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:
SB333, s. 1
1Section
1. 20.143 (1) (hm) of the statutes is created to read:
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20.143
(1) (hm)
Certified capital companies. All moneys received under subch.
3II of ch. 560 for the cost of administering subch. II of ch. 560.
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4Section
2. 76.635 of the statutes is created to read:
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576.635 Credit. (1) Definitions. In this section:
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(a) "Certified capital company" has the meaning given in s. 560.30 (2).
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(b) "Certified capital investment" has the meaning given in s. 560.30 (4).
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(c) "Investment date" has the meaning given in s. 560.30 (6).
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(d) "Investment pool" has the meaning given in s. 560.30 (7).
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(e) "Qualified investment" has the meaning given in s. 560.30 (11).
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11(2) Credit. An insurer that makes a certified capital investment may credit
12against the fees due under s. 76.60, 76.63, 76.65 or 76.66, for 10 years beginning with
13the year of the investment, either 10% of that investment or the amount by which
14the sum of the insurer's certified capital investments and the insurer's qualified
15investments exceeds the insurer's qualified investments in the taxable year before
16the insurer first claimed the credit under this section, whichever is less.
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17(3) Carry-forward. If the credit under sub. (2) is not entirely offset against the
18fees under s. 76.60, 76.63, 76.65 or 76.66 otherwise due, the unused balance may be
19carried forward and credited against those fees in the following years to the extent
1that it is not offset by those fees otherwise due in all the years between the year in
2which the investment was made and the year in which the carry-forward credit is
3claimed.
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4(4) Recapture. (a) If a certified capital company is decertified, or an
5investment pool is disqualified, under s. 560.37 before the certified capital company
6fulfills the investment requirement under s. 560.34 (1) (a) 1. with respect to the
7investment pool; any insurer that has received a credit under this section with
8respect to that investment pool shall repay that credit to the department of revenue,
9for deposit in the general fund, and may not claim more credit in respect to that
10investment pool.
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(b) If a certified capital company fulfills the investment requirement under s.
12560.34 (1) (a) 1. with respect to an investment pool but the certified capital company
13is decertified, or an investment pool is disqualified, under s. 560.37 before the
14certified capital company fulfills the investment requirement under s. 560.34 (1) (a)
152. for that investment pool, any insurer that has received a credit under this section
16with respect to that investment pool shall repay all credits that were claimed for
17taxable years after the taxable year that includes the 3rd anniversary of the
18investment date of the investment pool and may claim no more credits for taxable
19years after the taxable year that includes the 3rd anniversary of the investment date
20of the investment pool.
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21(5) Sale of credit. An insurer may sell a credit under this section to another
22insurer that is subject to taxation under this subchapter if the insurer notifies the
23department of revenue of the sale and includes with that notification a copy of the
24transfer documents.
SB333, s. 3
1Section
3. Subchapter II of chapter 560 [precedes 560.30] of the statutes is
2created to read:
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CERTIFIED CAPITAL COMPANIES
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6560.30 Definitions. In this subchapter:
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7(1) "Affiliate" means, with respect to a certified capital company or a certified
8investor, any of the following:
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(a) A person who, directly or indirectly, owns, controls, or holds power to vote,
1010% or more of the outstanding voting securities or other voting ownership interests
11of the certified capital company or certified investor.
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(b) A person, 10% of whose outstanding voting securities or other voting
13ownership interests are directly or indirectly owned, controlled or held with power
14to vote by the certified capital company or certified investor.
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(c) A person directly or indirectly controlling, controlled by, or under common
16control with, the certified capital company or certified investor.
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(d) A partnership in which the certified capital company or certified investor
18is a general partner.
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(e) A person who is an officer, director or agent of the certified capital company
20or certified investor, or is an immediate family member of such an officer, director or
21agent.
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22(2) "Certified capital company" means a person certified by the department
23under s. 560.31.
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24(3) "Certified capital company tax credit" means the tax credit under s. 76.635.
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1(4) "Certified capital investment" means an investment in a certified capital
2company that is certified under s. 560.32 (2) and that fully funds either the investor's
3equity interest in a certified capital company, a qualified debt instrument that a
4certified capital company issues, or both.
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5(5) "Certified investor" means a person who makes a certified capital
6investment.
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7(6) "Investment date" means, with respect to each investment pool, the date
8on which the last certified capital that is part of that investment pool was invested
9in the certified capital company.
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10(7) "Investment pool" means the aggregate of all investments of certified
11capital in a certified capital company that are made as part of the same transaction,
12except that investments received more than 30 days apart may not be considered
13part of the same investment pool.
