HB224

ENGROSSED

A BILL TO BE ENTITLED AN ACT

To establish the Alabama Small Business Investment Company Act; to provide for tax credits for taxpayers that make eligible capital contributions to an eligible Alabama small business investment fund; to require the Department of Commerce to accept applications for eligibility as an Alabama small business investment fund and to make determinations of eligibility; to specify the amount of tax credits that may be claimed for eligible contributions; to provide for the carrying forward of credits under certain conditions; to provide procedures for the revocation of tax credits for ineligible contributions; to provide procedures for the exit from the program; to require each small business investment fund to report to the department certain employment and financial information; to require the department to provide certain information regarding whether businesses satisfy certain criteria relating to instate activity prior to investments; to provide for determination fees; and to provide rulemaking authority.

BE IT ENACTED BY THE LEGISLATURE OF ALABAMA:

Section 1. This act shall be known and may be cited as the Alabama Small Business Investment Company Act.

Section 2. The Legislature finds and declares the following:

(1) Alabama small businesses have found it difficult to attract capital necessary to make investments that would stimulate economic development activity and create new jobs for the citizens of the state. Consequently, in order to maintain competitiveness and ensure access to capital for small business, a need exists for Alabama to attract capital that promotes the retention and expansion of existing jobs, stimulates the creation of new jobs, attracts new business and industry to the state, and stimulates growth in small businesses that are prepared to make meaningful investments and foster job creation in Alabama.

(2) Through the establishment of this act, Alabama can take steps to attract capital to stimulate small business development, retain and attract new business and industry to the state, create well paying jobs, and stimulate growth in small businesses that are prepared to make impactful economic development investments.

Section 3. For the purposes of this act, the following terms shall have the following meanings:

(1) AFFILIATE. A person that directly, or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another person. For the purposes of this subdivision, a person is "controlled by" another person if the controlling person holds, directly or indirectly, the majority voting or ownership interest in the controlled person or has control over the day-to-day operations of the controlled person by contract or by law.

(2) ALABAMA BUSINESS CONCERN. An operating company that, at the time of the initial investment in the company by an Alabama small business investment fund, satisfies all of the following:

a. Has its principal business operations in this state or shall use the proceeds of the Alabama small business investment to establish principal business operations in this state.

b. Has fewer than 250 150 employees or not more than five million dollars ($5,000,000) in net income for the preceding taxable year.

c. Is primarily engaged in manufacturing, processing, or assembling products, conducting research and development, or providing services.

d. Is not engaged in insurance, banking or lending, or the provision of professional services provided by accountants, attorneys, or physicians.

(3) ALABAMA SMALL BUSINESS INVESTMENT. Any capital or equity investment in an Alabama business concern or any loan to an Alabama business concern with an original maturity date at least two years after the date of issuance.

(4) ALABAMA SMALL BUSINESS INVESTMENT FUND. An entity approved by the department under Section 4.

(5) APPLICANT. An entity that applies to be an Alabama small business investment fund under Section 4.

(6) CLOSING DATE. The date on which an Alabama small business investment fund has collected all of the amounts specified by subdivisions (1) and (2) of subsection (f) of Section 4.

(7) CREDIT-ELIGIBLE CAPITAL CONTRIBUTION. An investment of cash by an insurance company subject to tax under Chapter 4A of Title 27, Code of Alabama 1975, in an Alabama small business investment fund that equals the amount specified by the department under subsection (e) of Section 4 and includes the purchase of an equity interest in the Alabama small business investment fund or the purchase, at par value or premium, of a debt instrument that satisfies all of the following:

a. Has an original maturity date of at least five years after the date of issuance.

b. Has a repayment schedule that is not faster than a level principal amortization over five years.

c. Has no interest, distribution, or payment features tied to the Alabama small business investment fund’s profitability or the success of the Alabama small business investments.

(8) DEPARTMENT. The Alabama Department of Commerce.

(9) OPERATING COMPANY. The term excludes any publicly traded business and any business that derives or projects to derive 15 percent or more of annual revenue from the rental or sale of real property, except any business that is a special purpose entity principally owned by a principal user of that property formed solely for the purpose of renting, either directly or indirectly, or selling real property back to such principal user if such principal user does not derive 15 percent or more of its gross annual revenue from the rental or sale of real property, nor is a publicly traded business.

(10) PRINCIPAL BUSINESS OPERATIONS. A business in which at least 80 percent of the business' employees reside in this state, the individuals who receive 80 percent of the business' payroll reside in this state, or the business has agreed to use the proceeds of an Alabama small business investment fund investment to relocate at least 80 percent of its employees to this state or pay at least 80 percent of its payroll to individuals residing in this state.

Section 4. (a) Beginning October 1, 2016, the department shall accept applications for approval as an Alabama small business investment fund. The application shall include all of the following:

(1) The total credit-eligible capital contributions sought by the applicant.

(2) A copy of the applicant or an affiliate of the applicant's license as a rural business investment company under 7 U.S.C. § 2009cc or as a small business investment company under 15 U.S.C. §681.

(3) Evidence that as of the date the application is submitted, the applicant or affiliates of the applicant have invested more than one hundred fifty million dollars ($150,000,000) in at least 20 operating companies with fewer than 250 employees at the time of investment.

(4) Evidence of satisfaction of either of the following:

a. As of the date the application is submitted, the applicant or affiliates of the applicant have invested more than twenty-five million dollars ($25,000,000) in operating companies located in Alabama.

b. The applicant has an office located in Alabama with at least two principals or persons employed or engaged to manage the funds of the applicant with at least five years of experience making debt, private equity, or venture capital investments on behalf of or as an institutional or accredited investor in Alabama.

