REPORT TITLE:
HSDC; Appropriation


DESCRIPTION:
Appropriates unspecified amount to the Hawaii strategic
development corporation revolving fund; restricts HSDC
investments to those with at least matching private investment;
requires venture capital investments of employees' retirement
system funds in qualified high tech businesses.  (SB1607 HD1)

 
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                                                        1607
THE SENATE                              S.B. NO.           S.D. 2
TWENTIETH LEGISLATURE, 1999                                H.D. 1
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO ECONOMIC DEVELOPMENT AND PRIVATE INVESTMENT
   ATTRACTION.


BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1                              PART I
 
 2      SECTION 1.  The legislature finds that economic
 
 3 diversification throughout many communities has been enhanced by
 
 4 the availability of venture capital investment.  Areas such as
 
 5 Silicon Valley, Route 128 in Boston, Austin, Texas, and Research
 
 6 Triangle in North Carolina have benefited greatly from venture
 
 7 capital supporting high growth technology companies.  Nationally,
 
 8 fourteen billion dollars of venture capital funding was generated
 
 9 in the last year.  Hawaii's future economic diversification and
 
10 creation of a flourishing technology component will be dependent
 
11 on the availability of venture capital.
 
12      The Hawaii strategic development corporation was established
 
13 by the legislature to develop a sustainable venture capital
 
14 industry in Hawaii and attract investment from the private
 
15 sector.  Hawaii has been successful in developing many new
 
16 technology companies which utilize research undertaken at the
 
17 University of Hawaii with support from the high technology
 
18 development corporation and the department of business, economic
 
19 development, and tourism.
 

 
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 1      To date, the Hawaii strategic development corporation has
 
 2 launched five venture capital limited partnerships which have
 
 3 invested in twenty-one companies in the fields of information
 
 4 technology, telecommunications, biotechnology, aquaculture, food
 
 5 processing and distribution, and others.  The corporation has
 
 6 leveraged its initial investment funds of $5,250,000 over ten
 
 7 times with private investment, and generated over $58,000,000 of
 
 8 venture capital for Hawaii companies.  As a result of receiving
 
 9 venture capital investment, these twenty-one companies have
 
10 created or sustained over five hundred jobs.
 
11      Hawaii strategic development corporation's investments have
 
12 served as the catalyst for Hawaii's venture capital industry.  It
 
13 is the goal of the corporation to use its investment fund to
 
14 attract private investment from Hawaii, the U.S. mainland, and
 
15 Asia, as private investment is seen as the long-term source of
 
16 venture capital for Hawaii's businesses.
 
17      Hawaii strategic development corporation's seed funding of
 
18 start-up companies represent long-term investments which have not
 
19 yet generated financial returns.  The corporation has fully
 
20 committed its available funds and will be unable to maintain its
 
21 momentum for business creation without additional funding.
 
22      There is a continuing need by Hawaii businesses for venture
 
23 capital so that in the future companies such as Verifone,
 

 
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 1 Neugenesis, Intelect, and Aspect will not have to relocate their
 
 2 operations to areas where venture capital is more readily
 
 3 available.
 
 4      The purpose of this part is to appropriate funds to be paid
 
 5 into the Hawaii strategic development corporation revolving fund.
 
 6      SECTION 2.  There is appropriated out of the general
 
 7 revenues of the State of Hawaii the sum of $          , or so
 
 8 much thereof as may be necessary for fiscal year 1999-2000, to be
 
 9 paid into the Hawaii strategic development corporation revolving
 
10 fund.
 
11      SECTION 3.  The sum appropriated shall be expended by the
 
12 Hawaii strategic development corporation for the purposes of this
 
13 Act; provided that:
 
14      (1)  Investments shall be made primarily in high technology
 
15           companies;
 
16      (2)  An investment expenditure is only permitted when the
 
17           amount is at least equally matched by private sector
 
18           investment; and
 
19      (3)  Up to $           shall be used to develop a plan to
 
20           further develop venture capital in Hawaii identifying
 
21           investment opportunities, listing resources and support
 
22           organizations, describing the impact of venture capital
 
23           on various communities, and targeting additional
 

 
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 1           private investment capital for Hawaii companies.
 
