2018 -- S 2665 SUBSTITUTE A | |
======== | |
LC004944/SUB A | |
======== | |
STATE OF RHODE ISLAND | |
IN GENERAL ASSEMBLY | |
JANUARY SESSION, A.D. 2018 | |
____________ | |
A N A C T | |
RELATING TO STATE AFFAIRS AND GOVERNMENT - ESTABLISHING A SMALL | |
BUSINESS DEVELOPMENT FUND | |
| |
Introduced By: Senators Conley, Sosnowski, DiPalma, Seveney, and Lombardo | |
Date Introduced: March 20, 2018 | |
Referred To: Senate Finance | |
It is enacted by the General Assembly as follows: | |
1 | SECTION 1. Title 42 of the General Laws entitled "STATE AFFAIRS AND |
2 | GOVERNMENT" is hereby amended by adding thereto the following chapter: |
3 | CHAPTER 64.33 |
4 | THE RHODE ISLAND SMALL BUSINESS DEVELOPMENT FUND |
5 | 42-64.33-1. Short title. |
6 | This chapter shall be known and may be cited as the "Rhode Island Small Business |
7 | Development Fund." |
8 | 42-64.33-2. Definitions. |
9 | (a) As used in this chapter: |
10 | (1) "Affiliate" means an entity that directly, or indirectly, through one or more |
11 | intermediaries, controls, or is controlled by, or is under common control with another entity. For |
12 | the purposes of this chapter, an entity is "controlled by" another entity if the controlling entity |
13 | holds, directly or indirectly, the majority voting or ownership interest in the controlled entity or |
14 | has control over the day-to-day operations of the controlled entity by contract or by law. |
15 | (2) "Applicable percentage" means zero percent (0%) for the first three (3) credit |
16 | allowance dates, and twenty-one and one-half percent (21.5%) for the fourth, fifth, and sixth |
17 | credit allowance dates. |
18 | (3) "Capital investment" means any equity investment in a small business development |
| |
1 | fund by a small business fund investor that: |
2 | (i) Is acquired after the effective date of this chapter at its original issuance solely in |
3 | exchange for cash; |
4 | (ii) Has one hundred percent (100%) of its cash purchase price used by the small business |
5 | development fund to make qualified investments in eligible businesses located in this state within |
6 | three (3) years of the initial credit allowance date; and |
7 | (iii) Is designated by the small business development fund as a capital investment under |
8 | this chapter and is certified by the department pursuant to § 42-64.33-4. This term shall include |
9 | any capital investment that does not meet the provisions of § 42-64.33-4(a) if the investment was |
10 | a capital investment in the hands of a prior holder. |
11 | (4) "Credit allowance date" means the date on which a capital investment is made and |
12 | each of the five (5) anniversary dates of the date thereafter. |
13 | (5) "Department" means the Rhode Island commerce corporation. |
14 | (6) "Eligible business" means a business that, at the time of the initial qualified |
15 | investment in the company: |
16 | (i) Has less than two hundred fifty (250) employees; |
17 | (ii) Has not more than fifteen million dollars ($15,000,000) in net income from the |
18 | preceding tax year; |
19 | (iii) Has its principal business operations in this state; and |
20 | (iv) Is engaged in industries related to clean energy, biomedical innovation, life sciences, |
21 | information technology, software, cyber physical systems, cybersecurity, data analytics, defense, |
22 | shipbuilding, maritime, composites, advanced business services, design, food, manufacturing, |
23 | transportation, distribution, logistics, arts, education, hospitality, tourism, or, if not engaged in the |
24 | industries, the department makes a determination that the investment will be beneficial to the |
25 | economic growth of the state. |
26 | (7) "Eligible distribution" means: |
27 | (i) A distribution of cash to one or more equity owners of a small business fund investor |
28 | to fully or partially offset a projected increase in the owner's federal or state tax liability, |
29 | including any penalties and interest, related to the owner's ownership, management, or operation |
30 | of the small business fund investor; |
31 | (ii) A distribution of cash as payment of interest and principal on the debt of the small |
32 | business fund investor or small business development fund; or |
33 | (iii) A distribution of cash related to the reasonable costs and expenses of forming, |
34 | syndicating, managing, and operating the small business fund investor or the small business |
| LC004944/SUB A - Page 2 of 10 |
1 | development fund, or a return of equity to affiliates of a small business fund investor or small |
2 | business development fund. The distributions may include reasonable and necessary fees paid for |
3 | professional services, including legal and accounting services, related to the formation and |
4 | operation of the small business development fund. |
