SB94: Bill Text

LRB-1556/3

MPG&JK:nwn&kjf:md

2011 - 2012 LEGISLATURE

2011 Senate BILL 94

May 13, 2011 - Introduced by Senators Hopper, Darling, Lazich, Olsen, Leibham, Schultz and Wanggaard, cosponsored by Representatives Tauchen, Klenke, Kuglitsch, Fields, Williams, Kestell, Nygren, Spanbauer, A. Ott, Van Roy, LeMahieu, Petrowski, Endsley and Bies. Referred to Committee on Economic Development and Veterans and Military Affairs.

SB94,2,3 An Act to amend 1.12 (1) (b), 13.172 (1), 13.48 (13) (a), 13.62 (2), 13.94 (1) (mm), 13.94 (4) (a) 1., 13.95 (intro.), 16.002 (2), 16.004 (4), 16.004 (5), 16.004 (12) (a), 16.045 (1) (a), 16.15 (1) (ab), 16.41 (4), 16.417 (1) (b), 16.52 (7), 16.528 (1) (a), 16.53 (2), 16.54 (9) (a) 1., 16.765 (1), 16.765 (2), 16.765 (5), 16.765 (6), 16.765 (7) (intro.), 16.765 (7) (d), 16.765 (8), 16.85 (2), 16.865 (8), 71.05 (6) (a) 15., 71.21 (4), 71.26 (1) (be), 71.26 (2) (a) 4., 71.34 (1k) (g), 71.45 (2) (a) 10., 76.67 (2), 77.54 (9a) (a), 77.92 (4), 100.45 (1) (dm), 101.177 (1) (d), 230.03 (3), 281.75 (4) (b) 3. and 285.59 (1) (b); to repeal and recreate 16.417 (1) (b); and to create 13.94 (1) (dx), 13.94 (1s) (c) 6., 19.42 (10) (t), 19.42 (13) (p), 20.195, 40.02 (54) (n), 70.11 (38v), 71.05 (6) (a) 25., 71.05 (6) (a) 26., 71.05 (6) (b) 48., 71.07 (8s), 71.10 (4) (ds), 71.26 (2) (a) 4c., 71.26 (2) (a) 4d., 71.26 (2) (a) 4e., 71.28 (8s), 71.30 (3) (dn), 71.45 (2) (a) 10c., 71.45 (2) (a) 10d., 71.45 (2) (a) 10e., 71.47 (8s), 71.49 (1) (dn), 73.033, 76.634 and chapter 239 of the statutes; relating to: creation of the Wisconsin Venture Capital Authority, creation of the badger jobs fund and the jobs now fund certification program, both of which are to be administered by the Wisconsin Venture Capital Authority, making an appropriation, and providing a penalty.

Analysis by the Legislative Reference Bureau

Wisconsin venture capital authority

This bill creates an authority to be known as the "Wisconsin Venture Capital Authority" (authority) to oversee programs related to venture capital investment in Wisconsin businesses.

Composition and General Operation

Board of Directors

Under the bill, the authority is governed by a seven-member board of directors (board) that consists of the chief executive officer of the Wisconsin Economic Development Corporation; four members from the private sector nominated by the governor and appointed with the advice and consent of the senate; one member appointed by the speaker of the assembly; and one member appointed by the senate majority leader. The members of the board appointed by the governor, the speaker of the assembly, and the senate majority leader serve staggered three-year terms and must have experience that qualifies them to serve on the board. The members of the board may not be compensated, but the members may be reimbursed for actual and necessary expenses, including travel expenses, incurred in the performance of their duties.

The bill gives the board the powers necessary or convenient to carry out its duties, as well as specific powers to conduct its corporate business. Under the bill, the authority is a participating employer in the Wisconsin Retirement System. The board may hire an executive director. The members of the board appointed by the speaker of the assembly and the senate majority leader, the executive director, if any, and the manager of the badger jobs fund administered by the authority are subject to state ethics laws.

