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ECONOMIC DEVELOPMENT QUARTERLY / November 2001

CAPCO representatives, more restrictive legislation may encourage the CAPCOs to do fewer seed deals. That is, fewer restrictions on investments would encourage more seed investment because the CAPCOs can offset the higher risk seed deals with investments in larger, less risky ventures. The experience in Louisiana, however, suggests that when CAPCOs have no size restrictions, they will focus on relatively large companies and large deals.8

New York

The New York CAPCO legislation was signed into law in 1997 with the stated objective of encouraging the investment of private financial resources in state venture capital markets as a means to fostering the creation and expansion of new small business enterprises. The legislation created a 100% tax credit for insurance companies, taken at a rate of 10% over 10 years. A total of $100 million was allocated to the program by the 1997 legislation, with $50 million in tax credits available in 1999 and the remaining $50 million in 2000. An additional $30 million in funding for the program was authorized in 1999, with all $30 million available for tax credits in 2001.

In addition to the $30 million, however, the New York legislature also authorized the state controller to invest up to $250 million of state pension funds in New York venture capital firms. The venture capital funds must match the state’s investment . . .

The $30 million appropriation that New York authorized for CAPCOs in 1999 was significantly less than the $150 million proposed initially. In addition to the $30 million, however, the New York legislature also authorized the state controller to invest up to $250 million of state pension funds in New York venture capital firms. The venture capital funds must match the state’s investment and place the capital in New York firms that meet the CAPCO definition of qualified businesses. Legis- lation also was proposed but not passed, enabling banks to receive a 100% tax credit for investing in certified capital companies.

Initially, six CAPCOs qualified for certification in the state. However, one of these CAPCOs opted to manage BancOne’s New York CAPCO, reducing the number of CAPCOs to five. The remaining four CAPCOs are Advantage Capital New York Partners, New York Small Business Venture Fund, Wilshire Advisers, and Exponential Business Development Company. The initial $100 million allocation was distributed as follows: approximately $31 million each to Advantage Capital and the New York Small Business Venture Fund, approximately $28 million to BancOne Capital Corporation, and approximately $3 million each to Wilshire Advisers and Exponential Business Development Company.

The New York legislation differs from the standard CAPCO model in that early-stage busi- nesses are targeted. CAPCOs must invest 25% of certified capital within 2 years, 40% within 3 years, and 50% within 4 years, of which at least 50% must be in early-stage businesses as defined by the legislation. The remaining capital can be invested in any qualified business, defined as firms with fewer than 200 employees and less than $5 million in gross revenues.

Florida

The Florida CAPCO program was authorized in 1998 with the goal of stimulating investments in new and expanding businesses in Florida. The legislation allocated $150 million in tax credits at 10% a year over a 10-year period. The program provides a 100% premium tax credit for insurance companies doing business in Florida. Unlike CAPCO programs in other states, the Florida pro- gram is administered by three agencies. The Department of Banking and Finance (DBF) certifies and decertifies the CAPCOs; the Governor’s Office of Tourism, Trade, and Economic Develop- ment (OTTED) allocates the premium tax credits and reports on the program; and the Department of Revenue oversees tax filings, audits, and credit forfeiture.

The implementation of the Florida CAPCO program is illustrative of a potential shortcoming of CAPCO legislation in general. On December 31, 1998, the DBF certified 15 CAPCOs. On January 26, 1999, OTTED notified the 15 CAPCOs that they had until March 15, 1999, to obtain binding investment commitments from insurance companies. Unlike the other state programs, each CAPCO had to receive commitments of at least $15 million. Similar to New York, each CAPCO could not submit commitments of more than the $150 million appropriation. Only 3 of the 15 certi- fied CAPCOs were able to raise $15 million in commitments, and these 3 CAPCOs requested

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