Program Guidelines

INCITE Co-Investment Fund

Program Guidelines

Below you will find Program Guidelines for the INCITE Co-Investment Fund.  These Program Guidelines are subject to amendment, modification or supplement by the Tennessee Department of Economic and Community Development from time to time.

PROGRAM OVERVIEW

  1. What is the INCITE Co-Investment Fund?

The Tennessee Department of Economic and Community Development (“ECD”) is creating the INCITE (Innovation, Commercialization, Investment, Technology and Entrepreneurship) Co-Investment Fund (the “Fund”) using $29.7 million of federal funding Tennessee was awarded under the State Small Business Credit Initiative (“SSBCI”). The Fund’s design has been approved by the U.S. Department of Treasury, who administers the SSBCI program. The purpose of the Fund is to increase access to seed-, early- and expansion-stage capital for Tennessee businesses. The Fund is designed to be self-sustaining and to complement Tennessee’s existing capital access initiatives.

 

  1. What is the State Small Business Credit Initiative?

SSBCI is a $1.5 billion federal program administered by the U.S. Department of Treasury to strengthen state programs that provide access to capital. SSBCI is expected to spur up to $15 billion in new lending to small businesses and small manufacturers. SSBCI allows states, territories and eligible municipalities to create new or build upon existing state small business financing programs, including capital access programs, collateral support programs, loan participation programs, loan guarantee programs and venture capital programs.

 

  1. What are the goals of the Fund?

The goals of the Fund are:

  • Create and retain high-quality jobs in Tennessee;
  • Provide Tennessee companies access to additional seed-, early-, and expansion-stage venture capital, in part by attracting and leveraging significant private capital investment;
  • Accelerate technology commercialization from Tennessee research institutions to Tennessee companies; and
  • Minimize administrative costs and maximize funding to Tennessee companies.

 

  1. How does the Fund work?

The Fund will be set up to maximize eligibility and will not target specific investors, companies, or industry sectors. Any person or entity meeting the criteria of an approved investor (“Approved Investor”) will be eligible to apply for Co-Investment funding for any qualified investment (“Qualified Investment”) on a first come, first served basis. The amount of Co-Investment funding available for a specific transaction is discussed below. Proceeds from the liquidation of securities from Qualified Investments held by the Tennessee Technology Development Corporation d/b/a Launch Tennessee (“LaunchTN”) will be allocated among and distributed to LaunchTN and Approved Investors as discussed in Question #27. The Fund’s share of these proceeds will be reinvested into the program until March 31, 2017.

 

  1. How does the Fund differ from TNInvestco?

The ultimate goal of both programs is to expand access to capital for high-potential, high-growth companies in Tennessee. However, the Fund will function differently than the TNInvestco Program. Under the Fund, any investor that meets the Approved Investor criteria and submits a Qualified Investment will be eligible to take advantage of the program on a first come, first served basis. The Fund is funded by federal funds from the SSBCI managed by the U.S. Department of Treasury. Under the TNInvestco Program, ten firms were selected and seeded to make direct investments in Tennessee companies. The TNInvestco Program is funded by state funds.

 

  1. Who administers the Fund?

LaunchTN is administering the Fund on behalf of ECD.

 

APPROVED INVESTORS

 

  1. What are the eligibility requirements for Approved Investors?

Prior to applying for Co-Investment funding, an applicant must be certified by LaunchTN as an Approved Investor. Approved Investors must meet criteria one and two below:

  1. Be any of the following:
    1. TNInvestco, as certified by the State of Tennessee, in compliance with T.C.A. § 4-28-101 et seq.;
    2. Small Business Investment Company (SBIC), New Market Venture Capital Company or Rural Business Investment Company, as certified by the U.S. Small Business Administration;
    3. A person or entity that has at least $5 million of assets under management, or an investment vehicle that is managed exclusively by a person or entity having at least $5 million of assets under management, and is deemed an accredited investor under the Securities Act of 1933; or
    4. A person or entity that is deemed an accredited investor under the Securities Act of 1933. A person or entity approved solely under this Section D (i) is only eligible to participate in Qualified Investments in which there is a participating Approved Investor as qualified under Section A, B, or C above and (ii) is not eligible to be the lead Approved Investor for the respective Qualified Investment transaction.
  2. Submit a fully completed Approved Investor application to LaunchTN. The application is available at tntechnology.org/incite. The application process will ensure that:
    1. All Applicants: Have affirmed the legal criteria set forth in the Approved Investor application and been determined by LaunchTN to be an applicant acting in the best interest of the program.
    2. Section C Applicants Only: Have invested at least $1.5 million in entities that would qualify as Qualified Businesses as defined in Question #9 with the exception that the entities do not have to be headquartered, have their principle business operations, or at least 60% of their employees in the State of Tennessee. Investments by a Section C applicant who is an individual in (i) any entity in which the Section C applicant serves in a senior management position and/or (ii) any entity with respect to which the Section C applicant owns and/or controls more than 50% of the voting securities of such entity will be excluded for purposes of calculating the $1.5 million requirement in the preceding sentence. The Section C applicant must provide LaunchTN with supporting evidence of these investments.

