Investor Venture Capital Contract by loz14014


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 9                              A BILL
28   Be it enacted by the General Assembly of the State of South
29   Carolina:
31   SECTION 1. Chapter 45, Title 11 of the 1976 Code is amended to
32   read:
34                            “CHAPTER 45
36            Venture Capital Investment Act of South Carolina
39     Section 11-45-10. This chapter may be cited as the „Venture
40   Capital Investment Act of South Carolina‟.

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 1      Section 11-45-20. The General Assembly desires to increase
 2   the availability of equity, near-equity, or seed capital for emerging,
 3   expanding, relocating, and restructuring enterprises in the State, so
 4   as to help strengthen the state‟s economic base, and to support the
 5   economic development goals of this State in accordance with the
 6   strategy established by the Department of Commerce. The
 7   General Assembly also desires to address the long-term capital
 8   needs of small-sized and medium-sized firms, to address the needs
 9   of micro enterprises, to expand availability of venture capital, and
10   to increase international trade and export finance opportunities for
11   South Carolina-based companies.
13      Section 11-45-30. For purposes of this chapter:
14      (1) „Authority‟ means the South Carolina Venture Capital
15   Authority created pursuant to this chapter.
16      (2) „Certificate‟ means a document executed by the authority
17   pursuant to which a tax credit is available to a person pursuant to
18   this chapter.
19      (3) „Equity, near-equity, or seed capital‟ means capital invested
20   in common or preferred stock, debt with equity conversion rights,
21   royalty rights, limited partnership interests, limited liability
22   company interests, and any other securities or rights that evidence
23   ownership in private business.
24      (4) „Investor‟ means any corporation, limited liability
25   company, community development corporation, or unincorporated
26   business entity, including a general or limited partnership, and
27   including SC Launch! that is selected by a designated investor
28   group to receive investments from the designated investor group
29   and then make venture capital investments with these funds that
30   meet the requirements of this chapter. An investor, a senior
31   member of its management team, or a qualified investment
32   professional working closely with the investor‟s senior
33   management team must be a legal resident of this State and have a
34   minimum of five years experience in venture capital investing. In
35   addition, substantially all of an investor‟s business activity must be
36   venture capital investing; provided that this requirement shall not
37   apply to SC Launch!.
38      (5) „Innovation fund‟ means the South Carolina Technology
39   Innovation Fund.
40      (6) „Person‟ means any individual, corporation, partnership, or
41   other lawfully organized entity.
42      (7) „Research and development‟ means laboratory, scientific,
43   or experimental testing and development related to new products,

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 1   new uses for existing products, or improvements to existing
 2   products.      Research and development also includes intellectual
 3   property, information technology, or technology transfer
 4   endeavors. The term does not include efficiency surveys,
 5   management studies, consumer surveys, economic surveys,
 6   advertising, or promotion, or research in connection with literary,
 7   historical, or similar projects.
 8      (8) „Tax credit‟ means a credit against a person‟s income tax
 9   liability pursuant to Chapter 6, Title 12; bank tax liability pursuant
10   to Chapter 11, Title 12; net income tax liability pursuant to
11   Chapter 13, Title 12; liability for license fees and taxes pursuant to
12   Chapters 20 and 23, of Title 12; or insurance premium tax liability
13   pursuant to Chapter 7, Title 38; or other tax liability under Title
14   38, as the case may be, or in the case of a repeal or reduction by
15   the State of the tax liability imposed by these sections, any other
16   tax imposed upon the person by this State.
17      (9) „Venture capital‟ means equity, near-equity, and seed
18   capital financing including, without limitation, early stage research
19   and development capital for startup enterprises, and other equity,
20   near-equity, or seed capital for growth and expansion of
21   entrepreneurial enterprises.
22      (10) „Lender‟ means a banking institution subject to the income
23   tax on banks under Chapter 11, of Title 12, an insurance company
24   subject to a state premium tax liability pursuant to Chapter 7, of
25   Title 38, a captive insurance company regulated pursuant to
26   Chapter 90, of Title 38, a utility regulated pursuant to Title 58, or a
27   financial institution with proven experience in state-based venture
28   capital transactions, pursuant to guidelines established by the
29   authority. Both the guidelines and the lender must be approved by
30   the State Budget and Control Board.
31      (11) „Capital commitment‟ means the amount of money
32   committed by a designated investor group to an investor for a term
33   of up to ten years, which term may be extended to provide for an
34   orderly liquidation of the investor‟s portfolio investments.
35      (12) „Community development corporation‟ is as defined in
36   Section 34-43-20(2).
37      (13) „Revolving fund‟ means a bank account:
38         (a) created by a designated investor group with a financial
39   institution with an office or branch in this State; and
40         (b) used solely as provided in this chapter or any applicable
41   designated investor contract.

