Floriday CAPCO measure costing state $75 million, losing jobs- Rhode Island, Colorado and Georgia question or change CAPCO

Senate President Jim King is considering repealing a state program that is giving three venture capital companies $75 million in taxpayer money but has so far resulted in a loss of 174 jobs.

By:
S V Dáte
Palm Beach Post in NASVF.org

The "CAPCO" program, originally passed in 1998, was supposed to bring more high-paying jobs to the state. Under the way the law was written, however, the amount of money flowing to the venture capital companies is not based on the number of jobs created, meaning the companies could pocket all of that $75 million investment’s final value even if more jobs are lost.

"It was never our intent to enrich venture capitalists," said King, who said he learned details about the program from an article in The Palm Beach Post last month. He said he plans a summer study of the program, with legislation undoing the program if possible next spring. "The Senate is going to be prepared to make some changes if it appears that is what is necessary, and it seems like it is necessary."

The author of the law, Tallahassee lobbyist Pete Dunbar, could not be reached for comment Friday. He was able to get the law through both chambers with little discussion five years ago on behalf of New Orleans-based Advantage Capital Partners, which pushed similar laws through other statehouses. Tate Garrett, the head of Advantage’s Florida office in Tampa, also could not be reached Friday.

The CAPCO program uses a complicated system of tax credits for insurance companies totaling $150 million over 10 years to put $75 million into the hands of the venture capital companies to invest in Florida businesses.

Unlike a traditional venture capital partnership, in which the party putting up the money makes 80 percent of the profits, the Florida law gives 100 percent of the profits to the venture capital companies until the $75 million has doubled to $150 million, and 90 percent of the profits thereafter with 10 percent going to the state. Once the state has recovered its original $150 million, the venture capital companies would once again get 100 percent of all subsequent profits.

King said that setup does not pass the straight-face test, and that he owes it to taxpayers to repeal at least the second phase of CAPCO passed in 2002, if not the original law, "even it means risking a lawsuit."

Advantage Capital has threatened Gov. Jeb Bush with a lawsuit if the state does not allocate another $150 million to pay for the program’s second phase. The legislature authorized the expansion — pushed by Advantage Capital — but did not appropriate money to pay for it in 2002, and lawmakers declined again this spring to appropriate any new money for it.

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Legislature questions CAPCO bill that would offer the tax breaks to insurance companies that invest in a fund used to help Rhode Island companies grow

By:
Scott Mayerowitz
Providence Journal

A plan to give insurance companies $50 million in tax breaks so they could make speculative investments in small Rhode Island businesses has resurfaced in the final legislative push of the season.

The Certified Capital Companies, or CAPCO, bill would give insurance companies the tax breaks — over 10 years — if they invest in a fund that would be used to help Rhode Island companies grow.

Versions of the bill last year and earlier this session called for $100 million in tax breaks, but a group of private investment companies pushing the legislation has scaled back the amount as part of an effort to quell the state Economic Development Corporation’s concerns.

But Giovanni Cicione, a lobbyist for the Economic Development Corporation, told the House Corporations Committee yesterday that the concessions did not appear to be enough to make this a good deal for the state.

Cicione said the Economic Development Corporation and the investors were "still very far apart."

Insurance companies in Rhode Island pay a 2-percent tax on the premium payments they collect from Rhode Islanders. The legislation says that for every dollar the companies put into the CAPCO fund, they would receive a $1 credit on that premium tax.

Venture capitalists that have been approved by the state — otherwise known as certified-capital companies — get the money from the insurance companies. And those money managers are responsible for investing it in local businesses.

The insurance companies stand to gain a lot from the legislation and lose nothing.

If they invest poorly and lose all of their venture capital, it still would not be a loss because that money otherwise would have gone for taxes.

But if they only lose a portion of the venture capital or invest wisely and make money on their investment, they are well ahead of what would have been spent on taxes.

The state only gains if the companies that receive the much-needed venture capital are successful, create more jobs and pay taxes. The state would also get a share of the insurance companies’ investment profits.

Originally, the state was set to get 10 percent of the profits, but only if the investment fund saw a return of 15 percent or greater. Under the proposal submitted yesterday by Richard Licht, lobbyist for four out-of-state companies that want to manage such investments, the state would now get 25 percent of any profits.

