2019 -- H 5216

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LC000662

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     STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2019

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A N   A C T

RELATING TO STATE AFFAIRS AND GOVERNMENT - ESTABLISHING A SMALL

BUSINESS DEVELOPMENT FUND

     

     Introduced By: Representatives Solomon, Amore, Shekarchi, Casey, and Morin

     Date Introduced: January 30, 2019

     Referred To: House Small Business

     It is enacted by the General Assembly as follows:

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     SECTION 1. Title 42 of the General Laws entitled "STATE AFFAIRS AND

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GOVERNMENT" is hereby amended by adding thereto the following chapter:

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CHAPTER 64.33

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THE RHODE ISLAND SMALL BUSINESS DEVELOPMENT FUND

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     42-64.33-1. Short title.

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     This chapter shall be known and may be cited as the "Rhode Island Small Business

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Development Fund."

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     42-64.33-2. Definitions.

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     (a) As used in this chapter:

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     (1) "Affiliate" means an entity that directly, or indirectly, through one or more

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intermediaries, controls, or is controlled by, or is under common control with another entity. For

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the purposes of this chapter, an entity is "controlled by" another entity if the controlling entity

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holds, directly or indirectly, the majority voting or ownership interest in the controlled entity or

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has control over the day-to-day operations of the controlled entity by contract or by law.

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     (2) "Applicable percentage" means zero percent (0%) for the first three (3) credit

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allowance dates, and twenty-one and one-half percent (21.5%) for the fourth, fifth, and sixth

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credit allowance dates.

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     (3) "Capital investment" means any equity investment in a small business development

 

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fund by a small business fund investor that:

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     (i) Is acquired after the effective date of this chapter at its original issuance solely in

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exchange for cash;

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     (ii) Has one hundred percent (100%) of its cash purchase price used by the small business

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development fund to make qualified investments in eligible businesses located in this state within

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three (3) years of the initial credit allowance date; and

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     (iii) Is designated by the small business development fund as a capital investment under

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this chapter and is certified by the department pursuant to § 42-64.33-4. This term shall include

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any capital investment that does not meet the provisions of § 42-64.33-4(a) if the investment was

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a capital investment in the hands of a prior holder.

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     (4) "Credit allowance date" means the date on which a capital investment is made and

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each of the five (5) anniversary dates of the date thereafter.

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     (5) "Department" means the Rhode Island commerce corporation.

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     (6) "Eligible business" means a business that, at the time of the initial qualified

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investment in the company:

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     (i) Has less than two hundred fifty (250) employees;

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     (ii) Has not more than fifteen million dollars ($15,000,000) in net income from the

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preceding tax year;

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     (iii) Has its principal business operations in this state; and

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     (iv) Is engaged in industries related to clean energy, biomedical innovation, life sciences,

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information technology, software, cyber physical systems, cybersecurity, data analytics, defense,

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shipbuilding, maritime, composites, advanced business services, design, food, manufacturing,

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transportation, distribution, logistics, arts, education, hospitality, tourism, or, if not engaged in the

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industries, the department makes a determination that the investment will be beneficial to the

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economic growth of the state.

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     (7) "Eligible distribution" means:

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     (i) A distribution of cash to one or more equity owners of a small business fund investor

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to fully or partially offset a projected increase in the owner's federal or state tax liability,

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including any penalties and interest, related to the owner's ownership, management, or operation

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of the small business fund investor;

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     (ii) A distribution of cash as payment of interest and principal on the debt of the small

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business fund investor or small business development fund; or

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     (iii) A distribution of cash related to the reasonable costs and expenses of forming,

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syndicating, managing, and operating the small business fund investor or the small business

 

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development fund, or a return of equity to affiliates of a small business fund investor or small

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business development fund. The distributions may include reasonable and necessary fees paid for

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professional services, including legal and accounting services, related to the formation and

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operation of the small business development fund.