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 1      (14) „Designated investor contract‟ means an agreement entered
 2   into between the authority and any person selected as a designated
 3   investor group pursuant to Section 11-45-50.
 4      (15) „Designated investor group‟ means a person who enters
 5   into a designated investor contract with the authority pursuant to
 6   Section 11-45-50.
 7      (16) „Interest‟ means interest on the outstanding balance owed
 8   or owing to a lender by a designated investor group under such
 9   calculations, terms, or conditions as determined by the authority,
10   provided that the method of calculating interest may be included in
11   the tax credit certificates to the extent that the authority considers
12   the information necessary or appropriate.
13      (17) „SC Launch!‟ means SC Launch!, which is a South
14   Carolina nonprofit corporation, or any entity designated by the
15   South Carolina Research Authority and approved by the authority.
16      (18) „South Carolina knowledge economy‟ means economic
17   activity directed at promoting and encouraging in South Carolina
18   the commercialization of applied research and high technology
19   industries in ways that will help create additional jobs that will
20   increase the per capita income of South Carolinians, and shall
21   include without limitation activities relating to the
22   commercialization of new advances in the life sciences,
23   pharmaceuticals, biotechnology, hydrogen and fuel cells, military
24   and defense technology, chemical products, high tech fibers,
25   advanced materials, automotive, aerospace and information
26   technology, and health science technology.
28      Section 11-45-40. (A) There is created, within the South
29   Carolina Department of Commerce, the South Carolina Venture
30   Capital Authority.
31      (B)(1) The authority must be governed by a board composed of
32   seven directors, one of whom must be appointed by the Speaker of
33   the House of Representatives, one of whom must be appointed by
34   the Chairman of the House Ways and Means Committee, one of
35   whom must be appointed by the President Pro Tempore of the
36   Senate, one of whom must be appointed by the Chairman of the
37   Senate Finance Committee, and three of whom must be appointed
38   by the Governor, one of whom shall serve as chairman. No sitting
39   member of the General Assembly may be appointed to serve on the
40   board in any capacity including an ex officio capacity. Directors
41   must be selected based upon outstanding knowledge and
42   leadership, must be knowledgeable in the management of money
43   and finance, and must possess experience in the management of

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 1   investments similar in nature and in value to those of the
 2   designated investor groups. Directors serve for a term of office of
 3   four years and until their successors are appointed and qualify,
 4   except that of the initial directors appointed the member appointed
 5   by the Speaker of the House of Representatives shall serve for an
 6   initial term of two years, the member appointed by the President
 7   Pro Tempore of the Senate shall serve for an initial term of two
 8   years, and one member appointed by the Governor shall serve for
 9   an initial term of two years as designated by the Governor so as to
10   allow the terms of the directors to be staggered. Any appointments
11   to the governing board of the South Carolina Venture Capital Fund
12   made prior to the effective date of the creation of the South
13   Carolina Venture Capital Authority as established by this chapter
14   shall expire on the effective date of the creation of the authority,
15   and appointments to the governing board of the authority shall be
16   made as provided in this section and shall supercede these prior
17   appointments.
18         (2) The directors have the authority to govern the authority
19   in accordance with the requirements of this chapter.
20         (3) A conflict of interest is considered to exist if a director of
21   the authority, an officer, agent, or employee thereof, or any
22   for-profit firm or corporation in which a director, officer, agent, or
23   employee of the authority, or any member of his immediate family,
24   as defined in Section 2-17-10(7), is an officer, partner, or principal
25   stockholder who engages in business activity with the authority
26   either directly or indirectly in which the director, officer, agent,
27   employee, or firm would personally benefit. In this case, the
28   director, officer, agent, or employee shall refrain from any
29   involvement of any type in regard to the activity including, but not
30   limited to, discussing the proposed activity with another person
31   associated with the entity desiring to engage in the activity with the
32   authority, negotiating any aspects of the proposed activity with the
33   authority, voting on any matter pertaining to the activity, and
34   communicating with other board members, officers, agents, or
35   employees of the authority concerning the activity. When a
36   conflict arises, the director, officer, agent, or employee involved in
37   the conflict, at the discretion of the board, shall resolve the conflict
38   or resign from the position creating the conflict. Directors,
39   officers, agents, and employees of the authority are subject to all
40   provisions of Chapter 17, Title 2 and Chapter 13, Title 8, and the
41   provisions of this item are supplemental to and not in lieu of the
42   provisions of Chapter 17, Title 2 and Chapter 13, Title 8.