Affirmative answers by an applicant to one or more questions contained in the “Legal” section of the Approved Investor application or adverse findings from any applicant owner, director, officer or executive background check conducted by LaunchTN as part of the application process may result in the rejection of an Approved Investor application.

Non-Tennessee persons and entities are eligible to be certified as Approved Investors as long as they meet all required Approved Investor criteria.

 

  1. How do you confirm that the Approved Investor has $5 million of assets under management for purposes of Section 1.C. of Question 7 above?

All investments that the applicant has made in a non-public company as well as all funds that are legally committed to a pooled investment vehicle are counted towards the $5 million threshold with the exception of (a) investments in real property and (b) with respect to any Section C applicant who is an individual, investments by the Section C applicant in (i) any entity in which the Section C applicant serves in a senior management position and/or (ii) any entity with respect to which the Section C applicant owns and/or controls more than 50% of the voting securities of such entity. Assets under management may also include liquid investments such as cash and marketable securities. An applicant must provide LaunchTN with supporting evidence of these assets.

 

QUALIFIED INVESTMENTS
 

  1. What are the eligibility requirements for Qualified Investments?

A Qualified Investment is defined as an investment of cash by an Approved Investor in a Qualified Business for the purchase of equity or equity warrants.

A Qualified Business is a business that meets the following requirements:

      • The business must be a non-public company.
      • The business must be headquartered in Tennessee; its principal business operations must be located in Tennessee; and at least 60% of its employees must be providing services in Tennessee to the business.
      • Is not engaged in a business involving:
        1. Real estate, real estate development or leasing;
        2. Insurance, banking or lending;
        3. Professional services provided by a lawyer, accountant, registered investment advisor or physician;
        4. Oil and gas exploration or mining;
        5. Gambling enterprises (unless the business earns less than 33% of its annual net revenue from lottery sales);
        6. Construction;
        7. The production or distribution of motion pictures, television shows or sound recordings;
        8. Pyramid sales, where the participant’s primary incentive is based on the sales made by an ever-increasing number of participants;
        9. Accommodation and food services establishments; and/or
        10. Retail establishments, except when the primary purpose of the business is the development or support of electronic commerce using the Internet.
      • Businesses engaged in activities that are prohibited by federal law or applicable law in the jurisdiction where the business is located or the activities are conducted will not be considered Qualified Businesses. Included in these activities is the production, servicing, or distribution of otherwise legal products that are to be used in connection with an illegal activity, such as selling drug paraphernalia or operating a motel that knowingly permits illegal prostitution.
      • Businesses engaged in speculative activities that develop profits from fluctuations in price rather than through normal course of trade, such as wildcatting for oil and dealing in commodities futures, will not be considered Qualified Businesses, unless such activities are incidental to the regular activities of the businesses and part of a legitimate risk management strategy to guard against price fluctuations related to the regular activities of the businesses.
      • Charitable, religious, or other non-profit institutions, government-owned corporations, consumer and marketing cooperatives, and churches and organizations promoting religious objectives are not Qualified Businesses.
      • Businesses must have less than 500 existing employees.
      • A business that is (i) an executive officer, director, or principal shareholder of LaunchTN; (ii) a member of the immediate family of an executive officer, director, or principal shareholder of LaunchTN; or (iii) a related interest of any such executive officer, director, principal shareholder or immediate family member, will not be considered a Qualified Business. For purposes of this requirement, the terms “executive officer,” “director,” “principal shareholder,” “immediate family,” and “related interest” refer to the same relationship to LaunchTN as the relationship described in Part 215 of Title 12 of the Code of Federal Regulations, or any successor to such part.
      • Businesses must meet the criteria set forth in the Qualified Investment application and be determined by LaunchTN to be acting in the best interest of the program.