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     (8) "Jobs created" means a newly created position of employment that was not previously

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located in the state at the time of the qualified investment in the eligible business and requiring a

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minimum of thirty five (35) hours worked each week, measured each year by subtracting the

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number of employment positions at the time of the initial qualified investment in the eligible

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business from the monthly average of employment positions for the applicable year. The number

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shall not be less than zero.

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     (9) "Jobs retained" means a position requiring a minimum of thirty five (35) hours

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worked each week that existed prior to the initial qualified investment. Retained jobs shall be

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counted each year based on the monthly average of employment positions for the applicable year.

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The number shall not exceed the initial amount of retained jobs reported and shall be reduced

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each year if employment at the eligible business concern drops below that number.

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     (10) "Minority business enterprise" means a small business concern which is certified by

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the Rhode Island office of diversity, equity and opportunity as being a minority or women

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business enterprise.

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     (11) "Principal business operations" means the location where at least sixty percent

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(60%) of a business's employees work or where employees who are paid at least sixty percent

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(60%) percent of the business's payroll work. A business that has agreed to relocate employees

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using the proceeds of a qualified investment to establish its principal business operations in a new

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location shall be deemed to have its principal business operations in the new location if it satisfies

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these requirements no later than one hundred eighty (180) days after receiving a qualified

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investment.

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     (12) "Purchase price" means the amount paid to the small business development fund that

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issues a capital investment which shall not exceed the amount of capital investment authority

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certified pursuant to § 42-64.33-4.

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     (13) "Qualified investment" means any investment in an eligible business or any loan to

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an eligible business with a stated maturity date of at least one year after the date of issuance,

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excluding revolving lines of credit and senior secured debt unless the eligible business has a

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credit refusal letter or similar correspondence from a depository institution or a referral letter or

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similar correspondence from a depository institution referring the business to a small business

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development fund; provided that, with respect to any one eligible business, the maximum amount

 

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of investments made in the business by one or more small business development funds, on a

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collective basis with all of the businesses' affiliates, with the proceeds of capital investments shall

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be twenty percent (20%) of the small business development fund's capital investment authority,

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exclusive of investments made with repaid or redeemed investments or interest or profits realized

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thereon. An eligible business, on a collective basis with all of the businesses' affiliates, is

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prohibited from receiving more than four million dollars ($4,000,000) in investments from one or

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more small business development funds with the proceeds of capital investments.

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     (14) "Small business development fund" means an entity certified by the department

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under § 42-64.33-4.

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     (15) "Small business fund investor" means an entity that makes a capital investment in a

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small business development fund.

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     (16) "State" means the State of Rhode Island and Providence Plantations.

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     (17) "State tax liability" means any liability incurred by any entity under § 44-17-1 et

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seq., § 27-2-17 or, if the taxes are eliminated or reduced, the term shall also mean any tax liability

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imposed on an entity or other person that had tax liability under the laws of this state.

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     42-64.33-3. Tax credit established.

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     (a) Upon making a capital investment in a small business development fund, a small

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business fund investor earns a vested right to a credit against the entity's state tax liability that

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may be utilized on each credit allowance date of the capital investment in an amount equal to the

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applicable percentage for the credit allowance date multiplied by the purchase price paid to the

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small business development fund for the capital investment. The amount of the credit claimed by

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a small business fund investor shall not exceed the amount of the entity's state tax liability for the

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tax year for which the credit is claimed. Any amount of credit that a small business investor is

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prohibited from claiming in a taxable year as a result of this section may be carried forward for

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use in any subsequent taxable year. It is the intent of this chapter that a small business investor

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claiming a credit under this section is not required to pay any additional tax that may arise as a

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result of claiming the credit.

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     (b) No credit claimed under this section shall be refundable or saleable on the open

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market. Credits earned by or allocated to a partnership, limited liability company, or S

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corporation may be allocated to the partners, members, or shareholders of the entity for their

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direct use in accordance with the provisions of any agreement among the partners, members, or

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shareholders, and a small business development fund must notify the department of the names of

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the entities that are eligible to utilize credits pursuant to an allocation of credits or a change in

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allocation of credits or due to a transfer of a capital investment upon the allocation, change, or

 

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transfer. The allocation shall be not considered a sale for purposes of this section. Interest in a

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partnership, limited liability company, or S corporation may be earned by the purchase of an

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equity interest in the partnership, limited liability company or S corporation or the purchase of a

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debt instrument issued by the partnership, limited liability company, or S corporation.

