Barkley et al. / CERTIFIED CAPITAL COMPANIES
$274 million in tax credits. The credits were allocated among the 3 CAPCOs on a pro rata basis with Advantage Capital receiving almost $82 million, BancOne receiving approximately $31 mil- lion, and Wilshire Partners receiving about $37 million. It is important to note that all of these CAPCOs were operating in other states at the time of their certification in Florida. This experience supports the idea that existing CAPCOs have a competitive advantage in fund-raising over newer CAPCOs because of (a) their expertise in designing an investment instrument that is acceptable to insurance companies and (b) the contacts that existing CAPCOs have developed within the insur- ance industry through their activities in other states.
In Florida, the certification requirements for CAPCO managers are more stringent than in most other states. Managers must have at least 5 years of venture investing experience in a private ven- ture fund, including investing in early-stage businesses. This experience is important because Florida requires, as does New York, that 50% of certified capital be invested within 5 years with at least 50% of these investments in early-stage technology businesses.
Florida also places more restrictions on its definition of a qualified business than do most other states. Qualified businesses must have fewer than 200 employees, and businesses must agree to keep their headquarters and any manufacturing facility financed with CAPCO investments in Florida for 10 years. In addition, there should be a reasonable expectation that the business will grow to have $25 million in revenues within 5 years of the investment.
The Florida legislation provides for state participation in returns to CAPCO investments. No liquidating distributions can be made until 100% of certified capital is invested in qualified busi- nesses, and if distributions to the investors exceed the original amount of certified capital, the CAPCOs must pay 10% of the excess to the state.
. . . existing CAPCOs have a competitive advantage in fund- raising over newer CAPCOs because of (a) their expertise in designing an investment instrument that is acceptable to insurance companies and (b) the contacts that existing CAPCOs have developed within the insurance industry . . .
As is the case in other states, the legislation passed in Florida was significantly different from that first proposed. Promoters of the initial CAPCO legislation sought tax credits of $500 million with no annual tax credit limit. The amount authorized was $150 million, with an annual limit imposed. The original legislation also contained no provision for the state to share in the gains from CAPCO investments, and CAPCO principals were required to have only 2 years of experience, with no reference to early-stage investing experience. Finally, small businesses were defined more broadly, according to the SBA definition, and there were no additional requirements in terms of workforce size, remaining in Florida, or types of industries that qualified for investment.
Wisconsin passed CAPCO legislation with an allocation of $50 million in tax credits in 1997; however, the rules implementing the legislation were not established until 1999. Seven CAPCOs were certified by the state (Advantage Capital Wisconsin Partners, BancOne Stonehenge Capital Fund Wisconsin, CFB Wisconsin CAPCO Division, Stifel Wisconsin CAPCO I, Venture Investors CAPCO I, Wilshire Investors, and Wisconsin Development Capital), but only one of these CAPCOs (Venture Investors) was headquartered in Wisconsin prior to passage of the CAPCO leg- islation. Of the seven CAPCOs, only three submitted applications for tax credits based on certified capital raised from the insurance industry (Advantage Capital, BancOne Stonehenge, and Wilshire Investors). Each of these CAPCOs received an allocation of $16,666,666.65 on October 21, 1999.
The provisions of the Wisconsin CAPCO legislation are similar to the standard CAPCO model with two exceptions. First, qualified businesses are restricted to those with fewer than 100 employ- ees and less than $2 million net income. Second, voluntary decertification of a CAPCO is permit- ted when the CAPCO has invested an amount equal to 100% of certified capital or when at least 10 years have passed since the last certified capital investment was made in the CAPCO. The state’s regulatory authority over the CAPCO ends with voluntary decertification. Because the state requires that only 50% of certified capital be invested within 5 years, it would be possible for a CAPCO to voluntarily decertify after 10 years, having invested only the equivalent of 50% of certi- fied capital. At this point, distributions of profit could be made to the partners, without meeting the 100% investment requirement. This language provides a loophole in the legislation that may be abused by the CAPCOs.