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equal 110% of certified capital raised) but results in only $14 million of capital available for invest- ments in qualified Louisiana businesses. The remaining $11 million of the original $25 million raised is reserved for $10 million of collateral on the insurance companies’ loans to the CAPCOs and $1 million for financing and related costs.

The Louisiana program has been amended over time. The 200% tax credit for insurance com- pany investors was reduced to 120% in 1989 and to 110% in 1998. The original legislation placed no limit on the total amount of credits on premium taxes or income taxes the state would provide. In 1998, the legislature placed an annual limit ($72,727,272) on investments in CAPCOs that would result in premium tax credits. No limit on the availability of income tax credits was enacted at this time. However, in 1999 the Office of Financial Institutions, the state regulatory authority, proposed an annual limit on income tax credits of $11,428,571. This proposal was in response to investments in CAPCOs at the end of 1998 that resulted in unexpectedly large income tax credit liabilities for the state.

As of March 2000, there were 32 CAPCOs certified in Louisiana. Of these 32, 11 were orga- nized by Advantage Capital, 3 by BancOne, and the remaining 18 by other companies within the state. From 1988 to 1991, the CAPCO program raised an annual average of $4.5 million in certified capital. This annual average increased to $27.5 million over the 1992 to 1996 period. In 1997 to 1998, the capital raised jumped to $361.4 million as a result of almost $180 million raised via income tax credits. For the entire period of 1988 to 1998, CAPCOs raised more than $517 million in certified capital (committing the state to more than $570 million in tax credits) and invested more than $149 million in 122 qualified businesses. As of December 1999, the CAPCOs reported invest- ments in 149 qualified businesses and claimed 4,841 jobs created or retained. This employment figure is reported by the CAPCOs to the regulatory authority but is not independently verified.

As the CAPCOs increased in size, they sought larger and later- stage investments.

As the CAPCOs increased in size, they sought larger and later-stage investments. The average investment in portfolio companies over the 1988 to 1998 period was $1.2 million. In an effort to retarget investments toward smaller companies, the state may require that beginning in 2000, 10% of certified capital be invested in either (a) approved capital management funds focused on preseed, seed, or early-stage investments of less than $1 million or (b) CAPCOs whose primary focus is investments of less than $l million in certified economically disadvantaged businesses or in businesses located in economically distressed areas.

To retain their certification, Louisiana CAPCOs must follow a schedule for investing certified capital. Within 3 years, at least 50% of the investment pool must be invested, with 30% in qualified businesses. Within 5 years, at least 80% must be invested, with 50% in qualified businesses. For funds certified before December 31, 1998, the CAPCO may voluntarily decertify once 60% of the investment pool has been invested in qualified businesses. For funds certified after this date, volun- tary decertification can occur only when 100% of certified capital has been invested in qualified businesses. No distribution to equity owners—that is, CAPCO partners—can be made before these decertification thresholds are reached, with the exception of qualified distributions (e.g., manage- ment fees, debt payments to the insurance companies).

The 1983 legislation provided no return to the state from investments made by CAPCOs; how- ever, in 1998, the legislature added a state profit sharing component to the CAPCO program. The state will receive 25% of the returns above the amount necessary to achieve a 15% internal rate of return (IRR) on a specific pool of certified capital (including value of tax credits). This change was implemented to help the state recoup part of the cost of the program and encourage the CAPCOs to expedite their investments in certified businesses.7

In summary, the Louisiana legislation was the result of efforts on the part of state economic development officials to stimulate the economy during a period of decline and to create venture capital resources within the state. According to state officials, Louisiana businesses have a source of venture capital they did not have prior to the CAPCO programs, and there has been a demonstra- tion effect for other venture funds in the state. However, the lack of a cap on tax credits issued, par- ticularly in terms of the income tax credit, created large, unexpected tax credit obligations on the part of the state. These obligations forced negotiations between the state and CAPCOs to postpone realization of tax credits over time.

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