Additionally, a Qualified Business must use Co-Investment funding for a “business purpose,” including without limitation start up costs, working capital, business procurement, franchise fees, equipment, inventory, and the purchase, construction, or renovation, or tenant improvements for, an eligible place of business that is not for passive real estate investment purposes. A “business purpose” does not include activities that relate to acquiring or holding passive investments (such as commercial real estate ownership and the purchase of securities) or lobbying activities (as defined in Section 3(7) of the Lobbying Disclosure Act of 1995, P.L. 104-65, as amended).

Further, a Qualified Business may not use Co-Investment Funding for any of the following prohibited purposes:

    • Reimbursing funds owed to any owner, including any equity injection or injection of capital for the Qualified Business’s continuance;
    • Purchasing any portion of the ownership interest of any owner of the Qualified Business;
    • Effecting a change that is not designed for the long-term benefit of the Qualified Business;
    • Refinancing existing debt where the lender is in a position to sustain a loss and the government (state or federal) would take over that loss;
    • Repaying delinquent federal or state income taxes, unless the Qualified Business has a payment plan in place with the relevant taxing authority;
    • Repaying taxes held in trust or escrow (e.g., payroll or sales taxes); or
    • Conducting basic or discovery research that is traditionally federally-funded (which is not intended to include general product development research).

A Qualified Business will be required to deliver to LaunchTN, as a condition to the closing of any Qualified Investment, a certification providing that the Qualified Business meets the Qualified Business requirements set forth above and that Co-Investment funding will be used for a business purpose and not for any prohibited purpose.

 

  1. How are Qualified Investments approved?

To obtain approval for a Qualified Investment, Approved Investors must complete the Qualified Investment application, which is available at www.launchtn.org/capital/incite.

Note that affirmative answers by a Qualified Business to one or more questions contained in the “Qualified Business Legal Certification,” which is a part of the Qualified Investment application, or adverse findings from any background check conducted by LaunchTN with respect to the Qualified Business or any of its owners, officers or executives as part of the Qualified Investment application process may result in the rejection of the Qualified Investment application.

 

  1. If I am an Approved Investor, can I make a Qualified Investment in a company that I own all or a portion of?

 Yes.

 

  1. If there are multiple Approved Investors participating in a single Qualified Investment, must every Approved Investor complete the Qualified Investment application?

 No. One Approved Investor may complete the Qualified Investment application on behalf of all of the Approved Investors participating in a single Qualified Investment. However, all Approved Investors participating in a single Qualified Investment must be parties to the same securities purchase agreement (see Question #22) and the same Co-Investment Agreement (as defined in Question #24), in each case, to which LaunchTN will also be a party. See Questions #22 and #24.

 

  1. Is there any situation where the Fund will not operate on a first come, first served basis as described in these Program Guidelines?

 Yes. In the event that Approved Investors exercise preemptive rights provided for by the terms of any securities purchased in a Qualified Investment in connection with the program, the Approved Investors exercising the preemptive rights will be required to submit a new Preemptive Rights application to LaunchTN as described in Question #42. LaunchTN will process the Preemptive Rights application and, if approved, the investment provided for in such application will be given priority over any proposed Qualified Investment contemplated by a Qualified Investment application that has been previously submitted but not yet approved.

 

FUNDING

 

  1. How much funding will the Fund co-invest for a particular Qualified Investment?

Funding will be made available in three tiers. Details on each tier are below. These descriptions are based on a single Approved Investor making a single Qualified Investment in a single Qualified Business. Question #15 provides information on situations in which two or more Approved Investors plan to invest in a particular Qualified Business. An Approved Investor’s matching funds must be invested in the same security and on the same terms as the Co-Investment funds.

Tier I: Seed Stage Investments (50%)

  • Seed stage Co-Investments from the Fund will range from $100,000 to $500,000 per Qualified Investment and will represent a $0.50 on the dollar match.
  • Approved Investors must invest between $200,000 and $1,000,000.
  • For example, an Approved Investor investing $200,000 in a Qualified Business will receive a Co-Investment from LaunchTN of $100,000 (50% match on $200,000).

Tier II: Early/Growth Stage Investments (33%)

      • Early/Growth stage Co-Investments from the Fund will range from $330,000.33 to $1,485,000 per Qualified Investment and will represent a 33% on the dollar match.
      • Approved Investors must invest between $1,000,001 and $4,500,000.
      • For example, an Approved Investor investing $3,000,000 in a Qualified Business will receive a Co-Investment from LaunchTN of $990,000 (33% match on $3,000,000).