5 | (8) "Jobs created" means a newly created position of employment that was not previously |
6 | located in the state at the time of the qualified investment in the eligible business and requiring a |
7 | minimum of thirty five (35) hours worked each week, measured each year by subtracting the |
8 | number of employment positions at the time of the initial qualified investment in the eligible |
9 | business from the monthly average of employment positions for the applicable year. The number |
10 | shall not be less than zero. |
11 | (9) "Jobs retained" means a position requiring a minimum of thirty five (35) hours |
12 | worked each week that existed prior to the initial qualified investment. Retained jobs shall be |
13 | counted each year based on the monthly average of employment positions for the applicable year. |
14 | The number shall not exceed the initial amount of retained jobs reported and shall be reduced |
15 | each year if employment at the eligible business concern drops below that number. |
16 | (10) "Minority business enterprise" means a small business concern which is certified by |
17 | the Rhode Island office of diversity, equity and opportunity as being a minority or women |
18 | business enterprise. |
19 | (11) "Principal business operations" means the location where at least sixty percent |
20 | (60%) of a business's employees work or where employees who are paid at least sixty percent |
21 | (60%) percent of the business's payroll work. A business that has agreed to relocate employees |
22 | using the proceeds of a qualified investment to establish its principal business operations in a new |
23 | location shall be deemed to have its principal business operations in the new location if it satisfies |
24 | these requirements no later than one hundred eighty (180) days after receiving a qualified |
25 | investment. |
26 | (12) "Purchase price" means the amount paid to the small business development fund that |
27 | issues a capital investment which shall not exceed the amount of capital investment authority |
28 | certified pursuant to § 42-64.33-4. |
29 | (13) "Qualified investment" means any investment in an eligible business or any loan to |
30 | an eligible business with a stated maturity date of at least one year after the date of issuance, |
31 | excluding revolving lines of credit and senior secured debt unless the eligible business has a |
32 | credit refusal letter or similar correspondence from a depository institution or a referral letter or |
33 | similar correspondence from a depository institution referring the business to a small business |
34 | development fund; provided that, with respect to any one eligible business, the maximum amount |
| LC004944/SUB A - Page 3 of 10 |
1 | of investments made in the business by one or more small business development funds, on a |
2 | collective basis with all of the businesses' affiliates, with the proceeds of capital investments shall |
3 | be twenty percent (20%) of the small business development fund's capital investment authority, |
4 | exclusive of investments made with repaid or redeemed investments or interest or profits realized |
5 | thereon. An eligible business, on a collective basis with all of the businesses' affiliates, is |
6 | prohibited from receiving more than four million dollars ($4,000,000) in investments from one or |
7 | more small business development funds with the proceeds of capital investments. |
8 | (14) "Small business development fund" means an entity certified by the department |
9 | under § 42-64.33-4. |
10 | (15) "Small business fund investor" means an entity that makes a capital investment in a |
11 | small business development fund. |
12 | (16) "State" means the state of Rhode Island and Providence Plantations. |
13 | (17) "State tax liability" means any liability incurred by any entity under § 44-17-1 et |
14 | seq., § 27-2-17 or, if the taxes are eliminated or reduced, the term shall also mean any tax liability |
15 | imposed on an entity or other person that had tax liability under the laws of this state. |
16 | 42-64.33-3. Tax credit established. |
17 | (a) Upon making a capital investment in a small business development fund, a small |
18 | business fund investor earns a vested right to a credit against the entity's state tax liability that |
19 | may be utilized on each credit allowance date of the capital investment in an amount equal to the |
20 | applicable percentage for the credit allowance date multiplied by the purchase price paid to the |
21 | small business development fund for the capital investment. The amount of the credit claimed by |
22 | a small business fund investor shall not exceed the amount of the entity's state tax liability for the |
23 | tax year for which the credit is claimed. Any amount of credit that a small business investor is |
24 | prohibited from claiming in a taxable year as a result of this section may be carried forward for |