Transitional Administration by the Department of Commerce and the Wisconsin Economic Development Corporation

Under the bill, the Department of Commerce administers the programs created under the authority until the board is in place and the authority has adequate personnel to carry out its duties or until the effective date of the 2011-13 biennial budget act, whichever is later. If as of the effective date of the 2011-13 biennial budget act the authority has not assumed administration of its programs, the authority's programs are to be administered by the Wisconsin Economic Development Corporation until the authority is prepared to assume administration of those programs.

General Reporting Requirements

Under the bill, the authority must submit an annual report to the legislature and to the governor that contains all of the following information:

1. An assessment of the success to date of each program administered by the authority.

2. An accounting of the financial status of each program administered by the authority, including the opinion of an independent certified public accountant.

3. Any recommendations the authority has for the improvement of each of its programs.

Badger Jobs Fund

Also under the bill, there is created a fund to be known as the "badger jobs fund" for the placement of capital with investors who are certified by the authority and who in turn invest badger jobs fund capital in Wisconsin businesses that meet certain criteria. The authority must hire a qualified fund manager to manage the badger jobs fund's investments. The badger jobs fund manager must establish and maintain an investment policy for the badger jobs fund that the authority reviews and approves on an annual basis. The authority may pay the fund manager a management fee of not more than 0.5 percent of the badger jobs fund's total assets.

Investor Certification

Under the bill, any person may apply to be certified to receive badger jobs fund capital. The authority charges such applicants an application fee in an amount determined by the authority. In determining whether to certify an applicant, the authority considers the applicant's venture capital experience or other experience that qualifies the applicant to receive badger jobs fund capital, the past performance of investments managed by the applicant, the applicant's commitment to investing in businesses within Wisconsin, and whether the investor is located in Wisconsin or agrees to maintain an office in Wisconsin.

Investment of Badger Jobs Fund Capital

Under the bill, the authority may invest badger jobs fund capital only in certified investors. The authority may not commit more than 15 percent of the total capital that the authority is authorized to raise for the badger jobs fund to a single certified investor.

The bill provides that a certified investor must contract with the authority before receiving any capital from the badger jobs fund. Under the contract, the certified investor must agree to all of the following:

1. The certified investor must commit to maintaining a significant physical presence in Wisconsin, including an office that is staffed by at least one full-time employee.

2. The certified investor must invest at least 50 percent of the badger jobs fund capital it receives only in a business that is headquartered in Wisconsin; that employs at least 50 percent of its employees in Wisconsin; that agrees to use badger jobs fund capital only for certain approved purposes; and that is not primarily engaged in real estate development or sales, insurance, banking, lending, lobbying, political consulting, professional services, or retail sales, other than direct sales of products the business itself manufactures.

3. The certified investor may not receive capital from the badger jobs fund that exceeds 25 percent of the total capital the investor raises from all sources, including the badger jobs fund.

4. When a certified investor invests badger jobs fund capital in a business, the certified investor must at least match the badger jobs fund's capital contribution to that investment with capital the certified investor has raised from other sources.

5. The certified investor may not apply the amount of capital it receives from the badger jobs fund toward certification for purposes of receiving early stage or angel investment tax credits from the Department of Commerce.

Issuance of Bonds

The bill authorizes the authority to issue up to $200,000,000 in bonds or other obligations to raise capital for the badger jobs fund. The authority may contract with a bondholder to award franchise and income tax credits to a bondholder up to an amount equal to the amount the authority is unable to pay a bondholder on a bond. A bondholder may not claim those tax credits until January 1, 2016. Those tax credits may be carried forward until fully used and may be transferred or sold. The authority may not award tax credits to bondholders that total more than $300,000,000.

While the bill specifies that the state is not liable for a debt of the authority, the bill also contains a moral obligation pledge in which the legislature expresses its expectation and aspiration that the legislature will make an appropriation to pay a bondholder the amount of principal and interest or other financing charges the authority fails to pay on a bond.