Tier III: Expansion Stage Investments (25%)

        • Expansion stage Co-Investments from the Fund will range from $1,125,000.25, to $3,000,000 per Qualified Investment and will represent a $0.25 on the dollar match.
        • Approved Investors must invest between $4,500,001 and $12,000,000.
        • For example, an Approved Investor investing $10,000,000 in a Qualified Business will receive a Co-Investment from LaunchTN of $2,500,000 (25% match on $10,000,000).

 For a discussion of funding in the context of preemptive rights exercises, see Question #s 42 and 43.

 

  1. What happens if two or more Approved Investors plan to invest in the same Qualified Business?

 If two or more Approved Investors plan to invest in the same Qualified Business, one of the Approved Investors must complete the Qualified Investment application and indicate the other Approved Investors that are participating in the Qualified Investment in the appropriate section of the Qualified Investment application. In situations in which there are multiple Approved Investors investing in a single Qualified Business, the Co-Investment funding tier will be based on the aggregate amount of investment by all Approved Investors and the stock certificates or other securities evidencing the Qualified Investment will be issued to LaunchTN and the Approved Investors pro rata based on their respective investments in the Qualified Business. For example, in the context of a Tier III award, if Approved Investor #1 plans to invest $2 million in a Qualified Business and Approved Investor #2 plans to invest $3 million in the same Qualified Business, the total private sector investment from Approved Investors would be $5 million, thereby leveraging $1.25 million in Co-Investment funding. In this example, 32% of the securities resulting from the aggregate investment would be issued to Approved Investor #1, 48% of the securities resulting from the aggregate investment would be issued to Approved Investor #2, and 20% of the securities resulting from the aggregate investment would be issued to LaunchTN.

 

  1. If an Approved Investor is tranching an investment, will the Fund reserve funds for future tranches?

 No. However, an Approved Investor may apply for Co-Investment funding for a single Qualified Investment on multiple occasions, subject to the limitations outlined in Questions #20 and #21.

 

  1. What is the minimum total amount of funding an Approved Investor or syndicate of Approved Investors must be investing in a Qualified Business to qualify for the program?

 $200,000 (except in the context of preemptive rights exercises as described in Question #s 42-47).

 

  1. If participating in a syndicate of Approved Investors, what is the minimum amount of funding any single Approved Investor must be investing in a Qualified Business to qualify for the program?

 $50,000 (except in the context of preemptive rights exercises as described in Question #s 42-47).

 

  1. May an Approved Investor apply for funding for more than one Qualified Investment?

Yes.

 

  1. What is the maximum aggregate amount of Co-Investment funding a single Approved Investor can access?

 $3 million (inclusive of funds accessed by way of preemptive rights exercises).

 

  1. What is the maximum amount of Co-Investment funding that can go into a single Qualified Business, regardless of the number of Approved Investors in the Qualified Investment?

 $3 million (inclusive of funds accessed by way of preemptive rights exercises).

 

  1. How will an Approved Investor draw down funds from the program?

The Qualified Business will receive Co-Investment funding from LaunchTN pursuant to (1) the terms of a securities purchase agreement among LaunchTN, the Approved Investor(s) and the Qualified Business, or (2) the Approved Investor(s)’ and LaunchTN’s exercise of preemptive rights which may be granted in connection with the securities purchased as part of the Qualified Investment. The securities purchase agreement may be (1) in a form provided by the lead Approved Investor and containing certain non-negotiable required terms (the “Required Terms”) available at http://launchtn.org/investors/capital/incite or (2) the standard form non-negotiable Securities Purchase Agreement available at http://launchtn.org/investors/capital/incite. LaunchTN will provide Co-Investment funding directly to the Qualified Business upon LaunchTN’s receipt of satisfactory evidence that all Approved Investor(s) have fully funded their required investments in the Qualified Business. LaunchTN’s and the Approved Investor(s)’ investments in the Qualified Business must be provided (1) through and in accordance with one of the forms of securities purchase agreement described above or (2) pursuant to the exercise of preemptive rights as more fully described in Question #s 42-47.

If a Qualified Investment has been approved by LaunchTN, the Qualified Investment must be fully funded within 90 days after the date on which LaunchTN approved the Qualified Investment.

 

  1. Is there a lookback period?

 No. Only investments that have been approved as Qualified Investments in advance of closing are eligible for co-investment through the Fund. Any investment made in a Qualified Business other than pursuant to the terms of a securities purchase agreement among LaunchTN, the Approved Investor(s) and the Qualified Business as discussed in Question #22 or pursuant to the exercise of preemptive rights as more fully described in Question #s 42-47 will not be considered a Qualified Investment.