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14(8) "Qualified business" means a business which is a qualified business under
15s. 560.33.
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16(9) "Qualified debt instrument" means a debt instrument that a certified
17capital company issues at par value or at a premium; that has an original maturity
18date of at least 5 years from the date on which it was issued; that has a repayment
19schedule that is no faster than a level principal amortization and, until the certified
20capital company may make distributions other than qualified distributions, the
21interest, distribution or payment features of which are not related to the certified
22capital company's profitability or the performance of its investment portfolio.
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23(10) "Qualified distribution" means a distribution or payment by a certified
24capital company to its equity holders for any of the following:
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1(a) The costs of forming, syndicating, managing or operating the certified
2capital company.
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(b) An annual management fee that does not exceed 2.5% of the certified capital
4company's total certified capital.
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(c) Reasonable and necessary fees paid for professional services related to the
6operation of the certified capital company.
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(d) A projected increase in federal or state taxes, including penalties and
8interest on those taxes, of the equity owners of the certified capital company if those
9amounts are related to the certified capital company's ownership, management or
10operation.
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11(11) "Qualified investment" means an investment of cash in a qualified
12business for the purchase of any of the following:
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(a) An equity security of the qualified business.
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(b) A debt security of the qualified business if the debt has a maturity of at least
155 years and if one of the following conditions is met:
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1. The debt is unsecured.
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2. The debt is convertible into equity securities or equity participation
18instruments such as options or warrants.
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19560.31 Certification of certified capital companies. (1) Application. The
20department shall promulgate rules establishing procedures under which a person
21may apply to become a certified capital company. The department shall grant or deny
22an application for certification under this section within 30 days of the date of
23application. If the department denies certification, the department shall include
24with the denial a detailed description of the grounds for the refusal, including
25suggestions for removal of those grounds.
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1(2) Requirements for certification. The department shall certify a person as
2a certified capital company if the department determines that all of the following
3conditions have been met:
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(a) The person is a partnership, corporation, trust or limited liability company,
5whether organized for profit or not for profit, that has as its primary business activity
6the investment of cash in qualified businesses.
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(b) The person has a net worth, at the time of application, of at least $500,000
8and has at least $500,000 in cash, cash equivalents and marketable securities.
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(c) The directors, officers, general partners, trustees, managers or members or
10persons having a similar function are familiar with the requirements of this
11subchapter.
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(d) At least 2 officers, directors, general partners, trustees, managers or
13members each have at least 2 years of experience in the venture capital industry.
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(e) The person has included, in any offering material involving the sale of
15securities, the statement required under s. 560.32 (1).
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(f) The person has paid a nonrefundable application fee of $7,500.
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17560.32 Investments in certified capital companies. (1)
Required
18disclosures in securities offerings. Any offering material involving the sale of
19securities of a certified capital company shall include all of the following statements:
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(a) "By authorizing the formation of a certified capital company, the state does
21not necessarily endorse the quality of management or the potential for earnings of
22the company and is not liable for damages or losses to a certified investor in the
23company. Use of the word "certified" in an offering is not a recommendation or
24endorsement of the investment by the State of Wisconsin Department of Commerce."
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1(b) "Investments in a prospective certified capital company prior to the time the
2company is certified are not eligible for a certified capital company investment credit
3under section 76.635 of the Wisconsin Statutes. Investments in a certified capital
4company are not eligible for a certified capital company investment credit under
5section 76.635 of the Wisconsin Statutes unless the proposed investment is certified
6under section 560.32 (2) of the Wisconsin Statutes before the investment is made. In
7the event that certain statutory provisions are violated, the state may require
8forfeiture of unused certified capital company investment credits and repayment of
9used certified capital company investment credits."
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10(2) Certification of certified capital investments. (a) A person may apply
11to make a certified capital investment in a certified capital company by providing
12notice under this paragraph to the department on a form specified by the
13department. The notice shall include the name of the person, the name of the
14certified capital company, the amount of the investment and any other information
15specified by the department. The notice shall also include an undertaking by the
16person to make the investment within 5 days after the department notifies the
17person that the investment has been certified.
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(b) The department may certify an investment under this subsection only if,
19after the certification, the department will not have certified a total of more than
20$50,000,000 in investments under this subsection.
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(c) 1. Except as provided in subd. 2., the department may not certify an
22investment under this subsection if, after the certification, the investor, together
23with all affiliates of the investor, would have made more than $10,000,000 in certified
24capital investments in that year.
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12. If, by November 1 of a year, the department has certified less than
2$50,000,000 in certified capital investments, the limitation under subd. 1. does not
3apply for the remainder of that year.