 2      SECTION 4.  Section 211F-5, Hawaii Revised Statutes, is
 
 3 amended to read as follows:
 
 4      "[[]211F-5[]]  Hawaii strategic development corporation
 
 5 revolving fund.  There is established the Hawaii strategic
 
 6 development corporation revolving fund[.] which shall be
 
 7 administered by the board.  The following moneys shall be
 
 8 deposited into the Hawaii strategic development corporation
 
 9 revolving fund and shall not be considered part of the general
 
10 fund:  all moneys appropriated by the legislature, received as
 
11 repayments of loans, earned on investments, received pursuant to
 
12 a venture agreement, received as royalties, received as premiums
 
13 or fees charged by the corporation, or otherwise received by the
 
14 corporation.  The department of business, economic development,
 
15 and tourism shall not restrict the use of any moneys in the
 
16 Hawaii strategic development corporation revolving fund."
 
17                              PART II
 
18      SECTION 5.  The legislature finds that the shortage of
 
19 venture capital in Hawaii makes it difficult for local high
 
20 technology businesses to obtain the necessary  financing to
 
21 develop products, enter new markets, and expand on their early
 
22 success.  The purpose of this part is to require the board of
 
23 trustees of the employees' retirement system to invest employees'
 

 
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 1 retirement system funds in qualified high technology businesses,
 
 2 subject to minimum and maximum limits, as a means of providing
 
 3 venture capital for those businesses.
 
 4      SECTION 6.  Section 88-119, Hawaii Revised Statutes, is
 
 5 amended to read as follows:
 
 6      "88-119  Investments.  (a)  Investments may be made in:
 
 7      (1)  Real estate loans and mortgages.  Obligations (as
 
 8           defined in section 431:6-101) of any of the following
 
 9           classes:
 
10           (A)  Obligations secured by mortgages of nonprofit
 
11                corporations desiring to build multirental units
 
12                (ten units or more) subject to control of the
 
13                government for occupancy by families displaced as
 
14                a result of government action;
 
15           (B)  Obligations secured by mortgages insured by the
 
16                Federal Housing Administration;
 
17           (C)  Obligations for the repayment of home loans made
 
18                under the Servicemen's Readjustment Act of 1944 or
 
19                under Title II of the National Housing Act;
 
20           (D)  Other obligations secured by first mortgages on
 
21                unencumbered improved real estate owned in fee
 
22                simple; provided that [the]:
 
23                (i)  The amount of the obligation shall not at the
 

 
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 1                     time investment is made therein exceed eighty
 
 2                     per cent of the value of the real estate and
 
 3                     improvements mortgaged to secure it, and
 
 4                     except that the amount of the obligation at
 
 5                     the time investment is made therein may
 
 6                     exceed eighty per cent but no more than
 
 7                     ninety per cent of the value of the real
 
 8                     estate and improvements mortgaged to secure
 
 9                     it; [provided further that the] and
 
10               (ii)  The obligation is insured or guaranteed
 
11                     against default or loss under a mortgage
 
12                     insurance policy issued by a casualty
 
13                     insurance company licensed to do business in
 
14                     the State.
 
15                The coverage provided by the insurer [should]
 
16                shall be sufficient to reduce the system's
 
17                exposure to not more than eighty per cent of the
 
18                value of the real estate and improvements
 
19                mortgaged to secure it.  [Such] The insurance
 
20                coverage shall remain in force until the principal
 
21                amount of the obligation is reduced to eighty per
 
22                cent of the market value of the real estate and
 
23                improvements mortgaged to secure it, at which time
 

 
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 1                the coverage shall be subject to cancellation
 
 2                solely at the option of the board of trustees.
 
 3                Real estate shall not be deemed to be encumbered
 
 4                within the meaning of this subparagraph by reason
 
 5                of the existence of any of the restrictions,
 
 6                charges, or claims described in section 431:6-308;
 
 7           (E)  Other obligations secured by first mortgages of
 
 8                leasehold interests in improved real estate;
 
 9                provided that:
 
10                (i)  Each [such] leasehold interest [at such time]
 
11                     shall have a current term extending at least
 
12                     two years beyond the stated maturity of the
 
13                     obligation it secures; and
 
14               (ii)  The amount of the obligation shall not at the
 
15                     time investment is made therein exceed eighty
 
16                     per cent of the value of the respective
 
17                     leasehold interest and improvements, and
 
18                     except that the amount of the obligation, at
 
19                     the time investment is made therein, may
 
20                     exceed eighty per cent but no more than
 
21                     ninety per cent of the value of the leasehold
 
22                     interest and improvements mortgaged to secure
 
23                     it;
 