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     42-64.33-4. Application, approval and allocations.

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     (a) A small business development fund that seeks to have an equity investment certified

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as a capital investment and eligible for credits under this chapter shall apply to the department.

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The department shall begin accepting applications within ninety (90) days of the effective date of

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this chapter. The small business development fund shall include the following:

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     (1) The amount of capital investment requested;

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     (2) A copy of the applicant's or an affiliate of the applicant's license as a rural business

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investment company under 7 U.S.C. § 2009cc, or as a small business investment company under

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15 U.S.C. § 681, and a certificate executed by an executive officer of the applicant attesting that

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the license remains in effect and has not been revoked;

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     (3) Evidence that, as of the date the application is submitted, the applicant or affiliates of

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the applicant have invested at least one hundred million dollars ($100,000,000) in nonpublic

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companies;

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     (4) An estimate of the number of jobs that will be created or retained in this state as a

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result of the applicant's qualified investments;

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     (5) A business plan that includes a strategy for reaching out to and investing in minority

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business enterprises and a revenue impact assessment projecting state and local tax revenue to be

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generated by the applicant's proposed qualified investment prepared by a nationally recognized,

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third-party, independent economic forecasting firm using a dynamic economic forecasting model

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that analyzes the applicant's business plan over the ten (10) years following the date the

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application is submitted to the department; and

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     (6) A nonrefundable application fee of five thousand dollars ($5,000), payable to the

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department.

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     (b) Within thirty (30) days after receipt of a completed application, the department shall

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grant or deny the application in full or in part. The department shall deny the application if:

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     (1) The applicant does not satisfy all of the criteria described in subsection (a) of this

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section;

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     (2) The revenue impact assessment submitted with the application does not demonstrate

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that the applicant's business plan will result in a positive economic impact on this state over a ten

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(10) year period that exceeds the cumulative amount of tax credits that would be issued to the

 

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applicant if the application were approved; or

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     (3) The department has already approved the maximum amount of capital investment

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authority under subsection (g) of this section.

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     (c) If the department denies any part of the application, it shall inform the applicant of the

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grounds for the denial. If the applicant provides any additional information required by the

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department or otherwise completes its application within fifteen (15) days of the notice of denial,

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the application shall be considered completed as of the original date of submission. If the

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applicant fails to provide the information or fails to complete its application within the fifteen

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(15) day period, the application remains denied and must be resubmitted in full with a new

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submission date.

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     (d) If the application is complete, the department shall certify the proposed equity

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investment as a capital investment that is eligible for credits under this chapter, subject to the

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limitations contained in subsection (g) of this section. The department shall provide written notice

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of the certification to the small business development fund.

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     (e) The department shall certify capital investments in the order that the applications were

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received by the department. Applications received on the same day shall be deemed to have been

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received simultaneously.

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     (f) For applications that are complete and received on the same day, the department shall

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certify applications in proportionate percentages based upon the ratio of the amount of capital

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investments requested in an application to the total amount of capital investments requested in all

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applications.

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     (g) The department shall certify sixty-five million dollars ($65,000,000) in capital

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investments pursuant to this section; provided that not more than twenty million dollars

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($20,000,000) may be allocated to any individual small business development fund certified

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under this section.