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 1     (C) Any fees or other amounts received by the authority
 2   pursuant to any designated investor contract must be held by the
 3   authority in a fund that is separate and distinct from the state
 4   general fund. Subject to approval by the board of directors, the
 5   fund must be administered by the Department of Commerce to
 6   support the economic development goals of this State in
 7   accordance with the strategy established by the Department of
 8   Commerce.
10      Section 11-45-50. (A)(1) The authority shall solicit as
11   necessary from time to time investment plans for the raising and
12   investing of capital in accordance with the requirements of this
13   chapter.
14        (2) Investment plans submitted shall address such matters as
15   may be required by the authority including, but not limited to the
16   submitting person‟s:
17           (a) level of experience;
18           (b) quality of management;
19           (c) investment philosophy and process;
20           (d) probability of success in fund raising; and
21           (e) plan for achieving the purposes of this chapter.
22        (3) The authority shall consider the investment plans
23   submitted pursuant to this section and shall select one or more
24   designated investor groups deemed best qualified to:
25        (a) capitalize one or more private revolving funds in
26   accordance with this chapter;
27        (b) invest the capital as permitted by this chapter in a
28   manner mobilizing equity, near-equity or seed capital investments
29   in ventures promoting the economic development goals of this
30   State; and
31        (c) help build a significant, fiscally strong, and permanent
32   resource to serve the objectives expressed in this chapter.
33      (B)(1) Each designated investor group selected pursuant to
34   subsection (A)(3) of this section shall enter into a designated
35   investor contract with the authority, which designated investor
36   contract must contain any investment guidelines and other terms
37   and conditions the authority considers necessary, advisable, or
38   appropriate.
39        (2) A designated investor contract may authorize a
40   designated investor group to invest capital either through investors
41   or directly in South Carolina-based companies, or both; provided,
42   however, that any designated investor group authorized to invest

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 1   directly in South Carolina-based companies shall meet the
 2   requirements set forth in this chapter for an investor.
 3        (3) The authority may charge a fee under each designated
 4   investor contract as compensation.
 5      (C) Each designated investor group must have a manager who
 6   is a person with demonstrated substantial successful experience in
 7   the design, implementation, and management of venture capital
 8   investment programs and in capital formation.
 9      (D) The authority shall require one or more designated investor
10   groups to make capital commitments of twenty-five million dollars
11   to SC Launch!. The authority may establish guidelines for the
12   terms of the capital commitment to SC Launch!, including whether
13   the capital commitment is a contractual arrangement with SC
14   Launch! or an equity investment, and for the investments of the
15   capital by SC Launch!. The guidelines shall address:
16        (1) the financial criteria to be applied in selecting South
17   Carolina-based companies in which to invest the funds received
18   pursuant to this chapter;
19        (2) the nature of the activities engaged in by these
20   companies, which activities must be aligned with the objectives of
21   the South Carolina Research Authority as set forth in Sections
22   13-17-87 and 13-17-88; and
23        (3) how investments can be made without unnecessarily
24   competing with investments by existing designated investor groups
25   and investors.
26      (E) The authority shall have the right as further specified in the
27   designated investor contract to:
28        (1) remove and replace any designated investor group; and
29        (2) effect the assignment of all assets, liabilities, and tax
30   credits acquired or incurred in connection with this chapter to any
31   other designated investor group.
33      Section 11-45-55. (A) Each designated investor group shall
34   have the power and authority to borrow funds from lenders and
35   invest those funds in accordance with the provisions of this chapter
36   and its designated investor contract.
37      (B) The authority shall issue tax credit certificates to each
38   lender contemporaneously with each loan made pursuant to this
39   chapter in accordance with any guidelines established by the
40   authority pursuant to Section 11-45-100. The tax credit certificates
41   must describe procedures for the issuance, transfer and redemption
42   of the certificates, and related tax credits. These certificates also
43   must describe the amounts, year, and conditions for redemption of