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4(3) Limitation on certified investor investment. A certified investor may not,
5individually, or with or through one or more affiliates, own 10% of more of the equity
6securities in, be a general partner or manager of, or otherwise control the
7investments of the certified capital company. This subsection does not preclude a
8certified investor from exercising its legal rights and remedies, including interim
9management of a certified capital company, in the event that a certified capital
10company is in default of its statutory or contractual obligations to the certified
11investor.
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12560.33 Qualified businesses. (1) Qualifications. A business is a qualified
13business if the department issues a written opinion under sub. (2) that the business
14is a qualified business, if the department fails to provide a certified capital company
15with a written opinion under sub. (2) within 10 working days after a request for an
16opinion is received by the department, or if all of the following requirements are met
17as of the time that a certified capital company, or any affiliate of the certified capital
18company, makes its first investment in the business:
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(a) The business is headquartered in this state and its principal business
20operations are located in this state.
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(am) The business is in need of venture capital and is unable to obtain
22conventional financing, as defined by the department by rule.
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(b) The business has no more than 300 employes, at least 75% of whom are
24employed in this state.
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1(c) During its 2 most recent fiscal years, the business had, together with all of
2its consolidated affiliates, an average annual net income, after federal income taxes
3and excluding any carry-over losses, of not more than $6,000,000, as determined in
4accordance with generally accepted accounting principles.
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(d) The business has, together with its consolidated affiliates, a net worth that
6is not in excess of $18,000,000.
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(e) The business is not predominantly engaged in professional services
8provided by accountants, lawyers or physicians.
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(f) The business is not engaged in the development of real estate for resale.
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(g) The business is not engaged in banking or lending and does not make any
11loans to, or investments in, certified capital corporations.
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12(2) Department opinions and exceptions. A certified capital company may,
13prior to making an investment in a specific business, request a written opinion from
14the department that a business in which it proposes to invest is a qualified business.
15If the department determines that the business meets the requirements under sub.
16(1), the department shall issue a written opinion stating that the business is a
17qualified business. If the department determines that the business does not meet
18all of the requirements under sub. (1), the department may nonetheless issue a
19written opinion stating that the business is a qualified business if the department
20determines that the proposed investment in the business will further state economic
21development. Upon receiving a request, the department shall, within 10 working
22days, determine whether or not the business is a qualified business and provide the
23certified capital company with a written opinion stating its determination and
24providing an explanation of the reasons for its determination. If the department fails
25to provide the certified capital company with a written opinion within 10 working
1day after receiving a request for an opinion under this subsection with respect to a
2proposed investment, the business in which the certified capital company proposes
3to invest is a qualified business.
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4560.34 Operation of certified capital companies. (1) Qualified
5investment requirements. (a) In order for a certified capital company to prevent
6disqualification of one of its investment pools under s. 560.37, the certified capital
7company shall ensure that each of its investment pools makes qualified investments
8according to the following schedule:
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1. Within 3 years after the investment date for a particular investment pool,
10at least 30% of the investment pool shall be placed in qualified investments.
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2. Within 5 years after the investment date for a particular investment pool,
12at least 50% of the investment pool shall be placed in qualified investments.
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(b) The department shall promulgate rules governing the extent to which a
14reinvestment of proceeds from a qualified investment in a qualified business may be
15counted toward the percentage requirements under par. (a) and s. 560.36 (3). These
16rules may provide that reinvested proceeds from short-term investments shall be
17only partially counted toward the percentage requirements under par. (a) and s.
18560.36 (3). The rules may also provide that proceeds from an investment in a
19qualified business that are reinvested in that qualified business, or an affiliate of
20that qualified business, shall be only partially counted toward the percentage
21requirements under par. (a) and s. 560.36 (3).
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22(2) Nonqualified investments. All certified capital investments in a certified
23capital company that are not invested in qualified investments may be held or
24invested by the certified capital company as it considers appropriate, except that a
1certified capital company may not invest certified capital investments in an
2insurance company or in an affiliate of an insurance company.
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3(3) Diversification requirement. A certified capital company may not make
4a qualified investment in a person if, at the time of the investment, more than 15%
5of the total certified capital of the certified capital company would be invested in that
6person and affiliates of that person.
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7(4) Restrictions on management. No certified capital company may be
8managed or controlled by, or have a general partner that is, an insurance company
9or an affiliate of an insurance company.
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10560.35 Reporting requirements and fees. (1) Receipts of certified
11capital. As soon as practicable after the receipt of a certified capital investment, a
12certified capital company shall report all of the following to the department:
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(a) The name of the certified investor from which the certified capital was
14received, including the certified investor's tax identification number.
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(b) The amount of the certified capital investment.