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     (h) Within sixty (60) days of the applicant receiving notice of certification, the small

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business development fund shall issue the capital investment to and receive cash in the amount of

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the certified amount from a small business fund investor. At least forty-five percent (45%) of the

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small business fund investor's capital investment shall be composed of capital raised by the small

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business fund investor from sources, including directors, members, employees, officers, and

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affiliates of the small business fund investor, other than the amount of capital invested by the

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allocatee claiming the tax credits in exchange for the allocation of tax credits; provided that at

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least ten percent (10%) of the capital investment shall be derived from the small business

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investment fund's managers. The small business development fund shall provide the department

 

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with evidence of the receipt of the cash investment within sixty-five (65) days of the applicant

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receiving notice of certification. If the small business development fund does not receive the cash

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investment and issue the capital investment within the time period following receipt of the

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certification notice, the certification shall lapse and the small business development fund shall not

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issue the capital investment without reapplying to the department for certification. Lapsed

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certifications revert to the authority and shall be reissued pro rata to applicants whose capital

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investment allocations were reduced pursuant to this chapter and then in accordance with the

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application process.

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     42-64.33-5. Tax credit recapture and exit.

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     (a) The department may recapture, from a small business fund investor that claimed the

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credit on a tax return, the credit allowed under this chapter if:

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     (1) The small business development fund does not invest one hundred (100%) percent of

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its capital investment authority in qualified investments in this state within three (3) years of the

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first credit allowance date;

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     (2) The small business development fund, after satisfying subsection (a)(1) of this

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section, fails to maintain qualified investments equal to one hundred (100%) percent of its capital

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investment authority until the sixth anniversary of the initial credit allowance date. For the

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purposes of this subsection, a qualified investment is considered maintained even if the qualified

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investment was sold or repaid so long as the small business development fund reinvests an

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amount equal to the capital returned or recovered by the small business development fund from

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the original investment, exclusive of any profits realized, in other qualified investments in this

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state within twelve (12) months of the receipt of the capital. Amounts received periodically by a

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small business development fund shall be treated as continually invested in qualified investments

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if the amounts are reinvested in one or more qualified investments by the end of the following

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calendar year. A small business development fund shall not be required to reinvest capital

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returned from qualified investments after the fifth anniversary of the initial credit allowance date,

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and the qualified investments shall be considered held continuously by the small business

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development fund through the sixth anniversary of the initial credit allowance date;

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     (3) The small business development fund, before exiting the program in accordance with

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subsection (e) of this section, makes a distribution or payment that results in the small business

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development fund having less than one hundred percent (100%) of its capital investment

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authority invested in qualified investments in this state or available for investment in qualified

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investments and held in cash and other marketable securities;

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     (4) The small business development fund, before exiting the program in accordance with

 

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subsection (e) of this section, fails to make qualified investments in minority business enterprises

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that when added together equal at least ten percent (10%) of the small business development

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fund's capital investment authority; or

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     (5) The small business development fund violates subsection (d) of this section.

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     (b) Recaptured credits and the related capital investment authority revert to the

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department and shall be reissued pro rata to applicants whose capital investment allocations were

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reduced pursuant to § 42-64.33-4(f) of this section and then in accordance with the application

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process.

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     (c) Enforcement of each of the recapture provisions of subsection (a) of this section shall

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be subject to a six (6) month cure period. No recapture shall occur until the small business

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development fund has been given notice of noncompliance and afforded six (6) months from the

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date of the notice to cure the noncompliance.

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     (d) No eligible business that receives a qualified investment under this chapter, or any

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affiliates of the eligible business, may directly or indirectly:

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     (1) Own or have the right to acquire an ownership interest in a small business

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development fund or member or affiliate of a small business development fund, including, but not

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limited to, a holder of a capital investment issued by the small business development fund; or

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     (2) Loan to or invest in a small business development fund or member or affiliate of a

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small business development fund, including, but not limited to, a holder of a capital investment

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issued by a small business development fund, where the proceeds of the loan or investment are

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directly or indirectly used to fund or refinance the purchase of a capital investment under this

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chapter.

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     (e) On or after the sixth anniversary of the initial credit allowance date, a small business

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development fund may apply to the department to exit the program and no longer be subject to

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regulation under this chapter. The department shall respond to the exit application within thirty

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(30) days of receipt. In evaluating the exit application, the fact that no credits have been

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recaptured and that the small business development fund has not received a notice of recapture

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that has not been cured pursuant to subsection (c) of this section shall be sufficient evidence to

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prove that the small business development fund is eligible for exit. The department shall not

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unreasonably deny an exit application submitted under this subsection. If the exit application is

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denied, the notice shall include the reasons for the determination.

