Report Title:

State Private Investment Fund

Description:

Adopts new capital formation incentives.

THE SENATE

S.B. NO.

3024

TWENTY-SECOND LEGISLATURE, 2004

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

relating to capital formation.

 

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

SECTION 1. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"chapter

State private investment fund

part i. general definitions

§   -1 Definitions. As used in this chapter:

"Board" means the board of directors of the corporation.

"Corporation" means the Hawaii strategic development corporation, a public body corporate and politic and an instrumentality and agency of the state, established pursuant to and governed by chapter 211F.

"Director" means any person who is a member of the board.

"Equity capital" means capital invested in common or preferred stock, royalty rights, limited partnership interests, limited liability company interests, and any other securities or rights that evidence ownership in private business.

"Guarantee" shall mean each guaranty or agreement issued by the corporation as authorized by this chapter.

"Investor group" means any person that is engaged or considered for engagement by the corporation as an investor group pursuant to the provisions of this chapter.

"Near-equity capital" means capital invested in unsecured, undersecured, subordinated, or convertible loans, or debt securities.

"Person" means any individual, corporation, limited liability company, partnership, or other lawfully organized entity.

"Put option" means a right or privilege to sell an amount of tax credits during a time period ending on the expiration date of the option.

"State" means the State of Hawaii.

"Tax credits" means tax credits issued or transferred pursuant to this chapter and available against liabilities imposed by chapter 235 and chapter 241.

"Taxpayer" means a person subject to a tax imposed by chapters 235 and 241.

§   -2 Short title. This chapter shall be known and may be cited as the "State private investment fund."

§   -3 Findings and purpose. A critical shortage of seed and venture capital resources exists in the State and that shortage is impairing the growth of commerce in the State. A need exists to increase the availability of venture equity capital for emerging, expanding, relocating, and restructuring enterprises in the State, and an increase in return-driven, venture capital investments in such enterprises in the State will help to diversify the State's economic base. Accordingly, this chapter is enacted to:

(1) Mobilize equity and near-equity capital for

investment in a broad variety of venture capital partnerships in diversified industries;

(2) Retain the private sector culture of focusing on rate

of return in the investing process;

(3) Secure the services of high quality managers in the venture capital industry;

(4) Enhance the venture capital culture and infrastructure in the State so as to increase venture capital investment and promote venture capital investing within the State; and

(5) Accomplish the foregoing purposes in a return-driven manner with the goal of minimizing any adverse impact on State tax revenues.

§   -4 Mission of the corporation. The mission of the corporation, pursuant to this chapter and in addition and supplemental to those set forth in chapter 211F, shall be to mobilize equity and near-equity capital for investment in such a manner that will result in a significant potential to diversify and stabilize the economy of the State. Notwithstanding anything to the contrary in chapter 211F or otherwise, the corporation shall have the power and authority to carry out the purposes, mission, and provisions of this chapter.

PART II. IMPLEMENTATION

§   -5 Business plan. In order to fulfill its mission as the mobilizer of equity and near-equity capital, the implementation of this chapter by the corporation shall be subject to the supervision of the board. The corporation shall develop an annual business plan for the implementation of this chapter. The business plan shall be submitted to the board for its approval and shall be included in its annual report, which shall be published as provided in section -8.

§   -6 Tax credits. (a) The State hereby issues to the corporation tax credits that may be transferred or otherwise utilized to reduce the tax liability of any person pursuant to the provisions of chapter 235 and chapter 241. The total amount of tax credits that are hereby issued, and which may be transferred pursuant to this chapter by the corporation is $100,000,000. The credits shall be freely transferable by the corporation to transferees, and by transferees to subsequent transferees; however, the tax credits so transferred by the corporation shall not be exercisable before July 1, 2005, nor after July 1, 2030. The corporation shall not transfer tax credits except in conjunction with a legitimate call on a corporation guarantee or agreement. The corporation shall immediately notify the president of the senate of the State of Hawaii, the speaker of the house of representatives of the State of Hawaii, and the governor of the State of Hawaii in writing if any tax credit is transferred by the corporation in conjunction with a legitimate call on a corporation guarantee or agreement; provided, the corporation shall not be required to make such notification for transfers to subsequent transferees.