 
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 1                provided further that the obligation is insured or
 
 2                guaranteed against default or loss under a
 
 3                mortgage insurance policy issued by a casualty
 
 4                insurance company licensed to do business in the
 
 5                State.  The coverage provided by the insurer
 
 6                [should] shall be sufficient to reduce the
 
 7                system's exposure to not more than eighty per cent
 
 8                of the value of the leasehold interest and
 
 9                improvements mortgaged to secure it.  [Such] The
 
10                insurance coverage shall remain in force until the
 
11                principal amount of the obligation is reduced to
 
12                eighty per cent of the market value of the
 
13                leasehold interest and improvements mortgaged to
 
14                secure it, at which time the coverage shall be
 
15                subject to cancellation solely at the option of
 
16                the board of trustees;
 
17           (F)  Obligations for the repayment of home loans
 
18                guaranteed by the department of Hawaiian home
 
19                lands pursuant to section 214(b) of the Hawaiian
 
20                Homes Commission Act, 1920; and
 
21           (G)  Obligations secured by second mortgages on
 
22                improved real estate for which the mortgagor
 
23                procures a second mortgage on the improved real
 

 
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 1                estate for the purpose of acquiring the
 
 2                leaseholder's fee simple interest in the improved
 
 3                real estate; provided that any prior mortgage does
 
 4                not contain provisions which might jeopardize the
 
 5                security position of the retirement system or the
 
 6                borrower's ability to repay the mortgage loan.
 
 7           The board of trustees may retain such real estate,
 
 8           including leasehold interests therein, as it may
 
 9           acquire by foreclosure of mortgages or in enforcement
 
10           of security, or as may be conveyed to it in
 
11           satisfaction of debts previously contracted; provided
 
12           that all such real estate, other than leasehold
 
13           interests, shall be sold within five years after
 
14           acquiring the same, subject to extension by the
 
15           governor for additional periods not exceeding five
 
16           years each, and that all such leasehold interests shall
 
17           be sold within one year after acquiring the same,
 
18           subject to extension by the governor for additional
 
19           periods not exceeding one year each;
 
20      (2)  Government obligations, etc.  Obligations of any of the
 
21           following classes:
 
22           (A)  Obligations issued or guaranteed as to principal
 
23                and interest by the United States or by any state
 

 
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 1                thereof or by any municipal or political
 
 2                subdivision or school district of any of the
 
 3                foregoing; provided that principal of and interest
 
 4                on such obligations are payable in currency of the
 
 5                United States; or sovereign debt instruments
 
 6                issued by agencies of, or guaranteed by foreign
 
 7                governments;
 
 8           (B)  Revenue bonds, whether or not permitted by any
 
 9                other provision hereof, of the State or any
 
10                municipal or political subdivision thereof,
 
11                including the board of water supply of the city
 
12                and county of Honolulu, and street or improvement
 
13                district bonds of any district or project in the
 
14                State; and
 
15           (C)  Obligations issued or guaranteed by any federal
 
16                home loan bank including consolidated federal home
 
17                loan bank obligations, the Home Owner's Loan
 
18                Corporation, the Federal National Mortgage
 
19                Association, or the Small Business Administration;
 
20      (3)  Corporate obligations.  Investments may be made in
 
21           below investment grade or nonrated debt instruments,
 
22           foreign or domestic, in accordance with investment
 
23           guidelines adopted by the board of trustees;
 

 
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 1      (4)  Preferred and common stocks.  Shares of preferred or
 
 2           common stock of any corporation created or existing
 
 3           under the laws of the United States or of any state or
 
 4           district thereof or of any country;
 
 5      (5)  Obligations eligible by law for purchase in the open
 
 6           market by federal reserve banks;
 
 7      (6)  Obligations issued or guaranteed by the International
 
 8           Bank for Reconstruction and Development, the Inter-
 
 9           American Development Bank, the Asian Development Bank,
 
10           or the African Development Bank;
 
11      (7)  Obligations secured by collateral consisting of any of
 
12           the securities or stock listed above and worth, at the
 
13           time the investment is made, at least fifteen per cent
 
14           more than the amount of the respective obligations;
 