25 | use in any subsequent taxable year. It is the intent of this chapter that a small business investor |
26 | claiming a credit under this section is not required to pay any additional tax that may arise as a |
27 | result of claiming the credit. |
28 | (b) No credit claimed under this section shall be refundable or saleable on the open |
29 | market. Credits earned by or allocated to a partnership, limited liability company, or S |
30 | corporation may be allocated to the partners, members, or shareholders of the entity for their |
31 | direct use in accordance with the provisions of any agreement among the partners, members, or |
32 | shareholders, and a small business development fund must notify the department of the names of |
33 | the entities that are eligible to utilize credits pursuant to an allocation of credits or a change in |
34 | allocation of credits or due to a transfer of a capital investment upon the allocation, change, or |
| LC004944/SUB A - Page 4 of 10 |
1 | transfer. The allocation shall be not considered a sale for purposes of this section. Interest in a |
2 | partnership, limited liability company, or S corporation may be earned by the purchase of an |
3 | equity interest in the partnership, limited liability company or S corporation or the purchase of a |
4 | debt instrument issued by the partnership, limited liability company, or S corporation. |
5 | 42-64.33-4. Application, approval and allocations. |
6 | (a) A small business development fund that seeks to have an equity investment certified |
7 | as a capital investment and eligible for credits under this chapter shall apply to the department. |
8 | The department shall begin accepting applications within ninety (90) days of the effective date of |
9 | this chapter. The small business development fund shall include the following: |
10 | (1) The amount of capital investment requested; |
11 | (2) A copy of the applicant's or an affiliate of the applicant's license as a rural business |
12 | investment company under 7 U.S.C. § 2009cc, or as a small business investment company under |
13 | 15 U.S.C. § 681, and a certificate executed by an executive officer of the applicant attesting that |
14 | the license remains in effect and has not been revoked; |
15 | (3) Evidence that, as of the date the application is submitted, the applicant or affiliates of |
16 | the applicant have invested at least one hundred million dollars ($100,000,000) in nonpublic |
17 | companies; |
18 | (4) An estimate of the number of jobs that will be created or retained in this state as a |
19 | result of the applicant's qualified investments; |
20 | (5) A business plan that includes a strategy for reaching out to and investing in minority |
21 | business enterprises and a revenue impact assessment projecting state and local tax revenue to be |
22 | generated by the applicant's proposed qualified investment prepared by a nationally recognized, |
23 | third-party, independent economic forecasting firm using a dynamic economic forecasting model |
24 | that analyzes the applicant's business plan over the ten (10) years following the date the |
25 | application is submitted to the department; and |
26 | (6) A nonrefundable application fee of five thousand dollars ($5,000), payable to the |
27 | department. |
28 | (b) Within thirty (30) days after receipt of a completed application, the department shall |
29 | grant or deny the application in full or in part. The department shall deny the application if: |
30 | (1) The applicant does not satisfy all of the criteria described in subsection (a) of this |
31 | section; |
32 | (2) The revenue impact assessment submitted with the application does not demonstrate |
33 | that the applicant's business plan will result in a positive economic impact on this state over a ten |
34 | (10) year period that exceeds the cumulative amount of tax credits that would be issued to the |
| LC004944/SUB A - Page 5 of 10 |
1 | applicant if the application were approved; or |
2 | (3) The department has already approved the maximum amount of capital investment |
3 | authority under subsection (g) of this section. |
4 | (c) If the department denies any part of the application, it shall inform the applicant of the |
5 | grounds for the denial. If the applicant provides any additional information required by the |
6 | department or otherwise completes its application within fifteen (15) days of the notice of denial, |
7 | the application shall be considered completed as of the original date of submission. If the |
8 | applicant fails to provide the information or fails to complete its application within the fifteen |
9 | (15) day period, the application remains denied and must be resubmitted in full with a new |
10 | submission date. |
11 | (d) If the application is complete, the department shall certify the proposed equity |