The chairperson of the authority's board must notify the Joint Committee on Finance (JCF) when the authority has reached the $200,000,000 bond limit for the badger jobs fund and has satisfied 90 percent of its debt to bondholders. The chairperson must provide a second such notice when the authority has satisfied 100 percent of its total debt to bondholders under the badger jobs fund. If, within 14 working days after the date of the chairperson's second notice, the cochairpersons of JCF do not notify the authority that the committee has scheduled a meeting to review dissolution of the badger jobs fund, the authority must dissolve the badger jobs fund and liquidate all of the badger jobs fund's assets, paying the proceeds to the state for deposit in the general fund. If JCF does schedule a meeting to consider dissolution, the authority may dissolve the badger jobs fund only with the approval of JCF.

The authority may reinvest amounts that it receives as returns from its investments in certified investors only if the authority meets the conditions and gives the notices described above, and JCF does not approve dissolution of the badger jobs fund. Any reinvestment must meet the other requirements in the bill with respect to investments in certified investors.

Tax Revenue from Businesses that Receive Investments

The authority's administration of the badger jobs fund is supported in part by tax revenue raised from businesses that benefit from the badger jobs fund or from the certified jobs now fund program described below. Under the bill, the authority and the Department of Revenue (DOR) are to coordinate with each other to determine the amount of withholding taxes that each business that receives investment capital under the badger jobs fund or the certified jobs now fund program paid for the year prior to the first year in which the business received any such investment. Then, each year for 15 years following that first year of investment or until the badger jobs fund is dissolved, whichever occurs first, DOR transfers to the authority an amount equal to 50 percent of the increase, if any, in withholding taxes paid by the business over the amount determined, as described above, for the year prior to that first year of investment.

Reporting Requirements

The bill provides that the authority must include in its annual report to the legislature and the governor all of the following information specifically relating to the badger jobs fund:

1. The current investment policy of the badger jobs fund.

2. The badger jobs fund's internal rate of return from its investments in certified investors.

3. An accounting of the withholding tax revenue received by the authority from businesses that received investment capital contributed by the badger jobs fund from a certified investor.

4. An accounting of any compensation, including a management fee, paid to the badger jobs fund manager during the preceding year.

5. An accounting of the value of tax credits awarded to bondholders during the preceding year, including a description of the circumstances leading to the award of the credits and the likelihood that the authority will award additional tax credits to bondholders in the future.

6. For each certified investor in whom the badger jobs fund invested capital during the preceding year, the name and address of the investor and the amount of each investment.

7. The internal rate of return realized by each certified investor.

8. An accounting of any fee a certified investor paid to itself or any principal or manager during the preceding year.

9. For each business in which a certified investor made an investment of capital from the badger jobs fund during the preceding year, the name and address of the business and a description of the nature of the business, the amount of each investment in the business, an identification of the certified investor who made the investment, and an accounting of the number of employees the business has hired since badger job funds capital was first invested in the business.

Certified Jobs Now Fund Program

Under the bill, the authority also administers a "certified jobs now fund" program under which an insurance company or other person subject to Wisconsin premium tax liability invests capital with a certified jobs now fund that in turn invests that capital in certain kinds of Wisconsin businesses.

Jobs Now Fund Certification

Any person may apply to become a certified jobs now fund. The authority must certify an applicant if the applicant pays an application fee in an amount determined by the authority and the authority determines that the applicant meets all of the following requirements:

1. The primary activity of the applicant is the investment of cash in certain kinds of businesses.

2. The applicant owns at least $500,000 in unencumbered cash or cash equivalents.

3. The applicant has at least two principals or investment managers who have at least five years of experience in the venture capital or private equity industry.

4. The applicant's strategic investment plan will benefit Wisconsin's economy.

Participating Investors

The bill provides that any insurance company or other person subject to premium tax liability may apply to the authority to invest in a certified jobs now fund. The bill directs the authority to establish a single 15-day period in which such applications may be submitted. The authority must give reasonable notice to potential applicants in advance of that application period.

A person for whom the authority has approved an investment is called a "participating investor" under the bill. If the authority approves an investment, the participating investor may claim up to 80 percent of the amount of its investment as a credit against the participating investor's premium tax liability. The authority may not award more than $200,000,000 in premium tax credits under the program. The authority may not award more than $50,000,000 in premium tax credits to a participating investor at any one time. The authority must begin approving investments and awarding corresponding tax credits within 90 days after the bill becomes effective.

