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S. 504
STATUS INFORMATION
General Bill
Sponsors: Senators Ritchie, Leventis, Ryberg, Alexander, Anderson, Branton, Courson, Drummond, Elliott, Fair, Ford, Giese, Glover, Gregory, Grooms, Hawkins, Hayes, Holland, Hutto, Jackson, Knotts, Kuhn, Land, Leatherman, Malloy, Martin, Matthews, McConnell, McGill, Mescher, Moore, O'Dell, Patterson, Peeler, Pinckney, Rankin, Ravenel, Reese, Richardson, Setzler, Short, J. Verne Smith, Thomas, Verdin and Waldrep
Document Path: l:\council\bills\gjk\20337sd03.doc
Introduced in the Senate on March 19, 2003
Currently residing in the Senate Committee on Finance
Summary: Venture Capital Investment Act
HISTORY OF LEGISLATIVE ACTIONS
Date Body Action Description with journal page number ------------------------------------------------------------------------------- 3/19/2003 Senate Introduced and read first time SJ-8 3/19/2003 Senate Referred to Committee on Finance SJ-8
View the latest legislative information at the LPITS web site
VERSIONS OF THIS BILL
TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING CHAPTER 45 TO TITLE 11 SO AS TO ENACT THE "VENTURE CAPITAL INVESTMENT ACT OF SOUTH CAROLINA" TO PROVIDE FOR THE ESTABLISHMENT OF A FUND SEPARATE AND DISTINCT FROM THE STATE GENERAL FUND IN THE DEPARTMENT OF COMMERCE KNOWN AS THE VENTURE CAPITAL FUND, TO PROVIDE FOR THE MANAGEMENT OF THIS SPECIAL FUND, TO PROVIDE FOR MONIES TO BE OBTAINED BY THE FUND FOR ITS STATED PURPOSES THROUGH LOANS MADE BY CERTAIN LENDERS, TO PROVIDE FOR REPAYMENTS TO LENDERS, AND TO PROVIDE THAT LENDERS SHALL RECEIVE TAX CREDITS WHICH MAY BE USED AS A CONTINGENT RESOURCE TO MEET PRINCIPAL AND INTEREST PAYMENTS WHEN DUE, TO PROVIDE FOR THE MANNER IN WHICH AND CONDITIONS UNDER WHICH INVESTMENTS FROM THE FUND MAY BE MADE IN VENTURE CAPITAL INVESTMENTS FOR THE BENEFIT OF THIS STATE; TO ESTABLISH THE SOUTH CAROLINA TECHNOLOGY INNOVATION FUND UNDER THE ADMINISTRATION OF THE BOARD OF DIRECTORS OF THE VENTURE CAPITAL FUND AND PROVIDE FOR ITS USES, AND TO PROVIDE THAT ON THE EFFECTIVE DATE OF THIS ACT, THE ASSETS AND LIABILITIES OF THE PALMETTO SEED CAPITAL FUND LIMITED PARTNERSHIP, AS ESTABLISHED IN CHAPTER 44, TITLE 41 OF THE 1976 CODE, ARE TRANSFERRED TO THE SOUTH CAROLINA TECHNOLOGY INNOVATION FUND WITHIN THE SOUTH CAROLINA VENTURE CAPITAL FUND; AND TO REPEAL CHAPTER 44, TITLE 41 RELATING TO THE PALMETTO SEED CAPITAL FUND LIMITED PARTNERSHIP.
Be it enacted by the General Assembly of the State of South Carolina:
SECTION 1. Title 11 of the 1976 Code is amended by adding:
Section 11-45-10. This chapter may be cited as the 'Venture Capital Investment Act of South Carolina'.
Section 11-45-20. The General Assembly desires to increase the availability of equity, near-equity, or seed capital in amounts of one hundred million dollars or more for emerging, expanding, relocating, and restructuring enterprises in the State, so as to help strengthen the state's economic base, and to support the economic development goals of this State as described in the strategic plan of the Department of Commerce to be published annually beginning in 2003. The General Assembly also desires to address the long-term capital needs of small-sized and medium-sized firms, to address the needs of micro enterprises, to expand availability of venture capital, and to increase international trade and export finance opportunities for South Carolina based companies.
Section 11-45-30. For purposes of this chapter:
(1) 'Authority' means the South Carolina Department of Commerce.
(2) 'Certificate' means a document executed by the fund verifying a tax credit for any year to which a lender is entitled.
(3) 'Equity, near-equity, or seed capital' means capital invested in common or preferred stock, debt with equity conversion rights, royalty rights, limited partnership interests, limited liability company interests, and any other securities or rights that evidence ownership in private business.
(4) 'Fund' means the South Carolina Venture Capital Fund.
(5) 'Investor' means any corporation, limited liability company, or unincorporated business entity, including a general or limited partnership, that is selected by the fund to receive investments from the fund and then make venture capital investments therewith that meet the requirements of this chapter. An investor or a senior member of its management team must be a legal resident of this State and have a minimum of five years' experience in venture capital investing. In addition, substantially all of an investor's business activity shall be venture capital investing.
