketplace that limits its sources of capital to banks, professional investors, and certain wealthy individuals that, all together, constitute only 1% of the US population. The Invest Tennessee Exemption provides smaller issuers with a new avenue to local public capital without the expense of registration. Having greater access to capital, small issuers will be better positioned for growth.

In addition to providing Tennessee companies with a new source of capital, the Invest Tennessee Exemption creates an opportunity to build a stronger local market for capital, spur local economic development, and create new jobs. One only needs to review the historical record to know that this vision is feasible. Before the passage of landmark securities legislation in the 1930s, local and regional stock markets flourished in the United States. They expanded local economies and helped create new jobs.

The Invest Tennessee Exemption contributes to a movement, particularly in the South, that will help fix certain small capital formation problems that have emerged over the last 100 years. Federal regulations have limited small issuer access to only the wealthiest investors, while virtually eliminating their access to public markets. At the same time, national marketplaces, like the New York Stock Exchange, have maximized economies of scale to drive down transaction costs, making local capital less economical. The Invest Tennessee Exemption solves the problem of access and makes small capital formation economically feasible on a local level.

The Invest Tennessee Exemption will also have a positive impact on our broader economy. The consolidation of our public markets has created a major market failure that adversely impacts our economy. By catering to the largest companies, the most lucrative clients, national securities marketplaces have dangerously narrowed the field of publicly listed companies. Today, most of our national wealth is yoked to the performance of national public capital markets that list less than 1% of all US companies, a very small group of companies that all have enormous market capitalizations. As a result, the failure of one can shock the entire system. The Invest Tennessee Exemption will help to diversify our public markets, reducing this systemic risk.

Thank you for proposing a rule that protects our local capital market, encourages local economic growth, and strengthens our national economy.

Enclosed please find my proposed revisions to the New Rule.

Thank you.


Robert Zeglarski, Esq

Suggested editorial changes to Chapter 0780-04-02-.17 Invest Tennessee Exemption:

  1. In §3(a)(1)(i), insert "deemed to be" after "An issuer shall be..." to harmonize the language with Rule 147.

  2. Strike §4 and replace it with the following language that is more consistent with the Securities and Exchange Commission's Compliance and Disclosure Interpretations, released October 2, 2014:
    "(4) Use of the Internet. An issuer shall not use the Internet to offer or sell securities pursuant to this exemption unless such issuer limits communications that are offers only to those persons having Internet Protocol, or IP, addresses that originate from the state of Tennessee and prevents any offers to be made to persons having IP addresses that originate in a state other than Tennessee. The issuer shall maintain a log of all user IP addresses that have viewed issuer communications that are offers."

  3. With respect to the established authority set forth at the end of the New Rule, strike all references to federal regulations, which provide no source of state rulemalcing authority.

Cutwater Law PLLC
115 Lincoln Ct.
Nashville, TN 37205

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