AB579: Bill Text

LRB-3742/1

KSH&JS:jlg:ijs

1997 - 1998 LEGISLATURE

1997 Assembly BILL 579

October 29, 1997 - Introduced by Representatives Ward, Hoven, R. Potter, Green, Plale, Kedzie, Lazich, La Fave, Schafer, Notestein, Gunderson, Ladwig, Goetsch, Plouff, Porter, Lorge, Hasenohrl, Freese, F. Lasee, Brandemuehl and Staskunas, cosponsored by Senators Moore, Plache, Darling, Fitzgerald, Breske, Grobschmidt, Wirch, Huelsman, C. Potter, George, Roessler and Rude. Referred to Committee on Financial Institutions.

AB579,1,6 An Act to create 20.143 (1) (hm), 76.635 and subchapter II of chapter 560 [precedes 560.30] of the statutes; relating to: creating a certified capital company program for companies that make certain types of investments, providing tax credits to persons who make certain investments in certified capital corporations, granting rule-making authority and making an appropriation.

Analysis by the Legislative Reference Bureau

This bill allows insurers that pay a fee based on their gross premiums, rather than an income tax or franchise tax, to claim as a credit against their license fees their investments in certified capital companies. The insurers that are eligible for the credit are life insurers, out-of-state accident and health insurers, mortgage guarantee insurers, out-of-state fire insurers, out-of-state ocean marine insurers and out-of-state companies that sell other kinds of property and casualty insurance. Under the bill, a "certified capital company" is subject to a range of requirements designed to ensure that the company is engaged in providing venture capital financing to certain types of qualified businesses. In order for an insurer to be eligible for the credit, the insurer's investment in a certified capital company must be made in a lump sum, but only 10% of the amount of the investment may be claimed as a credit in any year. Credits that are not used to offset the license fees may be carried forward. Unused credits may also be sold to another insurer that is subject to the premiums tax, if the seller notifies the department of revenue of the sale and provides the department a copy of the sale documents.

Under the bill, certain types of entities may apply to the department of commerce for certification as a certified capital company. The department of commerce may certify an applicant as a certified capital company if, among other things, the applicant is engaged in investing cash in qualified businesses, has a net worth of at least $500,000, meets certain requirements regarding experience in the venture capital industry and pays a $7,500 application fee. In order to remain certified as a certified capital company, the company must invest a specified percentage of its capital in certain types of small businesses, called "qualified businesses". The certified capital company have must placed 30% of its capital in qualified businesses within 3 years and 50% of its capital in qualified businesses within 5 years. The bill requires the department of commerce to promulgate rules governing the extent to which short-term investments may be counted toward these percentage requirements, as well as the extent to which the reinvestment of the proceeds of an investment in a qualified business may be counted. The remaining capital of a certified capital company may generally be invested as the company sees fit, except that it may not invest in an insurer or an affiliate of an insurer and except that no more than 15% of the company's capital may be placed in any one qualified business.

In general, a qualified business must be headquartered and have its principal business operations in Wisconsin. A qualified business must be in need of venture capital and must be unable to obtain conventional financing. The qualified business must have no more than 300 employes (at least 75% of whom must be employed in Wisconsin), must have had not more than $6,000,000 in average annual net income over its most recent 2 fiscal years, and must have a net worth of no more than $18,000,000. Generally, a business is not a qualified business if it is engaged in banking, lending, the development of real estate for resale, or professional services provided by accountants, lawyers or physicians. Even if a business does not meet these requirements, it may be considered a qualified business if the department of commerce determines that an investment in the business will further state economic development and the department issues a written opinion to that effect.

The bill subjects certified capital companies to a variety of reporting requirements and requires them to pay an annual fee of $5,000. The bill also limits the ability of certified capital companies to make distributions. A certified capital company may make a distribution only if the distribution will not adversely affect the ability of the certified capital company to place 100% of its initial capital in qualified businesses, if the distribution is used to pay debt or certain management fees or if the distribution is to pay the increased taxes of an investor resulting from the investor's investment in the certified capital company.