Rep. David A. Caprio, D-Narragansett, told the committee yesterday that the state is taking too large of a risk and there is no guarantee that these funds will show a profit.

Licht told the committee that venture capital is desperately needed in Rhode Island and that similar arrangements have been successful in Alabama, Colorado, Florida, Georgia, Louisiana, Missouri, New York, Texas and Wisconsin.

Although the legislation aims to raise $50 million, the insurance companies could use only 10 percent of their tax credits annually. Insurance companies couldn’t start using the credits for two years while they would have to put up the money up front.

In order to apply to the state to be a certified-capital company, a firm must have $500,000 and four years of venture capital experience.

Gingee M. Prince, the director of Enhanced Capital Partners LLC, of New York, and Licht said that additional venture capital would pour into the state after the insurance companies put up their money.

Last year, the Senate approved a CAPCO bill, but objections to the way the money would be raised stopped it from moving forward in the House. Licht said yesterday that there are still issues to resolve with the Economic Development Corporation. The House committee did not take any action on the bill yesterday.

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CAPCO to get capped?
Former supporters join push to alter or kill Colo. venture-capital program

By:
David Milstead
Rocky Mountain News in NASVF.org

Colorado lawmakers tried to create a $200 million venture-capital program to spread investment and jobs throughout the state, but two years after its launch, regulators and some of its original supporters say it’s so broken it may have to be killed.

"The program is structurally flawed, and it needs to be fundamentally changed, or it needs to be abolished," said Robert Lee, director of the Office of Economic Development and International Trade. His office administers the program.

Adds Rep. Brad Young, R-Lamar, who voted for the program in 2001: "I just don’t see that right now we can afford it, given we had to do such large cuts to the budget."

The program is called the "certified capital company," or CAPCO, program. Insurance companies, rather than paying $200 million in taxes on premiums to the state, are instead allowed to divert the money to -CAPCOs. The CAPCOs then make venture-capital investments to businesses in the state.

The practical effect of the program, say its detractors, is to make venture capitalists and insurance companies rich, while taxpayers, sacrificing $200 million in state revenue, get little return on their investment.

The CAPCO law requires that only half of the $200 million be invested. There is little or no chance for the state to get back any of the profits or even any of the capital. The fees taken by the for-profit CAPCOs that participate in the program could take up more than half of the $200 million.

The law does not require the recipients of CAPCO money to create jobs. And while backers of the CAPCO program said in 2001 that it would help rural areas, 75 percent of the CAPCO investments may be made anywhere in the state.

Program proponents say these criticisms are worst-case scenarios put forth by those who ignore the long-term benefits of helping businesses create more jobs. They note that the $8.7 million in CAPCO investments, made to 12 Colorado companies, is a significant chunk of recent venture capital in the state.

Those companies received $41.3 million in additional venture-capital funding at the same time as, or after, the CAPCO investment, the industry reports. The additional investment illustrates the program’s value in attracting funding for Colorado’s businesses, CAPCO backers say. The recipient companies doubled their employment from 219 to 438 after the CAPCO investments, the industry says.

CAPCO genesis

The nation’s first CAPCO program was introduced in Louisiana in 1983. Proponents said state subsidies were needed since there was virtually no access to venture capital for entrepreneurs in the impoverished state.

The CAPCO concept expanded to Missouri, Wisconsin, New York and Florida between 1996 and 1998.

A handful of investment companies have specialized in the CAPCO system. They hire lobbyists to try to get the program introduced in new states – including Colorado, where Advantage Capital had a lobbyist in 1999, according to records from the secretary of state’s office.

Advantage, and the two other major players, Stonehenge Capital of Ohio and Newtek Capital, a New York company also known as the Wilshire Group, all have Colorado CAPCOs.

A 2000 report from the National Governors Association for Best Practices on how states can provide seed and venture funding to businesses described the CAPCO system as "the most generous tax credits" in their study.

An October 2001 report by the National Association of Seed and Venture Funds on "Understanding CAPCOs" described the "vigorously promoted" programs as expensive and says: "Given the size of these programs, and the experience of states with legislating, implementing and monitoring these programs, it is important for policy- makers to have a comprehensive understanding of how CAPCOs work, what they cost a state, and how they compare to the traditional venture capital industry."

That warning came too late for Colorado.

In the spring of 2001, House Speaker Doug Dean,a Republican, and Senate Majority Leader Stan Matsunaka, a Democrat, introduced a CAPCO bill.