12 | investment as a capital investment that is eligible for credits under this chapter, subject to the |
13 | limitations contained in subsection (g) of this section. The department shall provide written notice |
14 | of the certification to the small business development fund. |
15 | (e) The department shall certify capital investments in the order that the applications were |
16 | received by the department. Applications received on the same day shall be deemed to have been |
17 | received simultaneously. |
18 | (f) For applications that are complete and received on the same day, the department shall |
19 | certify applications in proportionate percentages based upon the ratio of the amount of capital |
20 | investments requested in an application to the total amount of capital investments requested in all |
21 | applications. |
22 | (g) The department shall certify sixty-five million dollars ($65,000,000) in capital |
23 | investments pursuant to this section; provided that not more than twenty million dollars |
24 | ($20,000,000) may be allocated to any individual small business development fund certified |
25 | under this section. |
26 | (h) Within sixty (60) days of the applicant receiving notice of certification, the small |
27 | business development fund shall issue the capital investment to and receive cash in the amount of |
28 | the certified amount from a small business fund investor. At least forty-five percent (45%) of the |
29 | small business fund investor's capital investment shall be composed of capital raised by the small |
30 | business fund investor from sources, including directors, members, employees, officers, and |
31 | affiliates of the small business fund investor, other than the amount of capital invested by the |
32 | allocatee claiming the tax credits in exchange for the allocation of tax credits; provided that at |
33 | least ten percent (10%) of the capital investment shall be derived from the small business |
34 | investment fund's managers. The small business development fund shall provide the department |
| LC004944/SUB A - Page 6 of 10 |
1 | with evidence of the receipt of the cash investment within sixty-five (65) days of the applicant |
2 | receiving notice of certification. If the small business development fund does not receive the cash |
3 | investment and issue the capital investment within the time period following receipt of the |
4 | certification notice, the certification shall lapse and the small business development fund shall not |
5 | issue the capital investment without reapplying to the department for certification. Lapsed |
6 | certifications revert to the authority and shall be reissued pro rata to applicants whose capital |
7 | investment allocations were reduced pursuant to this chapter and then in accordance with the |
8 | application process. |
9 | 42-64.33-5. Tax credit recapture and exit. |
10 | (a) The department may recapture, from a small business fund investor that claimed the |
11 | credit on a tax return, the credit allowed under this chapter if: |
12 | (1) The small business development fund does not invest one hundred (100%) percent of |
13 | its capital investment authority in qualified investments in this state within three (3) years of the |
14 | first credit allowance date; |
15 | (2) The small business development fund, after satisfying subsection (a)(1) of this |
16 | section, fails to maintain qualified investments equal to one hundred (100%) percent of its capital |
17 | investment authority until the sixth anniversary of the initial credit allowance date. For the |
18 | purposes of this subsection, a qualified investment is considered maintained even if the qualified |
19 | investment was sold or repaid so long as the small business development fund reinvests an |
20 | amount equal to the capital returned or recovered by the small business development fund from |
21 | the original investment, exclusive of any profits realized, in other qualified investments in this |
22 | state within twelve (12) months of the receipt of the capital. Amounts received periodically by a |
23 | small business development fund shall be treated as continually invested in qualified investments |
24 | if the amounts are reinvested in one or more qualified investments by the end of the following |
25 | calendar year. A small business development fund shall not be required to reinvest capital |
26 | returned from qualified investments after the fifth anniversary of the initial credit allowance date, |
27 | and the qualified investments shall be considered held continuously by the small business |
28 | development fund through the sixth anniversary of the initial credit allowance date; |
29 | (3) The small business development fund, before exiting the program in accordance with |
30 | subsection (e) of this section, makes a distribution or payment that results in the small business |