The bill requires the department of commerce to conduct an annual review of a certified capital company to determine whether the company is in compliance with the bill's provisions. The bill contains provisions for disqualifying a certified capital company's investment pool or decertifying the certified capital company, if the company violates certain of the bill's requirements. If the certified capital company is decertified or the investment pool is disqualified, the insurance company tax credits claimed for the investment in that certified capital company or pool are subject to recapture or forfeiture.

For further information see the state fiscal estimate, which will be printed as an appendix to this bill.

The people of the state of Wisconsin, represented in senate and assembly, do enact as follows:

AB579, s. 1 Section 1. 20.143 (1) (hm) of the statutes is created to read:

AB579,3,3 20.143 (1) (hm) Certified capital companies. All moneys received under subch. II of ch. 560 for the cost of administering subch. II of ch. 560.

AB579, s. 2 Section 2. 76.635 of the statutes is created to read:

AB579,3,5 76.635 Credit. (1) Definitions. In this section:

AB579,3,6 (a) "Certified capital company" has the meaning given in s. 560.30 (2).

AB579,3,7 (b) "Certified capital investment" has the meaning given in s. 560.30 (4).

AB579,3,8 (c) "Investment date" has the meaning given in s. 560.30 (6).

AB579,3,9 (d) "Investment pool" has the meaning given in s. 560.30 (7).

AB579,3,10 (e) "Qualified investment" has the meaning given in s. 560.30 (11).

AB579,3,16 (2) Credit. An insurer that makes a certified capital investment may credit against the fees due under s. 76.60, 76.63, 76.65 or 76.66, for 10 years beginning with the year of the investment, either 10% of that investment or the amount by which the sum of the insurer's certified capital investments and the insurer's qualified investments exceeds the insurer's qualified investments in the taxable year before the insurer first claimed the credit under this section, whichever is less.

AB579,4,2 (3) Carry-forward. If the credit under sub. (2) is not entirely offset against the fees under s. 76.60, 76.63, 76.65 or 76.66 otherwise due, the unused balance may be carried forward and credited against those fees in the following years to the extent that it is not offset by those fees otherwise due in all the years between the year in which the investment was made and the year in which the carry-forward credit is claimed.

AB579,4,9 (4) Recapture. (a) If a certified capital company is decertified, or an investment pool is disqualified, under s. 560.37 before the certified capital company fulfills the investment requirement under s. 560.34 (1) (a) 1. with respect to the investment pool; any insurer that has received a credit under this section with respect to that investment pool shall repay that credit to the department of revenue, for deposit in the general fund, and may not claim more credit in respect to that investment pool.

AB579,4,19 (b) If a certified capital company fulfills the investment requirement under s. 560.34 (1) (a) 1. with respect to an investment pool but the certified capital company is decertified, or an investment pool is disqualified, under s. 560.37 before the certified capital company fulfills the investment requirement under s. 560.34 (1) (a) 2. for that investment pool, any insurer that has received a credit under this section with respect to that investment pool shall repay all credits that were claimed for taxable years after the taxable year that includes the 3rd anniversary of the investment date of the investment pool and may claim no more credits for taxable years after the taxable year that includes the 3rd anniversary of the investment date of the investment pool.

AB579,4,23 (5) Sale of credit. An insurer may sell a credit under this section to another insurer that is subject to taxation under this subchapter if the insurer notifies the department of revenue of the sale and includes with that notification a copy of the transfer documents.

AB579, s. 3 Section 3. Subchapter II of chapter 560 [precedes 560.30] of the statutes is created to read:

AB579,5,1 CHAPTER 560

AB579,5,2 SUBCHAPTER II

AB579,5,3 CERTIFIED CAPITAL COMPANIES

AB579,5,4 560.30 Definitions. In this subchapter:

AB579,5,6 (1) "Affiliate" means, with respect to a certified capital company or a certified investor, any of the following:

AB579,5,9 (a) A person who, directly or indirectly, owns, controls, or holds power to vote, 10% or more of the outstanding voting securities or other voting ownership interests of the certified capital company or certified investor.