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 1   the tax credits reflected on the certificates. Once a loan is made
 2   by a lender, the certificate issued to the lender shall be binding on
 3   the authority and this State and may not be modified, terminated,
 4   or rescinded. The form of the tax credit certificate must be
 5   approved by the State Budget and Control Board.
 6      (C) Tax credits represented by the certificates issued pursuant
 7   to this section may be used to offset any of the tax liabilities of a
 8   person as set forth in Section 11-45-30(8), subject to compliance
 9   with the conditions set forth on the certificates representing the tax
10   credits. The amount of the tax credits issued to any lender shall be
11   limited to an amount equal to the lender‟s principal loan amount
12   together with required interest. These tax credits may be carried
13   forward without limitation but are not refundable.          These tax
14   credits are hereby established and authorized in the amounts
15   required by this section.
16      (D) Use of tax credits by an insurance company shall not affect
17   the application of retaliatory taxes or other fees pursuant to
18   Chapter 7, Title 38 or any payments due under that chapter.
19      (E) The tax credits may also be transferred by any lender or
20   transferee of the tax credits to a person able to utilize the tax
21   credits as set forth in Section 11-45-30(8).
22      (F) An individual may claim the tax credit of a partnership,
23   limited liability company, „S‟ corporation, estate, or trust electing
24   to have the income taxed directly to the individual. The amount
25   claimed by the individual shall be based upon the pro rata share of
26   the individual‟s earnings from the partnership, limited liability
27   company, „S‟ corporation, estate, or trust.
28      (G) The authority shall ensure that the principal amount
29   authorized to be borrowed by all designated investor groups is no
30   more than fifty one hundred million dollars at any one time and no
31   more than twenty forty million dollars in tax credit certificates are
32   redeemable for any one year; provided, however, that of the one
33   hundred million dollars, twenty-five million dollars shall be
34   allocated to SC Launch! in accordance with Section 11-45-50(D)
35   and twenty-five million dollars shall be allocated only for one or
36   more designated investor groups to invest, whether directly or
37   through one or more investors, in South Carolina-based companies
38   engaged in the South Carolina knowledge economy. Any tax
39   credit certificates issued in one year but carried forward and
40   redeemed in a subsequent year do not count against the twenty
41   forty million dollar limitation on the total amount of tax credit
42   certificates which may be redeemed in that subsequent year.

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 1      (H) No certificate or tax credit issued or transferred pursuant to
 2   this chapter shall be considered a security pursuant to Title 35.
 3      (I)(1) The authority, in conjunction with the South Carolina
 4   Department of Revenue, shall develop a system for registration of
 5   all tax credits claimed under this chapter.
 6         (2) The system shall verify that any:
 7           (a) tax credit claimed upon a tax return is valid and
 8   properly taken in the year of claim; and
 9           (b) transfer of the tax credit is made in accordance with
10   the requirements of this chapter and any guidelines or regulations
11   under this chapter.
12         (3) Notwithstanding Section 12-54-240(A), the authority, the
13   Department of Commerce, the Department of Revenue, and the
14   Department of Insurance may exchange information for the
15   purpose of registering and verifying the existence, possession,
16   transfer, and use of tax credits pursuant to this chapter.
17      (J) No part of the fund held by the authority pursuant to
18   Section 11-45-40(C) or the capital in any revolving fund of a
19   designated investor group may inure to the benefit of or be
20   distributed to the authority‟s employees, officers, or board of
21   directors, or to members of their immediate families as this term is
22   defined in Section 2-17-10(7), except that the authority is
23   authorized to pay reasonable compensation for services provided
24   by employees of the authority or the Department of Commerce, as
25   the case may be, and out-of-pocket expenses incurred by these
26   employees, officers, or board members, as long as the
27   compensation does not create a conflict of interest pursuant to
28   Section 11-45-40.        The provisions of this subsection are
29   supplemental to and not in lieu of the provisions of Chapter 17,
30   Title 2 and Chapter 13, Title 8.
32      Section 11-45-60. Each designated investor group authorized
33   by its designated investor contract shall solicit from investors plans
34   for the investing of capital held in the designated investor group‟s
35   revolving fund in accordance with the requirements of this chapter.
36   Each designated investor group shall consider and select the
37   investment plans and shall select investors qualified to:
38      (1) make the most effective and efficient utilization of the
39   investment; and
40      (2) invest in venture capital investments, requiring equity,
41   near-equity, or seed capital which promote the economic
42   development goals of this State in accordance with the strategy
43   established by the Department of Commerce. Designated investor