(b) The corporation shall determine the amount of individual tax credits to be transferred pursuant to this chapter and may negotiate for the sale of such credits subject only to the limits imposed by this chapter. The corporation shall ensure that no more than $20,000,000 in tax credits has been transferred which may be claimed and used to reduce the tax otherwise imposed by chapter 235 and chapter 241 for one fiscal year (including any tax credits that are carried over by a taxpayer from a prior fiscal year and used to reduce taxes otherwise imposed in the current fiscal year, as permitted in subsection (f)). The board shall clearly indicate on the face of the certificate or other document transferring the tax credit the principal amount of the tax credit and the taxable year or years for which the credit may be claimed.

(c) The corporation shall in conjunction with the department of taxation, develop a system for registration of any tax credits issued or transferred pursuant to this chapter and a system of certificates that permits verification that any tax credit claimed upon a tax return is validly issued, properly taken in the year of claim, and that any transfers of the tax credit are made in accordance with the requirements of this chapter.

(d) The corporation may pay a fee and provide other consideration in connection with the purchase by the corporation of a put option or other agreement pursuant to which a transfer of tax credits authorized by this chapter may be made.

(e) The tax credits issued or transferred pursuant to this chapter, upon election by the taxpayer at utilization, shall be treated as a payment or prepayment in lieu of taxes imposed under chapter 235 and chapter 241. Tax credits utilized pursuant to this chapter shall be claimed as a payment of tax or estimated tax for the purposes of chapter 235 and chapter 241.

(f) If the tax credits under this section exceed the taxpayer's income tax liability under chapter 215 and chapter 241 for any taxable year, or for any other reason is not claimed by a taxpayer in whole or in part in any taxable year, the excess of the tax credit over liability, or the amount of the unclaimed tax credit, as the case may be, may be carried over and used as a credit against the taxpayer's income tax liability in any subsequent year until exhausted, subject to the deadline for the exercise of tax credits imposed in subsection (a).

§   -7 Investment of capital. (a) The corporation shall have the power to solicit investment plans from investor groups for the investment of capital in accordance with the requirements of this chapter. The corporation shall establish criteria for the selection of persons, firms, corporations, or other entities. Such criteria shall include the applicant's level of experience, quality of management, investment philosophy and process, probability of success in fund raising, plan for achieving the purposes of this chapter, and such other investment criteria as may be used in professional portfolio management that the corporation deems appropriate. If the corporation decides to engage one or more investor groups to deploy or generate capital, it shall consider and select one or more investment plans and investor groups that the corporation deems qualified to:

(1) Generate capital for investment with the most effective and efficient utilization of the guaranty;

(2) Invest the capital in private seed and venture capital entities in a manner mobilizing a wide variety of equity and near-equity investments in ventures promoting the economic development of the State; and

(3) Help build a significant, fiscally strong, and permanent resource to serve the objectives expressed in this chapter.

An investor group engaged by the corporation shall have a manager who is experienced in design, implementation, as well as the management of seed and venture capital investment programs and in capital formation. The corporation shall have the authority and discretion to remove and replace any investor group that has been engaged, and to effect the assignment of assets, liabilities, guarantees, and other contracts of this program to a new investor group, subject to such terms and conditions as may be set forth in the terms of engagement.

(b) The corporation shall have the power to extend one or more guarantees and to secure the performance of such guarantees in the form of a put option as well as other arrangements selected by the corporation. Without limiting the foregoing:

(1) The corporation may guarantee loans, lines of credit, and other indebtedness and equity investments, and may arrange for, pledge, and assign put options as well as other agreements to purchase tax credits on such terms as the board may approve from time to time in order to generate funds to deploy in a manner consistent with this chapter;

(2) The guarantees of loans, lines of credit, and other indebtedness may extend up to the principal amount plus interest over the term of the guarantee at a rate set by board resolution from time to time, a guarantee of a loan, lines of credit, or other indebtedness; and

(3) Guarantees of equity capital may extend up to the amount of the investment plus a rate of return set by board resolution from time to time.