15      (8)  Insurance company obligations.  Contracts and
 
16           agreements supplemental thereto providing for
 
17           participation in one or more accounts of a life
 
18           insurance company authorized to do business in Hawaii,
 
19           including its separate accounts, and whether the
 
20           investments allocated thereto are comprised of stocks
 
21           or other securities or of real or personal property or
 
22           interests therein;
 
23      (9)  Interests in real property.  Interests in improved or
 

 
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 1           productive real property in which, in the informed
 
 2           opinion of the board of trustees, it is prudent to
 
 3           invest funds of the system.  For purposes of this
 
 4           paragraph, "real property" includes any property
 
 5           treated as real property either by local law or for
 
 6           federal income tax purposes.  Investments in improved
 
 7           or productive real property may be made directly or
 
 8           through pooled funds, including common or collective
 
 9           trust funds of banks and trust companies, group or unit
 
10           trusts, limited partnerships, investment trusts, title-
 
11           holding corporations recognized under section 501(c)(2)
 
12           or section 501(c)(23) of the Internal Revenue Code of
 
13           1986, as amended, and other pooled funds invested on
 
14           behalf of the system by investment managers retained by
 
15           the system;
 
16     (10)  Other securities and futures contracts.  Securities and
 
17           futures contracts in which in the informed opinion of
 
18           the board of trustees it is prudent to invest funds of
 
19           the system, including currency, interest rate, bond,
 
20           and stock index futures contracts and options on such
 
21           contracts to hedge against anticipated changes in
 
22           currencies, interest rates, and bond and stock prices
 
23           that might otherwise have an adverse effect upon the
 

 
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 1           value of the system's securities portfolios; covered
 
 2           put and call options on securities; and stock; whether
 
 3           or not the securities, stock, futures contracts, or
 
 4           options on futures are expressly authorized by or
 
 5           qualify under the foregoing paragraphs, and
 
 6           notwithstanding any limitation of any of the foregoing
 
 7           paragraphs (including paragraph (4)); and
 
 8     (11)  Private placements.  Investments in institutional blind
 
 9           pool limited partnerships or direct investments which
 
10           make private debt and equity investments in privately
 
11           held companies.
 
12      (b)  At least 0.1 per cent of assets at the start of a
 
13 fiscal year, up to a maximum of $100,000,000 per fiscal year,
 
14 shall be venture capital investments by the board of trustees in
 
15 qualified high technology businesses.  Investment under this
 
16 subsection shall be made under the condition that there shall be
 
17 three or more unrelated investors other than the system involved
 
18 in the investment.  The board, in making investments under this
 
19 subsection, may consult with knowledgeable state agencies,
 
20 corporations, and financial institutions before investing assets
 
21 in qualified high technology businesses.
 
22      For the purposes of this subsection:
 
23      "Qualified high technology business" means:
 

 
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 1      (1)  A business, employing or owning capital or property, or
 
 2           maintaining an office, in this State; and
 
 3      (2)  (A)  That has qualified research expenses paid or
 
 4                incurred for research conducted in this State; or
 
 5           (B)  That receives income derived from qualified
 
 6                research expenses; provided that the income is
 
 7                received from products sold from, manufactured, or
 
 8                produced in the State; or services performed in
 
 9                this State.
 
10      The term "qualified high technology business" does not
 
11 include any trade or business involving the performance of
 
12 services in the field of law, engineering, architecture,
 
13 accounting, actuarial science, performing arts, consulting,
 
14 athletics, financial services, or brokerage services, or any
 
15 trade or business where the principal asset of the trade or
 
16 business is the reputation or skill of one or more of its
 
17 employees; any banking, insurance, financing, leasing, rental,
 
18 investing, or similar business; any farming business, including
 
19 the business of raising or harvesting trees; any business
 
20 involving the production or extraction of products of a character
 
21 with respect to which a deduction is allowable under section 611
 
22 (with respect to allowance of deduction for depletion), 613 (with
 
23 respect to basis for percentage depletion), or 613A (with respect
 

 
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 1 to limitation on percentage depleting in cases of oil and gas
 
 2 wells) of the Internal Revenue Code; any business operating a
 
 3 hotel, motel, restaurant, or similar business; any trade or
 
 4 business involving a hospital, a private office of a licensed
 
 5 health care professional, a group practice of license health care
 
 6 professionals, or nursing home.
 