It was hard to argue that Colorado, as a whole, was bereft of venture capital. The previous year, 2000, saw 105 Colorado companies receive $2.1 billion in venture-capital funds, according to the PricewaterhouseCoopers MoneyTree Survey. Colorado ranked fifth in the nation for VC dollars invested in the state.

Support on both sides

Despite the bill’s powerful bipartisan support, the measure narrowly passed. It was aided by rural legislators who saw the -CAPCO program as a way to spread the Front Range venture-capital wealth to the furthest reaches of the state. Gov. Bill Owens let it become law without his signature.

The first $100 million in tax credits were given out in 2002, to be used over the following 10 years, and the six Colorado CAPCOs got their first round of funding. The next $100 million in tax credits is scheduled to be given out next April.

Before that happens, some of the legislators who backed the program in 2001 want to kill it.

"I committed to the speaker of the House I’d support it without going through it a lot – I made one of those errors of not thinking it through," said Young.

Young introduced a bill in the last session to kill the program, but it ultimately failed. He then backed a resolution, which passed, to give subpoena power to the Legislative Audit Committee to study the CAPCOs.

Undoing the program

Other bills introduced in the last session attempted to divert the tax-credit money to other programs, such as the Cover Colorado health insurance program for the poor. They also failed.

Yet Young and others question whether the CAPCO law as written is a good idea even in flush times. CAPCO critics point to several problems:

• CAPCOs are required to invest 30 percent of the certified capital after three years and 50 percent after five years – but are never required to invest 100 percent of the money.

• The law allows CAPCOs to take 2.5 percent of the $100 million each year for management fees, plus another 2.5 percent each year for operating expenses, plus a "reasonable" amount of money for the expenses of forming the CAPCO, increased taxes paid by CAPCO owners and legal and professional expenses. Add this up, and the law seems to allow CAPCOs to take at least half the program’s money in fees by the end of the program.

• The CAPCOs don’t have a dollar of money available to invest right now for each dollar of tax credits the state just issued. Part of the problem comes because $100 million in tax credits, usable over 10 years, is worth only $50 million to $60 million in today’s dollars, the insurance companies estimate. Another part of the problem, though, is that insurance companies want their $100 million back in 10 years, plus a guaranteed return, regardless of investment performance. So -CAPCOs set tens of millions of dollars aside to make sure the insurance companies get their return.

• The state can get only a share of profits based on an internal rate-of-return formula in the law that is "not enforceable," said Alice Kotrlik, the director of business finance for the Office of Economic Development. The measurement requires that 100 percent of the program’s certified capital be invested, but the CAPCOs subtract their fees from the capital each year, making 100 percent investment impossible, Kotrlik said.

• While the CAPCOs are required to report jobs-created data to the state, there’s no requirement that any specific number of jobs be created by the companies that get CAPCO funding.

Turning sour

Momentum to change or kill the CAPCO program grew as legislators learned more of these details. In turn, the CAPCO industry, backed by the Colorado Software and Internet Association, mounted a fierce campaign to preserve the program.

Vic Ahmed, chairman of the CSIA, explained his group’s interest in CAPCO in a May visit to the Rocky Mountain News. He was joined by two CAPCO managers and a CAPCO funding recipient.

"It provides an engine for growth for the tech industry," Ahmed said. "There may be some truth to the fact that it’s more favorable than average for the insurance companies . . . but we need to look at things that are fiscally prudent and help the (tech) industry."

Chad Brownhill, the chairman of the CSIA’s public policy committee, urged members in an April e-mail message to call their representatives to support the CAPCO program.

"New Colorado jobs are on the line . . . The CAPCO program costs the state very little and is on track to bring over $1 billion of direct venture capital investment to early stage Colorado companies. . . . Instead of trying to kill CAPCO, we should instead be trying to extend the program into the future."

The $1 billion figure adds "leveraged" VC money – simultaneous and future investments in the CAPCO funding recipients – to the $200 million CAPCO total.

CAPCO backers defend the fee structure by noting that their investments are more geographically restricted than normal venture capitalists, who are free to invest anywhere. CAPCOs are also more regulated, as the Office of Economic Development has the power to rescind tax credits and quash deals that run afoul of the program’s rules.

