Barkley et al. / CERTIFIED CAPITAL COMPANIES
In return for future tax revenues sacrificed (due to tax credits) the state may receive new tax rev- enues from the businesses that start, expand, and remain within the state as a result of the CAPCO program. Some states also crafted or amended their legislation to permit state participation in the returns to CAPCO investments. Through these legislative changes, states can share in the returns from investments in businesses along with the additional tax revenues that may be generated through the investments.
CAPCOs are required to report to some regulatory authority on an annual basis. Information reported includes identity and amount of capital received from each investor; the amount of tax credits allocated to each investor; the identity, type, size, and location of qualified businesses in the portfolio; the amount of investment made in each business; jobs created by these companies (reported by the CAPCO but not independently verified by the regulatory authority); and audited financial statements.6
SUMMARY OF STATE EXPERIENCES
CAPCO legislation has evolved over time as states attempt to better regulate the timing of the CAPCOs’ investments and target these investments toward specific types of businesses. The sec- tions that follow summarize the experiences of Louisiana, Missouri, New York, Florida, and Wis- consin. Greatest attention is given to Louisiana and Missouri because these states have the most mature and active CAPCO programs.
The Louisiana CAPCO program was authorized by the 1983 legislature. The goals of the pro- gram included diversifying and stimulating the state economy, attracting and preserving jobs, developing a venture capital infrastructure, and attracting experienced venture capital manage- ment to the state. The program initially was structured with a 200% tax credit for insurance compa- nies on the state insurance premium tax (taken over 10 years) and a 35% income tax credit for other investors (taken in the year of the investment). However, there was little activity under the CAPCO program until 1988 as a result of (a) a weak state economy and, consequently, a weak pool of poten- tial investments and (b) regulatory restrictions within the insurance industry that made equity investments relatively unattractive. The program became attractive to insurance companies when the CAPCOs developed a bond-type instrument (fully insured, fully guaranteed, and rated a num- ber 1 by the National Association of Insurance Commissioners) that provided a guaranteed rate of return. Attempts by the CAPCOs to attract insurance company investment using a more traditional venture capital limited partnership structure with an 80/20 split of returns were not successful.
The structure of this guaranteed bond-type instrument is included in the private placement memorandum that is negotiated between the CAPCO and each insurance company. However, the general structure involves the set-aside of 40% of the certified capital in zero-coupon bonds to guarantee that the principal invested by the insurance company is returned at the end of 10 to 12 years. The CAPCO also guarantees the stream of tax benefits over a 10-year period, either through a parent organization (e.g., a bank) or through a third-party guarantor. In most cases, the insurance company takes no equity position in the CAPCO and, as a result, does not share in any final liqui- dating distributions of the fund.
According to a Louisiana Department of Economic Development (1999) report, the use of a guaranteed bond-type instrument by CAPCOs to attract insurance company funding is an expen- sive and inefficient means of capitalizing the CAPCOs. For example, the Louisiana study esti- mated that each $27.5 million of tax credits raises $25 million in certified capital (where tax credits
. . . a guaranteed bond- type instrument by CAPCOs to attract insurance company funding is an expensive and inefficient means of capitalizing the CAPCOs.