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 1   groups are not required to comply with this section with respect to
 2   investments of capital that the authority requires any designated
 3   investor groups to make in SC Launch! in accordance with Section
 4   11-45-50(D).
 6      Section 11-45-70. In order for a designated investor group to
 7   place monies held in its revolving fund with an investor for the
 8   purpose of making a venture capital investment, the following
 9   requirements must be met:
10      (1) No investment by an SC Launch! in any one investment
11   may exceed five million dollars, and no investment by any other
12   investor in any one investment may exceed the lesser of five
13   million dollars or fifteen percent of the committed capital of the
14   investor, whichever is less. In addition, an In addition, SC
15   Launch! must agree to invest all of the designated investor group‟s
16   twenty-five million dollar capital commitment to SC Launch! in
17   South Carolina-based companies, and any other investor must
18   agree to invest at least an amount equal to the designated investor
19   group‟s capital commitment to that investor in South
20   Carolina-based companies.
21      (2)(a) While each designated investor group shall give
22   preference to investors, otherwise qualified, that agree to maintain
23   either a headquarters or an office staffed by an investment
24   professional in South Carolina, investments may be made with
25   investors not principally located in South Carolina if the investors
26   are otherwise qualified pursuant to this chapter and, together with
27   related companies, have other venture capital investments in South
28   Carolina or in South Carolina-based companies or can provide
29   evidence to the authority of prior investments in South Carolina or
30   South Carolina-based companies at least equal to the total amount
31   of monies placed with that investor by the designated investor
32   group.
33        (b) „South Carolina-based companies‟ for purposes of this
34   chapter means any corporation, limited liability company,
35   community development corporation or unincorporated business
36   organization, including a general or limited partnership, that either:
37           ( i) has its principal place of business located in this State
38   and has at least fifty percent of its gross assets and fifty percent of
39   its employees located in this State at the time of the initial
40   investment; or
41           (ii) meets qualifications as may be determined by the
42   authority and set forth in any designated investor contract. If a
43   corporation, limited liability company, or unincorporated business

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 1   organization is a member of an affiliated group, the gross assets
 2   and the number of employees of all of the members of the
 3   affiliated group, wherever those assets and employees are located,
 4   shall be included for the purpose of determining the percentage of
 5   the corporation‟s, company‟s, or organization‟s gross assets and
 6   employees located in this State.
 7      (3) When selecting investors other than SC Launch! with
 8   which to place venture capital investments, each designated
 9   investor group shall give preference to investors that, together with
10   their affiliates, have on or before the date of the designated
11   investor group‟s capital commitment, aggregate capital
12   commitments of at least three times the amount of the designated
13   investor group‟s capital commitment. Capital commitments of an
14   investor and its affiliates for purposes of this requirement include
15   private, federal, or other nonstate funds secured by the investor and
16   its affiliates.
17      (4) Investors must develop a repayment plan based on expected
18   liquidity events of its portfolio investments. All repayments must
19   occur within ten years, subject to extension as described in Section
20   11-45-30(11).
22      Section 11-45-80.     In addition to and apart from the other
23   duties and functions of the authority, there is created under the
24   administration of the board of directors of the authority, a fund
25   entitled the South Carolina Technology Innovation Fund which
26   shall receive that funding as may be provided by law. The board
27   shall contract with a tax-exempt organization under Section
28   501(c)(3) of the Internal Revenue Code of 1986, as amended, for
29   administration of the innovation fund. The innovation fund must
30   be used by the board to:
31      (1) award small grants for the best and most creative ideas
32   from South Carolina research universities‟ technology incubators
33   with the awards to be available for eligible students and innovative
34   knowledge-based enterprises that are located in a research
35   university incubator. These grants are to be awarded to inspire and
36   encourage knowledge-based technology and intellectual property
37   transfers from research university faculty and students to the
38   marketplace;
39      (2) design a major education, marketing, and public relations
40   program to ensure that residents of South Carolina, members of the
41   General Assembly, and potential venture capital investors
42   understand and support the requirements for participation in the