 7      "Qualified research expenses" means:
 
 8      (1)  Research:
 
 9           (A)  With respect to which expenditures may be treated
 
10                as expenses under Internal Revenue Code section
 
11                174 (with respect to research and experimental
 
12                expenditures);
 
13           (B)  Which is undertaken for the purpose of discovering
 
14                information:
 
15                (i)  Which is technological in nature; and
 
16               (ii)  The application of which is intended to be
 
17                     useful in the development of a new or
 
18                     improved business component of the taxpayer;
 
19                     and
 
20           (C)  Substantially all of the activities of which
 
21                constitute elements of a process of
 
22                experimentation for a purpose described in
 
23                paragraph (3).
 

 
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 1           This term does not include any activity described in
 
 2           paragraph (4).
 
 3      (2)  Tests to be applied separately to each business
 
 4           component:
 
 5           (A)  Paragraph (1) shall be applied separately with
 
 6                respect to each business component of the
 
 7                taxpayer.
 
 8           (B)  The term "business component" means any product,
 
 9                process, computer software, technique, formula, or
 
10                invention which is to be:
 
11                (i)  Held for sale, lease, or license; or
 
12               (ii)  Used by the taxpayer in a trade or business
 
13                     of the taxpayer.
 
14           (C)  Special rule for production processes.  Any plant
 
15                process, machinery, or technique for commercial
 
16                production of a business component shall be
 
17                treated as a separate business component (and not
 
18                as part of the business component being produced).
 
19      (3)  Purposes for which research may qualify for credit.
 
20           For purposes of paragraph (1)(C):
 
21           (A)  Research shall be treated as conducted for a
 
22                purpose described in this paragraph if it relates
 
23                to:
 

 
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 1                (i)  A new or improved function;
 
 2               (ii)  Performance; or
 
 3              (iii)  Reliability or quality.
 
 4           (B)  Certain purposes not qualified.  Research in no
 
 5                event shall be treated as conducted for a purpose
 
 6                described in this paragraph if it relates to
 
 7                style, taste, cosmetic, or seasonal design
 
 8                factors.
 
 9      (4)  Activities for which credit not allowed.  "Qualified
 
10           research expenses" shall not include the following:
 
11           (A)  Any research conducted after the beginning of
 
12                commercial production of the business component;
 
13           (B)  Any research related to the adaptation of an
 
14                existing business component to a particular
 
15                customer's requirement or need;
 
16           (C)  Any research related to the reproduction of an
 
17                existing business component (in whole or in part)
 
18                from a physical examination of the business
 
19                component itself or from plans, blueprints,
 
20                detailed specifications, or publicly available
 
21                information with respect to the business
 
22                component;
 
23           (D)  Any efficiency survey; activity relating to
 

 
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 1                management function or technique; market research,
 
 2                testing, or development (including advertising or
 
 3                promotions); routine data collection; or routine
 
 4                or ordinary testing or inspection for quality
 
 5                control;
 
 6           (E)  Any research with respect to computer software
 
 7                which is developed by (or for the benefit of) the
 
 8                taxpayer primarily for internal use by the
 
 9                taxpayer, other than for use in:
 
10                (i)  An activity which constitutes qualified
 
11                     research (determined with regard to this
 
12                     subparagraph); or
 
13               (ii)  A production process with respect to which
 
14                     the requirements of paragraph (1) are met;
 
15           (F)  Any research conducted outside the State;
 
16           (G)  Any research in the social sciences, arts, or
 
17                humanities; and
 
18           (H)  Any research to the extent funded by any grant,
 
19                contract, or otherwise by another person (or
 
20                governmental entity).
 
21      "Venture capital investment" means any of the following
 
22 investments in a qualified high technology business:
 
23      (1)  Common or preferred stock and equity securities without
 

 
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 1           a repurchase requirement for at least five years;
 
 2      (2)  A right to purchase stock or equity securities;
 
 3      (3)  Any debenture or loan, whether or not convertible or
 
 4           having stock purchase rights, which are subordinated,
 
 5           together with security interests against the assets of
 
 6           the borrower, by their terms to all borrowings of the
 
 7           borrower from other institutional lenders, and that is
 
 8           for a term of not less than three years, and that has
 
 9           no part amortized during the first three years; and
 
10      (4)  General or limited partnership interests."
 
11      SECTION 7.  Statutory material to be repealed is bracketed.
 
12 New statutory material is underscored.
 
13      SECTION 8.  This Act shall take effect on July 1, 1999.
 

 
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