31 | development fund having less than one hundred percent (100%) of its capital investment |
32 | authority invested in qualified investments in this state or available for investment in qualified |
33 | investments and held in cash and other marketable securities; |
34 | (4) The small business development fund, before exiting the program in accordance with |
| LC004944/SUB A - Page 7 of 10 |
1 | subsection (e) of this section, fails to make qualified investments in minority business enterprises |
2 | that when added together equal at least ten percent (10%) of the small business development |
3 | fund's capital investment authority; or |
4 | (5) The small business development fund violates subsection (d) of this section. |
5 | (b) Recaptured credits and the related capital investment authority revert to the |
6 | department and shall be reissued pro rata to applicants whose capital investment allocations were |
7 | reduced pursuant to § 42-64.33-4(f) of this section and then in accordance with the application |
8 | process. |
9 | (c) Enforcement of each of the recapture provisions of subsection (a) of this section shall |
10 | be subject to a six (6) month cure period. No recapture shall occur until the small business |
11 | development fund has been given notice of noncompliance and afforded six (6) months from the |
12 | date of the notice to cure the noncompliance. |
13 | (d) No eligible business that receives a qualified investment under this chapter, or any |
14 | affiliates of the eligible business, may directly or indirectly: |
15 | (1) Own or have the right to acquire an ownership interest in a small business |
16 | development fund or member or affiliate of a small business development fund, including, but not |
17 | limited to, a holder of a capital investment issued by the small business development fund; or |
18 | (2) Loan to or invest in a small business development fund or member or affiliate of a |
19 | small business development fund, including, but not limited to, a holder of a capital investment |
20 | issued by a small business development fund, where the proceeds of the loan or investment are |
21 | directly or indirectly used to fund or refinance the purchase of a capital investment under this |
22 | chapter. |
23 | (e) On or after the sixth anniversary of the initial credit allowance date, a small business |
24 | development fund may apply to the department to exit the program and no longer be subject to |
25 | regulation under this chapter. The department shall respond to the exit application within thirty |
26 | (30) days of receipt. In evaluating the exit application, the fact that no credits have been |
27 | recaptured and that the small business development fund has not received a notice of recapture |
28 | that has not been cured pursuant to subsection (c) of this section shall be sufficient evidence to |
29 | prove that the small business development fund is eligible for exit. The department shall not |
30 | unreasonably deny an exit application submitted under this subsection. If the exit application is |
31 | denied, the notice shall include the reasons for the determination. |
32 | (f) If the number of jobs created or retained by the eligible businesses that received |
33 | qualified investments from the small business development fund, calculated pursuant to reports |
34 | filed by the small business development fund pursuant to § 42-64.33-7, is: |
| LC004944/SUB A - Page 8 of 10 |
1 | (1) Less than sixty percent (60%) of the amount projected in the approved small business |
2 | development fund's business plan filed as part of its application for certification under § 42- |
3 | 64.33-4, then the state shall receive thirty percent (30%) of any distribution or payment to an |
4 | equity holder in an approved small business development fund in excess of eligible distributions; |
5 | or |
6 | (2) Greater than sixty percent (60%) but less than one hundred percent (100%) of the |
7 | amount projected in the approved small business development fund's business plan filed as part of |
8 | its application for certification under § 42-64.33-4, then the state shall receive fifteen percent |
9 | (15%) of any distribution or payment to an equity holder in an approved small business |
10 | development fund in excess of eligible distributions. |
11 | (g) At the time a small business development fund applies to the department to exit the |
12 | program, it shall calculate the aggregate internal rate of return of its qualified investments. If the |
13 | small business development fund's aggregate internal rate of return on its qualified investments at |
14 | exit exceeds ten percent (10%), then, after eligible distributions, the state shall receive ten percent |
15 | (10%) of any distribution or payment in excess of the aggregate ten percent (10%) internal rate of |