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 1   fund, the strategic need for venture capital funding, and for grant
 2   support for deserving entrepreneurs.
 4      Section 11-45-90. Each designated investor group shall provide
 5   an annual report to the authority with that information as may be
 6   required by the authority, and which shall:
 7      (1) include an annual audit of the activities conducted by the
 8   designated investor group;
 9      (2) document and review the progress of the designated
10   investor group in implementing its investment plan;
11      (3) list any use, redemption, or transfer of tax credits allowed
12   under this chapter;
13      (4) include a schedule of the rates of return, net of total
14   investment expense, on assets held by the designated investor
15   group pursuant to this chapter overall and on those assets
16   aggregated by category over the most recent one-year, three-year,
17   five-year, and ten-year periods, to the extent available; and
18      (5) include a schedule of the sum of total investment expense
19   and total general administrative expense for the fiscal year incurred
20   and expressed as a percentage of the fair value of assets of the
21   designated investor group held pursuant to this chapter on the last
22   day of the fiscal year, and an equivalent percentage for the
23   preceding five fiscal years, if applicable.
25      Section 11-45-95. (A) The authority shall provide an annual
26   report to the Governor, the General Assembly, and other
27   appropriate officials and entities containing at a minimum the
28   following information:
29        (1) monies placed in venture capital investments with
30   approved investors and South Carolina-based companies
31   cumulatively and during that fiscal year;
32        (2) an audit of the activities conducted by the authority
33   during that fiscal year;
34        (3) the progress of the designated investor groups in
35   implementing their respective investment plans;
36        (4) the amount and time lines of tax credit certificates issued
37   both cumulatively and during that fiscal year, and any use,
38   redemption, or transfer of tax credits during that fiscal year;
39        (5) a description of a material interest held by a director,
40   officer, or employee of the authority with respect to the
41   investments or assets of the designated investor groups;
42        (6) a schedule of the aggregate rate of return, net of total
43   investment expense, on assets of the designated investor groups

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 1   held pursuant to this chapter over the most recent one-year,
 2   three-year, five-year, and ten-year periods, to the extent available;
 3   and
 4         (7) a schedule of the sum of total investment expense and
 5   total general administrative expense for the fiscal year incurred and
 6   expressed as a percentage of the fair value of assets of the
 7   designated investor groups held pursuant to this chapter on the last
 8   day of the fiscal year, and an equivalent percentage for the
 9   preceding five fiscal years, if applicable.
10      (B) These disclosure requirements are cumulative to and do not
11   replace other reporting requirements provided by law.
12      (C) Notwithstanding any other provision of law, private
13   investment and other proprietary financial data provided to the
14   authority by a designated investor group or an investor is not
15   subject to public disclosure under Title 30, Chapter 4.
17      Section 11-45-100. (A) The authority has the power to establish
18   guidelines and regulations and make any contract (including
19   without limitation any designated investor contract), execute any
20   document, perform any act, or enter into any financial or other
21   transaction necessary to implement this chapter.
22      (B) In furtherance of subsection (A) above, the authority, or the
23   Department of Commerce on its behalf, as the case may be, may
24   employ any person as may be required for:
25        (1) proper implementation of this chapter;
26        (2) the management of its assets; or
27        (3) the performance of any function authorized or required
28   by this chapter or necessary for the accomplishment of any
29   function.
30      (C) The provisions of Title 11, Chapter 35 do not apply to any
31   transaction necessary to implement this chapter.
33     Section 11-45-105. Any guideline issued by the authority
34   pursuant to this chapter must be approved by the State Budget and
35   Control Board.”
37   SECTION 2. This act takes effect upon approval by the Governor.
38                            ----XX----

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