 

  1. Who will hold the stock certificates?

 Stock certificates or other securities will be titled separately in the names of LaunchTN and each Approved Investor.  LaunchTN and the Approved Investor(s) will each separately hold the stock certificates or other securities from the Qualified Business (or other successor entities) that resulted in a matching investment from the Fund. LaunchTN will provide a proxy to the lead Approved Investor so that the lead Approved Investor can vote securities owned by LaunchTN. LaunchTN’s appointment of the lead Approved Investor as its proxy will be pursuant to the terms of a non-negotiable Co-Investment Agreement (the “Co-Investment Agreement”) among LaunchTN and the Approved Investor(s) (available at www.tntechnology.org).

 

  1. How will Approved Investors be compensated?

 Approved Investors will receive a 25% carry of LaunchTN’s profits at the time of a liquidity event. See Questions #26 through #29 for additional details.

 

  1. How is a liquidity event defined?

 A liquidity event is any transaction in which LaunchTN receives (1) cash or (2) equity securities having a “readily determinable fair value,” as defined by the Financial Accounting Standards Board Accounting Standards Codification, as amended (“Marketable Securities”), in exchange for securities of the Qualified Business (or any securities into which such securities are converted or for which such securities are exchanged). Share exchanges and other similar transactions will not be considered liquidity events to the extent LaunchTN’s interest in a Qualified Business is not tendered for cash or Marketable Securities.

 

  1. What happens to the proceeds from a liquidity event?

Proceeds from a liquidity event will be allocated as follows:

  1. First, proceeds from a liquidity event up to the total amount of LaunchTN’s capital investment will be returned to LaunchTN.
  2. Second, 25% of any profits from the liquidity event (calculated by subtracting the amount of LaunchTN’s capital investment from LaunchTN’s proceeds from the liquidity event) will be allocated and distributed to the Approved Investor(s) pro rata based on the Approved Investor(s)’ respective capital investments.
  3. Third, 75% of any profits from a liquidity event (as calculated under B above) will be returned to the program for reinvestment as outlined in Question #28.

 

  1. What will LaunchTN do with its share of proceeds from liquidity events?

 LaunchTN’s share of proceeds from liquidity events (as determined in the manner set forth in Question #27 above) will be reinvested into the program until March 31, 2017, as outlined in Question #30. After that time, all of LaunchTN’s proceeds will be returned to ECD unless other arrangements are made between LaunchTN and ECD.

 

  1. Will Approved Investors receive a management fee?

No.

 

PROCESS

 

  1. What will happen if the Fund is over-subscribed?

 Except with respect to an exercise of preemptive rights (as more fully described in Question #13), funding will be distributed on a first-come, first-served basis as determined by the date and time a complete Qualified Investment application is submitted to LaunchTN.  After all Co-Investment funds are fully allocated, LaunchTN will stop accepting Qualified Investment and Preemptive Rights applications and all previously submitted Qualified Investment and Preemptive Rights applications will be denied.  At such time as LaunchTN has received at least $3 million in proceeds from liquidity events, LaunchTN will reopen the Approved Investor and Qualified Investment and Preemptive Rights application processes until those funds are allocated.  As outlined in Question #28 above, this process will reoccur until March 31, 2017.

 

  1. When will the Approved Investor application be available?

December 28, 2011.

 

  1. When will LaunchTN begin accepting Approved Investor applications?

 December 28, 2011.

 

  1. When will the Qualified Investment application be available?

 The Qualified Investment application and related forms will be available for review on February 9, 2012.

 

  1. When will LaunchTN begin accepting Qualified Investment applications?

 February 15, 2012, at 3:30pm CST.

 

  1. Will there be an application fee?

 Yes. LaunchTN will charge a non-refundable application fee of $500 for each Approved Investor application. An additional $5,000 non-refundable application fee will be charged for each Qualified Investment application. For each Preemptive Rights application, an additional non-refundable application fee will be charged as follows: (1) if the amount of Co-Investment funding obtained as a result of the application is less than $75,000, the fee shall be $2,000, and (2) if the amount of Co-Investment funding obtained as a result of the application is equal to or greater than $75,000, the fee shall be $3,000.