It’s about the new jobs

Steven Bruny, the chief financial officer of Westminster-based Connexn Technologies, testified in favor of the CAPCO program after Advantage Capital contributed $450,000 to the company’s $11.3 million round of financing in July 2002. It was the third round for Connexn, which has attracted three rounds of venture capital totaling $28.8 million since September 1999, Bruny said. Connexn went from 60 employees before the third round to 100 today.

"Those are Colorado-based jobs, people paying taxes," Bruny said.

Another company, Federation Technologies, moved its headquarters from Israel to Centennial after Advantage Capital put $300,000 into the company.

Englewood’s Classic Events LLC, which operates Classic Party Rental and Alpine Party Rentals, got $1,240,000 from Stonehenge to buy another Colorado party-rental company and open three new locations.

It added about 60 employees in the acquisition and hired 60 more for the new locations, to bring total employment to about 170, said Chief Financial Officer Rob Kilgore.

"We would have been unable to complete the acquisition and open the new locations without the CAPCO financing," he said.

As the CAPCOs continue, it remains to be seen whether the bulk of the investments will continue to be along the Front Range – nine of the 12 investments have been in the Denver or Colorado Springs areas – or whether there will be more deals like the ones made in Steamboat Springs, Idaho Springs and Durango.

And it remains to be seen whether the General Assembly will change or kill the CAPCO program before the second and final allocation of $100 million in tax credits is made in April 2004.

Says Lee, the governor’s appointee who must oversee the CAPCO program: "The legislature intended this program to create jobs and provide access to capital. Very little of either has occurred."

Summary of results

State-backed capital company (CAPCO) program

• Total financing: $8,698,000

• Companies funded: 12

• Other venture-capital financing: $41,300,000

• Employees at time of financing: 219

• Employees as of May 1: 438

Source: Information provided by the six Colorado CAPCOs

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CAPCO Investments in Colorado

The following companies received state-backed venture capital investments through the CAPCO program over the past two years.

Classic Events LLC

• Location: Englewood

• Type of business: Provider of equipment for special events

• CAPCO investment: $1,240,000

Boa Technologies

• Location: Steamboat Springs

• Type of business: Developer and manufacturer of lace reels, laces and lace guides for footwear such as snowboard boots

• CAPCO investment: $400,000

Parker Medical

• Location: Arapahoe County

• Type of business: Developer of emergency medical care devices to assist with breathing

• CAPCO investment: $350,000

Ischemia Technologies

• Location: Arvada

• Type of business: Developer of biochemical diagnostic product used in the diagnosis of acute coronary syndrome

• CAPCO investment: $700,000

Anark Corp.

• Location: Boulder

• Type of business: Media platform integrates real-time 3-D and 2-D graphics, video, audio, text and data over the Internet

• CAPCO investment: $250,000

NextAction Corp.

• Location: Westminster

• Type of business: Database development and analysis for marketing and direct mail programs

• CAPCO investment: $400,000

Connexn Technologies Inc.

• Location: Westminster

• Type of business: Offers global Communication Service Providers solutions for revenue recovery and cost savings

• CAPCO investment: $450,000 ALTIA Inc.

• Location: Colorado Springs

• Type of business: Provides Simulation Graphics software to help developers produce prototypes that can be tested by customers

• CAPCO investment: $400,000

Federation Technologies

• Location: Centennial

• Type of business: Provides software infrastructure that aids in business performance and collaboration

• CAPCO investment: $300,000

Spin Maps Inc.

• Location: Durango

• Type of business: Producer of digital interactive markets

• CAPCO investment: $150,000

Universal Processing Services of Colorado

• Location: Idaho Springs

• Type of business: Electronic Payment Processing sales

• CAPCO investment: $3,308,000

StorePerform Technologies Inc.

• Location: Denver

• Type of business: Intranet-based software that combines task management, performance monitoring and process-driven analytics to improve effectiveness and profitability

• CAPCO investment: $750,00

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Georgia passes bill delaying tax credits for its CAPCO program for a year and a half.

http://www.legis.state.ga.us/legis/2003_04/search/hb492.htm

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CAPCOs under fire

Treasurer setting up task force to look at $200M program

By David Milstead, Rocky Mountain News

State Treasurer Mike Coffman is creating a task force to examine the state’s controversial $200 million CAPCO program.

The program, passed by the legislature two years ago, created "certified capital companies" to invest venture capital all across Colorado.