AB579,5,12 (b) A person, 10% of whose outstanding voting securities or other voting ownership interests are directly or indirectly owned, controlled or held with power to vote by the certified capital company or certified investor.

AB579,5,14 (c) A person directly or indirectly controlling, controlled by, or under common control with, the certified capital company or certified investor.

AB579,5,16 (d) A partnership in which the certified capital company or certified investor is a general partner.

AB579,5,19 (e) A person who is an officer, director or agent of the certified capital company or certified investor, or is an immediate family member of such an officer, director or agent.

AB579,5,21 (2) "Certified capital company" means a person certified by the department under s. 560.31.

AB579,5,22 (3) "Certified capital company tax credit" means the tax credit under s. 76.635.

AB579,6,2 (4) "Certified capital investment" means an investment in a certified capital company that is certified under s. 560.32 (2) and that fully funds either the investor's equity interest in a certified capital company, a qualified debt instrument that a certified capital company issues, or both.

AB579,6,4 (5) "Certified investor" means a person who makes a certified capital investment.

AB579,6,7 (6) "Investment date" means, with respect to each investment pool, the date on which the last certified capital that is part of that investment pool was invested in the certified capital company.

AB579,6,11 (7) "Investment pool" means the aggregate of all investments of certified capital in a certified capital company that are made as part of the same transaction, except that investments received more than 30 days apart may not be considered part of the same investment pool.

AB579,6,13 (8) "Qualified business" means a business which is a qualified business under s. 560.33.

AB579,6,20 (9) "Qualified debt instrument" means a debt instrument that a certified capital company issues at par value or at a premium; that has an original maturity date of at least 5 years from the date on which it was issued; that has a repayment schedule that is no faster than a level principal amoritization and, until the certified capital company may make distributions other than qualified distributions, the interest, distribution or payment features of which are not related to the certified capital company's profitability or the performance of its investment portfolio.

AB579,6,22 (10) "Qualified distribution" means a distribution or payment by a certified capital company to its equity holders for any of the following:

AB579,6,24 (a) The costs of forming, syndicating, managing or operating the certified capital company.

AB579,7,2 (b) An annual management fee that does not exceed 2.5% of the certified capital company's total certified capital.

AB579,7,4 (c) Reasonable and necessary fees paid for professional services related to the operation of the certified capital company.

AB579,7,8 (d) A projected increase in federal or state taxes, including penalties and interest on those taxes, of the equity owners of the certified capital company if those amounts are related to the certified capital company's ownership, management or operation.

AB579,7,10 (11) "Qualified investment" means an investment of cash in a qualified business for the purchase of any of the following:

AB579,7,11 (a) An equity security of the qualified business.

AB579,7,13 (b) A debt security of the qualified business if the debt has a maturity of at least 5 years and if one of the following conditions is met:

AB579,7,14 1. The debt is unsecured.

AB579,7,16 2. The debt is convertible into equity securities or equity participation instruments such as options or warrants.

AB579,7,23 560.31 Certification of certified capital companies. (1) Application. The department shall promulgate rules establishing procedures under which a person may apply to become a certified capital company. The department shall grant or deny an application for certification under this section within 30 days of the date of application. If the department denies certification, the department shall include with the denial a detailed description of the grounds for the refusal, including suggestions for removal of those grounds.

AB579,8,3 (2) Requirements for certification. The department shall certify a person as a certified capital company if the department determines that all of the following conditions have been met:

AB579,8,6 (a) The person is a partnership, corporation, trust or limited liability company, whether organized for profit or not for profit, that has as its primary business activity the investment of cash in qualified businesses.