 

  1. What are the reporting requirements for Approved Investors?

 In order for ECD to comply with Section 4.7 of its Allocation Agreement with the U.S. Department of Treasury, Approved Investors that have made a Qualified Investment must submit an annual report to LaunchTN by March 15th of every year that includes:

      1. A unique investment identification number (to be provided by LaunchTN);
      2. The census tract and zip code in which the Qualified Business’s principal executive office is located;
      3. The total amount of venture capital and other financing invested in the Qualified Business and, of that amount, the portion that is from non-private support (e.g., government loans and grants);
      4. The amount of Co-Investment funding provided by the Fund;
      5. The date of the Qualified Investment in the Qualified Business;
      6. The Qualified Business’s annual revenues in the last fiscal year;*
      7. The number of Full Time Equivalent (FTE) employees of the Qualified Business;
      8. The number of Full Time Equivalent (FTE) employees of the Qualified Business that provide services in Tennessee to the Qualified Business;
      9. The 6-digit North American Industry Classification System (NAICS) code for the Qualified Business’s industry;
      10. The year the Qualified Business was incorporated or organized;
      11. The estimated number of jobs created and the estimated number of jobs retained as a result of LaunchTN’s and the Approved Investor(s)’ investment in the Qualified Business; and
      12. The amount of additional Qualified Business follow-on private financing occurring after the closing of the Qualified Investment.

* Only required for the first annual report following the funding of a Qualified Investment.

 

  1. Will my applications be public information?

 Applications and supporting documentary material will be kept confidential pursuant to T.C.A. § 4-14-308. However, a list of Approved Investors and their contact information will be made publicly available on the LaunchTN website so that Tennessee companies seeking funding are able to contact Approved Investors.

 

  1. What steps are ECD and LaunchTN taking to ensure that historically underserved communities and disadvantaged populations are aware of the program?

 For purposes of the SSBCI program, the U.S. Department of Treasury defines small businesses in historically underserved communities as small businesses in low- and moderate-income, minority and other underserved communities, including women- and minority-owned small businesses. ECD and LaunchTN are taking six steps to ensure these communities and populations are made aware of the Fund.

First, the Fund will be set up to maximize eligibility and will not target specific investors, companies, or industry sectors. Any Approved Investor is eligible to apply for Co-Investment funding for a Qualified Investment.

Second, ECD will leverage its existing Business Enterprise Resource Office (BERO) to ensure that small businesses in low-and moderate-income, minority, and undeserved communities and women- and minority-owned businesses are aware of the Fund and how to access its funding. BERO provides assistance and development opportunities to small and minority- and women-owned businesses. Through BERO, ECD partners with other state agencies and small business support programs to provide information about programs, entrepreneurial support and one-on-one technical assistance.

Third, as part of the Jobs4TN Plan, ECD is conducting extensive outreach to the business and entrepreneurial communities across Tennessee in each of ECD’s nine “jobs base camp” regions. ECD’s 27-employee field staff will be calling on hundreds of businesses each month. ECD will provide information about the Fund to businesses during these meetings. ECD will track and monitor outreach efforts to businesses in underserved communities and disadvantaged populations.

Fourth, as part of the INCITE Initiative, ECD will be supporting a business accelerator in each of the nine “jobs base camp” regions across the state. Several of these accelerators will be located in underserved communities and supporting small businesses in disadvantaged populations.

Fifth, as part of its reporting obligations under the program, LaunchTN will collect and report to ECD information on businesses receiving funding under the program to monitor performance of the program in providing access to capital to underserved communities and disadvantaged populations.

Finally, ECD and LaunchTN will leverage both organizations’ existing websites to provide information on the Fund to interested small businesses. LaunchTN will create a Fund webpage that will make contact information for Approved Investors publicly available.

 

FOR TENNESSEE COMPANIES

  1. I am a small business. Can I directly access the program?

 No, but an Approved Investor can make a Qualified Investment in your business. A list of Approved Investors will be available at http://launchtn.org/investors/capital/incite.

 

PROGRAM GUIDELINES UPDATES

  1. Who will be subject to background checks performed by LaunchTN?

LaunchTN will perform background checks on the following individuals in connection with an Approved Investor application: (a) all directors of the Approved Investor applicant, (b) the president/chief executive officer, chief financial officer, and the next three highest ranking officers or executives of the Approved Investor applicant, and (c) any person who (i) beneficially owns, directly or indirectly, 10% or more of any equity securities of the Approved Investor applicant and (ii) is not a “qualified institutional buyer” (as defined in Rule 144A(a)(1) of the Securities Act of 1933).