(6) 'Innovation Fund' means the South Carolina Technology Innovation Fund.
(7) 'Person' means any individual, corporation, partnership, or other lawfully organized entity.
(8) 'Research and development' means laboratory, scientific, or experimental testing and development related to new products, new uses for existing products, or improvements to existing products. Research and development also includes intellectual property, information technology, or technology transfer endeavors. The term does not include efficiency surveys, management studies, consumer surveys, economic surveys, advertising, or promotion, or research in connection with literary, historical, or similar projects.
(9) 'Tax credit' means a credit against a lender's bank tax or insurance premium tax liability.
(10) 'Venture capital' means equity, near-equity, and seed capital financing including, without limitation, early stage research and development capital for startup enterprises, and other equity, near-equity, or seed capital for growth and expansion of entrepreneurial enterprises.
(11) 'Lender' means a banking institution subject to the income tax on banks under Chapter 11 of Title 12 and insurance and insurance companies subject to a state premium tax liability under Chapter 7 of Title 38.
(12) 'Capital commitment' means the amount of money committed by the fund to an investor for a term of up to ten years, which term may be extended to provide for an orderly liquidation of the investor's portfolio investments.
Section 11-45-40. (A) There is created, within the authority, a separate and distinct fund to be an independent instrumentality exercising essential public functions, and to be known as the 'fund' as defined in Section 11-45-30(4).
(B)(1) The fund must be governed by a board composed of seven directors two of whom must be appointed by the Speaker of the House of Representatives, two of whom must be appointed by the President Pro Tempore of the Senate, and three of whom must be appointed by the Governor, one of whom shall serve as chairman. Directors must be selected based upon outstanding knowledge and leadership, must be knowledgeable in the management of money and finance, and must possess experience in the management of investments similar in nature and in value to those of the fund, except that they may not be active owners or principals of companies or entities in the venture capital industry. Directors serve for a term of office of four years and until their successors are appointed and qualify, except that of the initial directors appointed, one must be appointed by the Speaker of the House of Representatives for a term of two years, one must be appointed by the President Pro Tempore of the Senate for a term of two years, and one must be appointed by the Governor for a term of two years so as to allow the terms of the directors to be staggered.
(2) The directors have the authority to govern the fund in accordance with the requirements of this chapter.
(3) A conflict of interest is considered to exist in a contractual relationship in which a director of the fund, an officer, agent, or employee thereof, or any for-profit firm or corporation in which a director, officer, agent, or employee of the fund, or any member of his immediate family, as defined in Section 2-17-10(7), is an officer, partner, or principal stockholder, directly or indirectly buys or sells goods or services to or otherwise contracts with the fund. In this case, the director, officer, agent, or employee shall refrain from official involvement in regard to the contract or agreement, from voting on any matter pertaining to the contract or agreement, and from communicating with other board members, officers, agents, or employees of the fund concerning the contract or agreement.
(C) The fund must be located within the Department of Commerce and is separate and distinct from the state general fund. The monies deposited in the accounts of the fund must be managed and invested by the directors with the assistance, if necessary, of professionals in the area of financial management and selected by a process as determined by the board of directors.
Section 11-45-50. (A) The fund shall seek competitive bids for interest bearing loans to meet its capital commitment obligations. The fund may retain an amount not to exceed one percent of the principal borrowed for operating expenses of the fund. Loan proceeds received by the fund must be in cash or immediately available funds and are to be used only as provided by this chapter.
(B) The fund shall retain any fees earned after repayment to lenders to use as a contingency fund for future obligations to lenders and to fulfill additional capital commitments. If at any time a principal or interest payment is due and the fund has insufficient monies to repay same, the fund shall issue tax credit certificates in an amount to meet the obligation as provided for below, and tax credits as stipulated in subsection (C) are hereby established in these required amounts.
(C) These tax credits may be used to offset the lenders' state bank tax or premium tax liability in the event the fund does not meet its obligation to repay the lenders' cash investment together with required interest at the date and time the payment is due. These tax credits may be carried forward without limitation but are not refundable.
(D) The tax credits may also be transferred among bank or insurance company lenders for consideration, and then used by the subsequent holder. These tax credits shall take the form of a certificate issued by the board of the fund stating the amounts, year, and conditions of the tax credits reflected on the certificate.
(E) The board in accepting loans to the fund giving rise to these tax credits shall ensure that no more than one hundred million dollars in total tax credit certificates are issued and outstanding at any one time with no more than twenty million dollars in tax credit certificates being redeemable for any one year.
(F) The fund is authorized to use the proceeds of loans received from lenders, together with other available monies, for making investments with venture capital investors and for paying and funding services as necessary.
(G) No part of the fund may inure to the benefit of or be distributed to its employees, officers, or board of directors, or to members of their immediate families as this term is defined in Section 2-17-10(7), except that the fund is authorized to pay reasonable compensation for services provided.