Additionally, under the bill, a participating investor may not claim a premium tax credit until after it has made an approved investment in a certified jobs now fund and may not claim a premium tax credit before January 1, 2014. A participating investor may not claim more than 25 percent of its approved premium tax credit in one year, but the premium tax credit may be carried forward until fully used. A participating investor may sell or otherwise transfer a premium tax credit awarded by the authority to another insurance company or other person subject to premium tax liability. A participating investor must report that sale or transfer to the authority and the commissioner of insurance.

Qualified Businesses

Once it receives investment capital from a participating investor, the bill authorizes a certified jobs now fund to invest that capital only in certain kinds of businesses, called "qualified businesses" under the bill. In particular, a qualified business is a business that meets all of the following conditions:

1. The business's headquarters are in Wisconsin.

2. The business is in need of venture capital and is unable to obtain conventional financing.

3. The business employs 100 or fewer employees, and at least 80 percent of those employees are employed in this state, or at least 80 percent of the business's payroll is paid to employees employed in this state.

4. The business is not primarily engaged in real estate development or sales, insurance, banking, lending, lobbying, political consulting, professional services, or retail sales, other than direct sales of products the business itself manufactures.

Also under the bill, in order to receive certified jobs fund investments, a qualified business must agree not to relocate its headquarters outside of Wisconsin and to maintain at least 75 percent of its employees in Wisconsin, or pay at least 75 percent of its payroll to employees in Wisconsin, as long as the certified jobs now fund continues to hold the investment.

Investments in Qualified Businesses

Under the bill, a certified jobs now fund is required to make investments in qualified businesses based on a specific investment schedule, and after seven years, a certified jobs now fund must have placed 100 percent of its capital received from a participating investor with qualified businesses, at least 50 percent of which must be invested in qualified businesses with gross revenue of $2,000,000 or less in the fiscal year immediately preceding the date of investment. If a certified jobs now fund fails to satisfy the investment schedule, it may be required to refrain from paying any management or similar fee until required investments are made. Under the bill, a certified jobs now fund may not invest more than 15 percent of its total capital received from participating investors in any one qualified business.

Distributions from Qualified Investments; Profit Sharing Fee

Under the bill, a certified jobs now fund is also limited in the distributions from investments that it may make before it has invested all of its capital received from a participating investor in qualified businesses. However, a certified jobs now fund may make a distribution of any kind once it has invested 100 percent of its capital received from a participating investor in qualified businesses, at least 50 percent of which is invested in qualified businesses with gross revenue of $2,000,000 or less in the fiscal year immediately preceding the date of investment. When such a distribution is made, the certified jobs now fund must pay to the authority a 20 percent profit sharing fee, which the authority then remits to the state for deposit in the general fund.

Annual Review by Authority

The bill provides that by January 31 of each year, a certified jobs now fund must submit a report to the authority that describes in detail the certified jobs now fund's investments in qualified businesses, including its progress with respect to the investment schedule required under the bill and any distributions the certified jobs now fund has made from those investments. The authority is required to complete an annual review of each certified jobs now fund to ensure that each certified jobs now fund is in full compliance with the bill. Additionally, within 90 days after the end of a certified jobs now fund's fiscal year, the certified jobs now fund must file with the authority a copy of its annual audited financial statement, including the opinion of an independent certified public accountant. The authority charges each jobs now fund an annual certification renewal fee of $5,000.

Decertification; Penalties for Noncompliance

The authority may decertify a certified jobs now fund that violates the requirements of the bill. In the event of decertification, a participating investor may be required to repay to the commissioner of insurance the amount of any credit against premium tax liability that the participating investor received based on its investment of capital in the decertified jobs now fund. The bill also authorizes the authority to fine a person who violates the bill's provisions up to $25,000 depending on the circumstances of the violation.

Reporting Requirements

Finally, the bill requires that the authority include in its annual report to the legislature and the governor all of the following information specifically relating to the certified jobs now fund program:

1. The information that each certified jobs now fund is required to report to the authority on an annual basis, including the number of new employees hired by businesses in which each certified jobs now fund has invested.