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     (f) If the number of jobs created or retained by the eligible businesses that received

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qualified investments from the small business development fund, calculated pursuant to reports

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filed by the small business development fund pursuant to § 42-64.33-7, is:

 

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     (1) Less than sixty percent (60%) of the amount projected in the approved small business

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development fund's business plan filed as part of its application for certification under § 42-

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64.33-4, then the state shall receive thirty percent (30%) of any distribution or payment to an

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equity holder in an approved small business development fund in excess of eligible distributions;

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or

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     (2) Greater than sixty percent (60%) but less than one hundred percent (100%) of the

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amount projected in the approved small business development fund's business plan filed as part of

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its application for certification under § 42-64.33-4, then the state shall receive fifteen percent

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(15%) of any distribution or payment to an equity holder in an approved small business

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development fund in excess of eligible distributions.

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     (g) At the time a small business development fund applies to the department to exit the

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program, it shall calculate the aggregate internal rate of return of its qualified investments. If the

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small business development fund's aggregate internal rate of return on its qualified investments at

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exit exceeds ten percent (10%), then, after eligible distributions, the state shall receive ten percent

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(10%) of any distribution or payment in excess of the aggregate ten percent (10%) internal rate of

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return to an equity holder in an approved small business development fund.

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     (h) The department shall not revoke a tax credit certificate after the small business

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development fund's exit from the program.

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     42-64.33-6. Request for determination.

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     (a) A small business development fund, before making a qualified investment, may

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request from the department a written opinion as to whether the business in which it is proposed

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to invest is an eligible business. The department, not later than the fifteenth business day after the

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date of receipt of the request, shall notify the small business development fund of its

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determination. If the department fails to notify the small business development fund by the

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fifteenth business day of its determination, the business in which the small business development

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fund proposes to invest shall be considered an eligible business.

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     42-64.33-7. Reporting obligations.

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     (a) Each small business development fund shall submit a report to the department and the

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division of taxation on or before the fifth business day after the third anniversary of the closing

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date. The report shall provide documentation as to the small business development fund's

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qualified investments and include:

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     (1) A bank statement evidencing each qualified investment;

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     (2) The name, location, status as a minority business enterprise if applicable, and industry

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of each business receiving a qualified investment, including either the determination letter set

 

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forth in § 42-64.33-6 or evidence that the business qualified as an eligible business at the time the

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investment was made; and

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     (3) The number of employment positions created or retained as a result of the small

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business development fund's qualified investments as of the last day of the preceding calendar

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year;

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     (b) On or before the last day of February of each year following the year in which the

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report required in subsection (a) of this section is due, the small business development fund shall

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submit an annual report to the department and the division of taxation including the following:

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     (1) The number of employment positions created or retained as a result of the small

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business development fund's qualified investments as of the last day of the preceding calendar

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year;

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     (2) The number of minority business enterprises that have received qualified investments

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and the amount of qualified investment that such minority business enterprises have received;

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     (3) The average annual salary of the positions described in subsection (b)(1) of this

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section; and

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     (4) The follow-on capital investment that has occurred along with or after the small

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business development fund's investment as of the last day of the preceding calendar year.

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     (c) A copy of the reports required under this section must also be sent concurrently to the

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speaker of the house, president of the senate, house finance chairperson, senate finance

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chairperson, and the general treasurer.

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     42-64.33-8. Rules and regulations.

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     The department and division of taxation may issue reasonable rules and regulations,

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consistent with this chapter, as are necessary to carry out the intent and purpose and

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implementation of the responsibilities under this chapter.

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     SECTION 2. This act shall take effect upon passage.

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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

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report annually, and the program would terminate after six (6) years.

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     This act would take effect upon passage.

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