16 | return to an equity holder in an approved small business development fund. |
17 | (h) The department shall not revoke a tax credit certificate after the small business |
18 | development fund's exit from the program. |
19 | 42-64.33-6. Request for determination. |
20 | (a) A small business development fund, before making a qualified investment, may |
21 | request from the department a written opinion as to whether the business in which it is proposed |
22 | to invest is an eligible business. The department, not later than the fifteenth business day after the |
23 | date of receipt of the request, shall notify the small business development fund of its |
24 | determination. If the department fails to notify the small business development fund by the |
25 | fifteenth business day of its determination, the business in which the small business development |
26 | fund proposes to invest shall be considered an eligible business. |
27 | 42-64.33-7. Reporting obligations. |
28 | (a) Each small business development fund shall submit a report to the department and the |
29 | division of taxation on or before the fifth business day after the third anniversary of the closing |
30 | date. The report shall provide documentation as to the small business development fund's |
31 | qualified investments and include: |
32 | (1) A bank statement evidencing each qualified investment; |
33 | (2) The name, location, status as a minority business enterprise if applicable, and industry |
34 | of each business receiving a qualified investment, including either the determination letter set |
| LC004944/SUB A - Page 9 of 10 |
1 | forth in § 42-64.33-6 or evidence that the business qualified as an eligible business at the time the |
2 | investment was made; and |
3 | (3) The number of employment positions created or retained as a result of the small |
4 | business development fund's qualified investments as of the last day of the preceding calendar |
5 | year; |
6 | (b) On or before the last day of February of each year following the year in which the |
7 | report required in subsection (a) of this section is due, the small business development fund shall |
8 | submit an annual report to the department and the division of taxation including the following: |
9 | (1) The number of employment positions created or retained as a result of the small |
10 | business development fund's qualified investments as of the last day of the preceding calendar |
11 | year; |
12 | (2) The number of minority business enterprises that have received qualified investments |
13 | and the amount of qualified investment that such minority business enterprises have received; |
14 | (3) The average annual salary of the positions described in subsection (b)(1) of this |
15 | section; and |
16 | (4) The follow-on capital investment that has occurred along with or after the small |
17 | business development fund's investment as of the last day of the preceding calendar year. |
18 | (c) A copy of the reports required under this section must also be sent concurrently to the |
19 | speaker of the house, president of the senate, house finance chairperson, senate finance |
20 | chairperson, and the general treasurer. |
21 | 42-64.33-8. Rules and regulations. |
22 | The department and division of taxation may issue reasonable rules and regulations, |
23 | consistent with this chapter, as are necessary to carry out the intent and purpose and |
24 | implementation of the responsibilities under this chapter. |
25 | SECTION 2. This act shall take effect upon passage. |
======== | |
LC004944/SUB A | |
======== | |
| LC004944/SUB A - Page 10 of 10 |
EXPLANATION | |
BY THE LEGISLATIVE COUNCIL | |
OF | |
A N A C T | |
RELATING TO STATE AFFAIRS AND GOVERNMENT - ESTABLISHING A SMALL | |
BUSINESS DEVELOPMENT FUND | |
*** | |
1 | This act would establish a small business development fund designed to encourage the |
2 | formation of private capital investment by federally licensed investment companies in |
3 | underserved small businesses, leveraged by delayed, at-risk stream of tax credits applicable |
4 | against insurance premium and retaliatory taxes that can be recaptured for noncompliance with |
5 | program investment requirements. Monetary penalties would exist if job creation and retention |
6 | projections would be missed, and the state shares in profits above a certain level of fund returns. |
7 | Investments would be designated for targeted growth industries for the state, and would be |
8 | required to be diversified – no one small business would receive more than four ($4,000,000) |
9 | million or twenty percent (20%) of a fund's investment authority. The investment funds would |
10 | report annually, and the program would terminate after six (6) years. |
11 | This act would take effect upon passage. |
======== | |
LC004944/SUB A | |
======== | |
| LC004944/SUB A - Page 11 of 10 |