But lawmakers are having second thoughts as they learn about the program’s structure, which includes tax credits and guaranteed returns for insurance companies and significant fees for the CAPCOs themselves.

To date, CAPCOs have invested $8.7 million in 12 Colorado companies; those recipients have added $41.3 million in simultaneous or subsequent venture-capital funding, the industry says. Over the 10 years of the program, CAPCO backers say, the program could help generate $1 billion in total venture-capital funding.

Coffman’s announcement comes on the heels of a Rocky Mountain News report Saturday that revealed the CAPCO investment record. Robert Lee, director of the Office of Economic Development and International Trade, told the News that the program his office administers "is structurally flawed, and it needs to be fundamentally changed, or it needs to be abolished."

Yet the treasurer had been lining up task force members for two months, ever since a firestorm broke out in the General Assembly and several legislators, including some original supporters, tried to fundamentally alter or even kill the program.

"The legislature was divided – some members were saying it’s a rip- off, and there were those who defended it," Coffman said. "There didn’t seem to be a whole lot in the middle."

A resolution passed late in the session authorized the Legislative Audit Committee to use subpoena power to evaluate the CAPCO program.

Coffman sees his task force, which includes CAPCO opponents from the legislature as well as supporters from the Colorado Software and Internet Association, as complementary, providing "a broader discussion."

"There seems to be some value (to CAPCO), but we’re not channeling it appropriately," Coffman said.

The clock is ticking: The next $100 million in tax credits will be given out in April. Yet it’s not clear that killing CAPCO is an option, since the program’s tax credits have been put into state law, and the elimination of them may be a de facto tax increase under the Taxpayer’s Bill of Rights.

That concern is shared by Lee and Coffman. "That’s my gut," Coffman said. "But we probably need a legal opinion on that."

Several other states have CAPCO programs, an idea that started in capital-bereft Louisiana in the early 1980s and spread in the late 1990s to Missouri, Wisconsin, New York and Florida.

Colorado seems to have soured on CAPCOs relatively quickly, in part because members of the legislature have come to see $200 million of tax credits – lost tax revenue – as too high a price to pay for the program.

There also are structural issues with the program, particularly an allowance for fees and expenses that, as the law is written, enables CAPCOs to take in excess of 5 percent of certified capital each year in fees. Over 10 years, that could suck up half the capital in the program.

Jim Kenyon, a former community banker and former chairman of the state’s Economic Development Commission, now runs the Murphree Colorado CAPCO. He agrees with Lee’s position: "The program is very inefficient and needs to have some substantial changes made to it."

He suggested two chief changes: removing the guaranteed return for the participating insurance companies and cutting the CAPCO fees.

"In essence, we think a structure that is much more similar in form to venture-capital funds, rather than the CAPCO program, is what will work best, going forward," Kenyon said. But Kenyon’s view may not represent the entire industry. Murphree Colorado CAPCO is not part of the Growth Capital Alliance, a CAPCO group that briefly maintained a Colorado office supported by Enhanced Capital Partners. Enhanced Capital is one of the Colorado CAPCOs and also participates in CAPCO programs in Louisiana and New York.

There are three other established CAPCO industry players in the Colorado program: St. Louis-based Advantage Capital; Columbus, Ohio- based Stonehenge Capital; and New York City-based Newtek Business Services, a public company whose CAPCO subsidiaries operate as the Wilshire Group.

The sixth Colorado CAPCO is Waveland Ventures LLC, a Milwaukee company that started its first CAPCO in Colorado.

Representatives of Stonehenge and Enhanced Capital declined Wednesday to speak for the industry as a whole. A representative of Advantage Capital is working on an explanation of the CAPCO program to distribute to Colorado legislators and economic developers in the wake of Saturday’s News report.

A CAPCO description on the Enhanced Capital Web site gives a defense of the industry: "The Certified Capital Company Program (CAPCO) is an effective and successful approach for developing small-business growth in its host state. . . . Each state that has enacted the CAPCO Program projects and expects the following results from CAPCO: (1) an increase in jobs, (2) an increase in tax revenue to the state, and (3) excellent follow-on investment opportunity in the companies that often received their first outside source of funding from the CAPCOs."

[email protected] or (303) 892-2648

http://www.insidedenver.com/drmn/business/article/0,1299,DRMN_4_2115082,00.html