Section 11-45-60. The fund shall solicit from investors plans for the investing of capital in the fund in accordance with the requirements of this chapter. The fund shall consider and select the investment plans and shall select investors qualified to:
(1) make the most effective and efficient utilization of the investment; and
(2) invest in venture capital investments, requiring equity, near-equity, or seed capital which promote the economic development goals of this State as described in the strategic plan of the Department of Commerce adopted and published as of that date.
Section 11-45-70. In order for the board of directors of the fund to place monies of the fund with an investor for the purpose of making a venture capital investment, the following requirements must be met:
(1) No investment by an investor in any one investment may exceed five million dollars or fifteen percent of the committed capital of the investor, whichever is less. In addition, an investor must agree to invest at least an amount equal to the fund's capital commitment to such investor in South Carolina based companies.
(2)(a) While the board of directors of the fund shall give preference to investors, otherwise qualified, whose headquarters are located in South Carolina, investments may be made with investors not principally located in South Carolina; provided, that the investors have other venture capital investments in South Carolina or in South Carolina based companies at least equal to the total amount of monies placed with that investor by the fund.
(b) 'South Carolina based companies' for purposes of this section means any corporation, limited liability company, or unincorporated business organization, including a general or limited partnership, that has its principal place of business located in this State and has at least fifty percent of its gross assets and fifty percent of its employees located in this State at the time of the initial investment. If a corporation, limited liability company, or unincorporated business organization is a member of an affiliated group, the gross assets and the number of employees of all of the members of the affiliated group, wherever those assets and employees are located, shall be included for the purpose of determining the percentage of the corporation's, company's, or organization's gross assets and employees located in this State.
(3) The investor with which the fund is placing its venture capital investment must have on or before the date of the fund's capital commitment, aggregate capital commitments of its own of at least three times the amount of the fund's capital commitment. An investor's own monies for purposes of this requirement include private, federal, or other nonstate funds secured by the investor.
(4) Investors must develop a repayment plan based on expected liquidity events of its portfolio investments. All repayments must occur within ten years, subject to extension as described in Section 11-45-30(12).
(5) No investment may violate the provisions of Section 11, Article X of the Constitution of this State.
Section 11-45-80. In addition to and apart from the other duties and functions of the fund, there is created under the administration of the board of directors of the fund, another fund entitled the South Carolina Technology Innovation Fund which shall receive that funding as may be provided by law. The board shall contract with the South Carolina Technology Alliance, a tax exempt organization under section 501(c)(3) of the Internal Revenue Code of 1986, as amended, for administration of the Innovation Fund.
The Innovation Fund must be used by the board to:
(1) award small grants for the best and most creative ideas from South Carolina research universities' technology incubators with the awards to be available for eligible students and innovative knowledge-based enterprises that are located in a research university incubator. These grants are to be awarded to inspire and encourage knowledge-based technology and intellectual property transfers from research university faculty and students to the marketplace;
(2) design a major education, marketing, and public relations program to ensure that residents of South Carolina, members of the General Assembly, and potential venture capital investors understand and support the requirements for participation in the fund, the strategic need for venture capital funding, and for grant support for deserving entrepreneurs.
Section 11-45-90. (A) The board shall provide loan, investment, tax credit, and expense reports at least quarterly during the fiscal year to the Governor, the General Assembly, and other appropriate officials and entities.
(B) In addition to the quarterly reports provided in subsection (A), the board shall provide an annual report to the Governor, the General Assembly, and other appropriate officials and entities containing at a minimum the following information:
(1) monies from the fund placed in venture capital investments with approved investors cumulatively and during that fiscal year;
(2) the extent of current loan obligations including principal and interest requirements;
(3) the amount and time lines of tax credit certificates issued both cumulatively and during that fiscal year;
(4) a description of a material interest held by a director, officer, or employee of the fund with respect to the investments or assets of the fund;
(5) a schedule of the rates of return, net of total investment expense, on assets of the fund overall and on assets aggregated by category over the most recent one-year, three-year, five-year, and ten-year periods, to the extent available; and
(6) a schedule of the sum of total investment expense and total general administrative expense for the fiscal year expressed as a percentage of the fair value of assets of the fund on the last day of the fiscal year, and an equivalent percentage for the preceding five fiscal years, if applicable.
(C) These disclosure requirements are cumulative to and do not replace other reporting requirements provided by law.
Section 11-45-100. The fund has the power to promulgate regulations and make a contract, execute a document, perform an act, or enter into a financial or other transaction necessary to implement this chapter."
SECTION 2. On the effective date of this act, the assets and liabilities of the Palmetto Seed Capital Fund Limited Partnership, as established in Chapter 44, Title 41 of the 1976 Code, are transferred to the South Carolina Technology Innovation Fund established within South Carolina Venture Capital Fund herein created, and Chapter 44, Title 41 of the 1976 Code is repealed.
SECTION 3. This act takes effect upon approval by the Governor.
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