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Kentucky Venture-capital bill woos investors with tax credits- Restrictions lifted to boost state’s small companies

Kentucky’s efforts to stimulate entrepreneurship got a boost this week when the General Assembly approved legislation that would make it more
attractive for venture capitalists to invest in ”new economy” businesses.

Ken Berzof
Louisville Courier Journal

Gov. Paul Patton is expected to sign the legislation Monday. Sponsored by House Speaker Jody Richards as House Bill 525, it makes sweeping
changes to similar legislation enacted two years ago.

”The bill is excellent,” Richards, D-Bowling Green, said yesterday. ”The changes will really help. Kentucky has been near the bottom in
new-economy-type businesses. We feel like in just a few years we’ll be up in the middle of the pack. Our goal is to be a major player in the knowledge
business.”

The existing Kentucky Investment Fund Act provides a 40 percent state tax credit to individuals and corporations that invest in venture-capital funds
certified by the Kentucky Economic Development Fund Authority, when the money is invested in small Kentucky companies.

But, Richards said, ”we’ve never been able to do a good job with it. There were so many restrictions, nobody used it. New-economy companies don’t
need tax breaks. They need seed money.”

The new legislation would ease some of those restrictions and make venture-capital investing more appealing, said Craig Greenberg, an attorney with
Frost Brown Todd in Louisville. He helped write the new legislation and also is a member of the Kentucky Innovation Commission, which is responsible
for advising state government on how to promote hightech development.

Among the many changes, Greenberg said, banks and insurance companies would become eligible for the tax breaks, and certain nonprofit
organizations also could benefit because they would be allowed to sell or transfer their credits.

Furthermore, the new legislation permits ”follow-on,” or additional investments, from investors who already have a financial stake in a company. And it
allows investors to participate in the company’s management, such as by serving on the board of directors.

That way, Greenberg said, ”people can contribute their expertise and have some control over the investment because they can help the company
grow.”

To be certified and eligible for tax credits for its investors, an investment fund must have at least four unaffiliated investors; no investor may own more
than 40 percent of the fund; and the fund’s committed capital must exceed $500,000.

When a fund makes a ”qualified” investment, each investor receives a state tax credit equal to 40 percent of his or her pro rata ownership share of the
investment, until all allocated credits are issued by the fund.

A qualified investment is one made in a business with a net worth of less than $5 million or net income of less than $3 million or, if a knowledgebased
business, a net worth of less than $10 million. The business must be principally engaged in a qualified business in Kentucky — except for certain
financial-services businesses, retail operations and residential developments. It must have no more than 100 employees and have more than half of its
assets, operations and employees in Kentucky.

Greenberg said the state will grant $3 million in tax credits each year for the next two fiscal years, which could generate as much as $7.5 million a year
in venture-capital investing.

”That’s a lot,” he said. ”It could make a significant difference over the next two years. In the third year, we’ll build that number up. This is a healthful
start.”

Greenberg said the impact of the new legislation would be especially felt by life-sciences and other medical-related companies.

”It’s difficult for them to raise capital because venture capitalists don’t understand life sciences. But with a 40 percent tax credit, more people will be
likely to take the risk.”

And life sciences, he said, ”is booming. If Louisville is to thrive in the new economy, it will be because of the development of life-sciences companies.
We’re a life-sciences industry town.”

Frost Brown Todd and the Louisville Medical Center Development Corp. are sponsoring a Life Science Day on Tuesday, featuring more than a dozen
venture capitalists from outside Kentucky who will get a glimpse of local companies.

In Louisville, Greenberg said, ”There are at least 20 early stage lifesciences companies that need to raise capital. If this bill helps funding, they can
become the next Amgen.

”Louisville could be a different town in 10 years. That’s the potential that this bill has.”

http://www.courier-journal.com

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