Guarantees, in whatever form negotiated by the corporation may be made for any period of time, but no term shall expire prior to January 1, 2006. The corporation may charge a reasonable fee for costs and the fair compensation of risks associated with its guarantee. The guarantees extended by the corporation shall in no way be an obligation of the State and may be restricted to specific funds or assets of the corporation; provided, that proceeds from the sale of any tax credits may be used to satisfy the contractual guarantee obligations of the corporation. The corporation shall have the right to contract freely to protect the interests of the State.

(c) If the corporation purchases any security pursuant to an agreement with an investor group, the corporation shall acquire such securities and may invest, manage, transfer or dispose of such securities in accordance with policies for the management of assets adopted by the corporation.

(d) The corporation shall have the power to make any contract, execute any document, charge reasonable fees for services rendered, perform any act or enter into any financial or other transaction necessary in order to carry out its mission. The corporation may employ such persons as may be required for the proper implementation of this chapter, the management of its assets, or the performance of any function authorized or required by this chapter necessary for the accomplishment of any such function. Such persons shall be selected by the corporation based upon outstanding knowledge and leadership in the field for which the person performs services for the board.

(e) In carrying out the mission of the corporation, as authorized in this chapter, neither the corporation nor its officers, directors, or employees shall be considered to be broker-dealers, agents, investment advisors, or investment adviser representatives under chapter 485. The tax credits issued or transferred pursuant to this chapter shall not be considered securities under chapter 485.

(f) Funds raised or arranged by the corporation pursuant to this chapter shall be invested in seed capital and venture capital investments, as such terms are defined in chapter 211F, which shall, to the extent consistent with this chapter, be governed by applicable provisions of chapter 211F.

§   -8 Annual reports - evaluation by the board. (a) The corporation shall publish a separate annual report in conjunction with its annual audit and present the report to the governor and legislature. The annual report shall review the mission of the board and programs implemented according to the objective measures set forth in the corporation's business plan. The corporation shall distribute this annual report by such means that will make it available to the financial community.

(b) Seven years after the corporation has begun operations under this chapter, the corporation shall review, analyze, and evaluate the extent to which the corporation has achieved its statutory mission. The evaluation shall include, but not be limited to, an examination of quantified results of the corporation's programs and plans.

§   -9 Spending authority. Notwithstanding other provisions of law, the corporation or any entity designated by the corporation shall have the authority to expend funds to administer and operate the programs of the corporation.

§   -10 Hawaii capital formation revolving fund. There is established a revolving fund for the corporation to be designated the Hawaii capital formation revolving fund. The fund shall be a continuing fund, not subject to fiscal year limitations, and shall consist of appropriated funds. All monies accruing to the credit of said fund are hereby appropriated and, as authorized by the corporation, shall be expended by the corporation to perform the duties imposed upon the corporation by law, and shall not be considered part of the general fund. The following moneys shall be deposited into the Hawaii capital formation revolving fund: all moneys appropriated by the legislature, received as repayment of loans, earned on instruments, received pursuant to a venture agreement, received as royalties, received as premiums or fees charged by the corporation, or otherwise received by the corporation.

§   -11 Construction. Nothing contained herein is or shall be construed as a restriction or limitation upon any powers that the corporation might otherwise have under any other law of the State heretofore or hereafter enacted and the provisions of this part are cumulative to those powers. To the extent consistent with this chapter, in administering, implementing, and carrying out the mission of the corporation pursuant to this chapter, the corporation shall be governed by and have the powers and authorities set forth in chapter 211F. These provisions hereof do and shall be construed to provide a complete, additional, and alternative method for the doing of the things authorized and shall be regarded as supplemental and additional to powers conferred by any other laws.

§   -12 Adoption of rules, policies, procedures and regulatory and administrative measures; enforceability of guarantees of corporation unaffected. (a) The corporation may adopt rules, policies, procedures, and regulatory and administrative measures necessary to administer the programs of the corporation or convenient for the organizational and internal management of the corporation's and board's responsibilities.

(b) The level, timing, or degree of success of the corporation in mobilizing or ensuring investment in Hawaii businesses or projects shall not compromise, diminish, invalidate or affect the enforceability of any guarantee of the corporation."

SECTION 2. This Act shall take effect on July 1, 2004.

INTRODUCED BY:

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