AB579,8,8 (b) The person has a net worth, at the time of application, of at least $500,000 and has at least $500,000 in cash, cash equivalents and marketable securities.

AB579,8,11 (c) The directors, officers, general partners, trustees, managers or members or persons having a similar function are familiar with the requirements of this subchapter.

AB579,8,13 (d) At least 2 officers, directors, general partners, trustees, managers or members each have at least 2 years of experience in the venture capital industry.

AB579,8,15 (e) The person has included, in any offering material involving the sale of securities, the statement required under s. 560.32 (1).

AB579,8,16 (f) The person has paid a nonrefundable application fee of $7,500.

AB579,8,19 560.32 Investments in certified capital companies. (1) Required disclosures in securities offerings. Any offering material involving the sale of securities of a certified capital company shall include all of the following statements:

AB579,8,24 (a) "By authorizing the formation of a certified capital company, the state does not necessarily endorse the quality of management or the potential for earnings of the company and is not liable for damages or losses to a certified investor in the company. Use of the word "certified" in an offering is not a recommendation or endorsement of the investment by the State of Wisconsin Department of Commerce."

AB579,9,9 (b) "Investments in a prospective certified capital company prior to the time the company is certified are not eligible for a certified capital company investment credit under section 76.635 of the Wisconsin Statutes. Investments in a certified capital company are not eligible for a certified capital company investment credit under section 76.635 of the Wisconsin Statutes unless the proposed investment is certified under section 560.32 (2) of the Wisconsin Statutes before the investment is made. In the event that certain statutory provisions are violated, the state may require forfeiture of unused certified capital company investment credits and repayment of used certified capital company investment credits."

AB579,9,17 (2) Certification of certified capital investments. (a) A person may apply to make a certified capital investment in a certified capital company by providing notice under this paragraph to the department on a form specified by the department. The notice shall include the name of the person, the name of the certified capital company, the amount of the investment and any other information specified by the department. The notice shall also include an undertaking by the person to make the investment within 5 days after the department notifies the person that the investment has been certified.

AB579,9,20 (b) The department may certify an investment under this subsection only if, after the certification, the department will not have certified a total of more than $50,000,000 in investments under this subsection.

AB579,9,24 (c) 1. Except as provided in subd. 2., the department may not certify an investment under this subsection if, after the certification, the investor, together with all affiliates of the investor, would have made more than $10,000,000 in certified capital investments in that year.

AB579,10,3 2. If, by November 1 of a year, the department has certified less than $50,000,000 in certified capital investments, the limitation under subd. 1. does not apply for the remainder of that year.

AB579,10,11 (3) Limitation on certified investor investment. A certified investor may not, individually, or with or through one or more affiliates, own 10% of more of the equity securities in, be a general partner or manager of, or otherwise control the investments of the certified capital company. This subsection does not preclude a certified investor from exercising its legal rights and remedies, including interim management of a certified capital company, in the event that a certified capital company is in default of its statutory or contractual obligations to the certified investor.

AB579,10,18 560.33 Qualified businesses. (1) Qualifications. A business is a qualified business if the department issues a written opinion under sub. (2) that the business is a qualified business, if the department fails to provide a certified capital company with a written opinion under sub. (2) within 10 working days after a request for an opinion is received by the department, or if all of the following requirements are met as of the time that a certified capital company, or any affiliate of the certified capital company, makes its first investment in the business:

AB579,10,20 (a) The business is headquartered in this state and its principal business operations are located in this state.

AB579,10,22 (am) The business is in need of venture capital and is unable to obtain conventional financing, as defined by the department by rule.

AB579,10,24 (b) The business has no more than 300 employes, at least 75% of whom are employed in this state.

AB579,11,4 (c) During its 2 most recent fiscal years, the business had, together with all of its consolidated affiliates, an average annual net income, after federal income taxes and excluding any carry-over losses, of not more than $6,000,000, as determined in accordance with generally accepted accounting principles.