LaunchTN will perform background checks on the following individuals in connection with a Qualified Investment application: (a) the three highest ranking officers or executives of the Qualified Business and (b) any person who (i) beneficially owns, directly or indirectly, 15% or more of any equity securities of the Qualified Business, and (ii) is not a “qualified institutional buyer” (as defined in Rule 144A(a)(1) of the Securities Act of 1933).

LaunchTN will perform background checks on the following individuals in connection with a Preemptive Rights application: (a) any of the three highest ranking officers or executives of the Qualified Business that were not listed in a prior Qualified Investment application or Preemptive Rights application during the 12-month period immediately prior to the date of the Preemptive Rights application and (b) any person who (i) beneficially owns, directly or indirectly, 15% or more of any equity securities of the Qualified Business, (ii) is not a “qualified institutional buyer” (as defined in Rule 144A(a)(1) of the Securities Act of 1933), and (iii) was not listed in a prior Qualified Investment application or Preemptive Rights application during the 12-month period immediately prior to the date of the Preemptive Rights application.

 

  1. Can funds provided by Approved Investor(s) in a Qualified Investment or preemptive rights exercise be used by the Qualified Business to repay indebtedness owed by the Qualified Business to an Approved Investor participating in the Qualified Investment or preemptive rights exercise?

Yes. The restriction on the use of funds by a Qualified Business listed in Question #9 prohibiting “the reimbursement of funds owed to any owner” is a prohibition on the use specifically of LaunchTN’s Co-Investment funding provided in a Qualified Investment or as part of a preemptive rights exercise, not the use of funds provided by an Approved Investor. However, if a Qualified Business intends to use or uses funds provided by an Approved Investor to repay or reimburse funds owed to any Approved Investor in the Qualified Investment or preemptive rights exercise (a “Receiving Approved Investor”), the calculation of LaunchTN’s amount of Co-Investment funding may be affected.

In the event that a Qualified Business intends to use or uses funds received from Approved Investor(s) in a Qualified Investment or preemptive rights exercise to repay or reimburse funds owed to any Receiving Approved Investor, the funds of Approved Investor(s) used or to be used to repay or reimburse a Receiving Approved Investor will be eligible for LaunchTN’s matching Co-Investment funding (discussed in Questions #14 and #15) only if the following criteria are satisfied:

      1. The Qualified Business’s indebtedness to or obligation to reimburse the Receiving Approved Investor is short-term in nature and, therefore, has been in existence no more than 60 days prior to the closing of the Qualified Investment or preemptive rights exercise;
      2. The reimbursement/repayment amount provided or to be provided by the Qualified Business to the Receiving Approved Investor must not exceed 25% of the aggregate amount of all Approved Investor funds received by the Qualified Business in the Qualified Investment or preemptive rights exercise; and
      3. The reimbursement/repayment amount provided or to be provided by the Qualified Business to the Receiving Approved Investor must not exceed 50% of the amount of funds provided in the Qualified Investment or preemptive rights exercise by the Receiving Approved Investor.

42.   Can an Approved Investor’s exercise of preemptive rights result in additional Co-Investment funding?

Yes. If securities purchased by Approved Investor(s) and LaunchTN in a Qualified Investment have preemptive rights, the Approved Investor(s)’ exercise of such preemptive rights may result in Co-Investment funding under the program, provided that (1) the Company has not previously received, in the aggregate, the maximum amount of Co-Investment funding permitted from the Fund as provided in these Program Guidelines, (2) LaunchTN’s proposed Co-Investment amount is equal to or greater than the minimum amount stated in Question #45, (3) all Co-Investment funds available in the Fund have not already been fully allocated, (4) the Fund has not terminated in accordance with these Program Guidelines, and (5) the applying Approved Investor has not accessed the maximum amount of funding available to such Approved Investor as set forth in Question #20. Approved Investors exercising preemptive rights must submit a Preemptive Rights application (to be provided and available at www.launchtn.org/capital/incite) at least 10 days prior to the exercise of the preemptive rights. If the Preemptive Rights application is approved, the funding of the preemptive rights exercise will be given priority over funding requested in any Qualified Investment application previously submitted but not yet approved.

 

  1. How will the amount of Co-Investment funding be determined if LaunchTN exercises preemptive rights?

The amount of any investment made by LaunchTN pursuant to the exercise of preemptive rights will not be subject to the limitations of the tiers discussed in Question #14. Rather, the amount of such investment will be determined based on the aggregate preemptive rights exercise by the Approved Investor(s) that were a party to prior Qualified Investment Application(s) approved in connection with Co-Investment(s) in the applicable Qualified Business (“Qualified Approved Investors”). The amount of each Qualified Approved Investor’s exercise will be determined based on the terms of the applicable preemptive right as originally drafted notwithstanding any modification or waiver thereof. LaunchTN will exercise its preemptive right to purchase a number of securities equal to: (A) the number of securities purchased by all Qualified Approved Investors pursuant to the applicable preemptive rights provision divided by (B) the total number of securities available to the Qualified Approved Investors for purchase pursuant to the applicable preemptive rights provision multiplied by (C) the number of securities available to LaunchTN for purchase pursuant to the applicable preemptive rights provision. If the number of securities purchased by a Qualified Approved Investor exceeds the number of securities available to the Qualified Approved Investor under the terms of the applicable preemptive rights provision as originally drafted, the excess securities purchased will not be counted toward the aggregate total purchased by Qualified Approved Investors for purposes of clause (A) above notwithstanding any modification or waiver of the preemptive right in connection with the applicable preemptive right exercise.

The examples below are provided for illustration purposes only. In each of the following examples, LaunchTN is entitled to purchase 1,000 securities under the applicable preemptive rights provision as originally drafted.

 

Example 1

Qualified Approved InvestorSecurities Which Qualified Approved Investor is Entitled to Purchase Pursuant to the Preemptive Rights ProvisionTotal Securities PurchasedSecurities Counted Toward Aggregate Total
A1,0001,0001,000
B1,0001,0001,000
C1,0001,0001,000
Total3,0003,0003,000
Securities Purchased by LaunchTN: 1,000

 

 

Example 2

Qualified Approved InvestorSecurities Which Qualified Approved Investor is Entitled to Purchase Pursuant to the Preemptive Rights ProvisionTotal Securities PurchasedSecurities Counted Toward Aggregate Total
A1,00000
B1,000500500
C1,0001,0001,000
Total3,0001,5001,500
Securities Purchased by LaunchTN: 500

 

 

Example 3

Qualified Approved InvestorSecurities Which Qualified Approved Investor is Entitled to Purchase Pursuant to the Preemptive Rights ProvisionTotal Securities PurchasedSecurities Counted Toward Aggregate Total
A1,00000
B1,000500500
C1,0002,5001,000
Total1,0003,0001,500
Securities Purchased by LaunchTN: 500

 

 

  1. Must the Qualified Business meet the requirements set forth in Question #9 at the time of the preemptive rights exercise in order to receive additional Co-Investment funding pursuant to a preemptive rights exercise?

Yes. LaunchTN will only exercise a preemptive right if the Qualified Business would be eligible for a Qualified Investment as described in Question #9.

 

  1. Is LaunchTN’s exercise of preemptive rights subject to a minimum or maximum investment amount?
      Yes. Unless otherwise approved by LaunchTN, in order for LaunchTN to participate in a preemptive rights exercise, the amount of LaunchTN’s proposed investment must be at least $25,000, as calculated pursuant to the formula set forth in the Preemptive Rights application. Additionally, unless otherwise approved by LaunchTN, LaunchTN will not invest more than $500,000 pursuant to a preemptive rights exercise.

 

  1. What constitutes a “Preemptive Right” for purposes of determining whether a Preemptive Rights application must be filed?

Under the Co-Investment Agreement by and among LaunchTN and the Approved Investors a party thereto, “Preemptive Right” is defined as “any right given to a holder of Company equity (an ‘Equity Holder’) to purchase newly issued securities of the Company in order to prevent dilution of the Equity Holder’s ownership interest in the Company.” Such rights may originate in any document relating to securities purchased by LaunchTN, including, but not limited to, the original purchase agreement, a shareholders’ agreement, an operating agreement, or any of the Qualified Business’s governing documents. Furthermore, if Approved Investor(s) waive their preemptive rights, or any term thereof, but proceed to purchase securities in the Qualified Business and such purchase would result in LaunchTN’s ownership interest in the Qualified Business being diluted, such purchase will be treated as an exercise of a preemptive right for which an application must be filed. In such event, unless otherwise approved by LaunchTN, LaunchTN’s purchase of securities will be based on the terms of the preemptive right being waived as such terms were originally drafted.

 

  1. Must an Approved Investor notify LaunchTN in the event that it waives a preemptive right?

Yes. An Approved Investor is required to give LaunchTN notice of its exercise or waiver of any rights, including preemptive rights, pursuant to the Co-Investment Agreement to which such Approved Investor is a party.

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