(5) In the event that the applicant or an affiliate of the applicant received an allocation of tax credits pursuant to Section 40-14B-1 et seq., Code of Alabama 1975, other than allocations pursuant to Section 40-14B-22, Code of Alabama 1975, evidence in the form of an official notice from the department or other evidence submitted to the department that the applicant or an affiliate of the applicant has invested a cumulative amount equal to 100 percent of the tax credits in qualified investments under that program.

(6) An estimate of the number of jobs that will be created or retained in this state as a result of the applicant's Alabama small business investments.

(7) A 10-year business plan that includes a revenue impact assessment for the applicant's proposed Alabama small business investments prepared by a nationally recognized third-party independent economic forecasting firm projecting state and local revenue under the applicant's business plan.

(8) A signed affidavit from each investor making a credit-eligible capital contribution on a form prescribed by the department which shall state the amount of the investor's credit-eligible capital contribution.

(9) A nonrefundable application fee of fifty thousand dollars ($50,000) payable to the department.

(b) The department shall make an application determination within 30 days of receipt of the application in the order in which the applications are received. The department shall deem applications received on the same day as received simultaneously. Except as provided in subsection (d) of Section 6, the department shall approve allocations of credit-eligible capital contributions that result in the utilization of up to twelve million five hundred thousand dollars ($12,500,000) of tax credits per year for eight years in accordance with subsection (b) of Section 5 for taxpayers that make credit-eligible capital contributions. If requests for credit-eligible capital contribution authority exceed this limitation, the department shall proportionally reduce the credit-eligible capital contribution authority for each approved application as necessary to avoid exceeding the limit.

(c) The department shall deny an application submitted under subsection (a) under any of the following circumstances:

(1) The application fee is not paid in full.

(2) The applicant does not satisfy all the criteria described in subdivisions (2), (3), (4), or (5) of subsection (a).

(3) The revenue impact assessment submitted with the application does not demonstrate that the applicant's business plan will result in a positive economic impact on this state over a 10-year period that exceeds the cumulative amount of tax credits for which the applicant applied.

(4) The credit-eligible capital contributions described in affidavits submitted under subdivision (5) of subsection (a) do not equal the total credit-eligible capital contribution authority sought under the applicant's business plan.

(5) The department has already approved the maximum amount of credit-eligible capital contributions allowed under subsection (b).

(d) If the department denies an application, the applicant may provide additional information to the department to complete, clarify, or cure defects in the application identified by the department within 15 days of the notice of denial. The department shall reconsider the application and make a determination within 15 days before approving any pending application submitted after the original submission date.

(e) The department shall not deny an application or reduce the requested credit-eligible capital contribution authority for reasons other than those described in subsections (b) and (c). Upon approval of an application, the department shall provide a written approval to the applicant as an Alabama small business investment fund specifying the amount of the applicant's credit-eligible capital contribution authority and the amount of tax credits awarded to each investor whose affidavit was included in the application specifying the amount of the investor's credit-eligible capital contribution.

(f)(1) After receiving the approval issued under subsection (e), an Alabama small business investment fund, within 60 days, shall collect both of the following:

a. The credit-eligible capital contributions from each investor equal to the amount of tax credits awarded to each investor under subsection (e).

b. Equity investments from affiliates of the Alabama small business investment fund, including employees, officers, and directors of such affiliates, equal to at least the greater of five hundred thousand dollars ($500,000) and 10 percent of the Alabama small business investment fund's credit-eligible capital contribution authority.

(2) Within 65 days, the Alabama small business investment fund shall send the department documentation sufficient to prove that it has collected the amounts set forth in this subsection.

(g) If the Alabama small business investment fund fails to fully comply with subsection (f), its approval shall lapse and the corresponding credit-eligible capital contributions under this section will not count toward the limits on total credit-eligible capital contributions prescribed by subsection (b). The department shall first award lapsed credit-eligible capital contribution authority pro rata to each Alabama small business investment fund that was awarded less than the requested credit-eligible capital contribution authority under subsection (b) which an Alabama small business investment fund may allocate to its investors in its discretion. The department may award any remaining credit-eligible contribution to new applicants.

Section 5. (a) There is hereby allowed a nonrefundable tax credit for taxpayers that make credit-eligible capital contributions to an Alabama small business investment fund in accordance with subsection (f) of Section 4. The credit may be claimed against the tax imposed under Chapter 4A of Title 27, Code of Alabama 1975. The credit may not be sold, transferred, or allocated to any other entity other than to an affiliate subject to the tax imposed under Chapter 4A of Title 27, Code of Alabama 1975. The Alabama small business investment fund shall notify the department of any transfer of any tax credits to affiliates. Notwithstanding any provision of this section to the contrary, to the extent any credits are used against the tax imposed under Chapter 4A of Title 27, Code of Alabama 1975, the Department of Finance shall adopt rules to ensure that the credit would reduce the distribution for annual $30,993,296 distribution to the Education Trust Fund in an amount equal to the credits used in any fiscal year. A taxpayer claiming a credit against state premium tax liability earned through a credit-eligible capital contribution is not required to pay any additional retaliatory tax levied by law as a result of claiming the credit.

(b) On the closing date, the taxpayer shall earn a vested credit equal to the amount of the taxpayer's credit-eligible capital contribution to the Alabama small business investment fund. The taxpayer may claim up to 12.5 percent of the credit authorized under this section in any taxable year, beginning in the third full calendar year after the credit-eligible capital contribution, exclusive of amounts carried forward pursuant to subsection (c).

(c) If the amount of the credit for a taxable year exceeds the tax otherwise due for that year, the excess shall be carried forward to ensuing taxable years until fully used.

Section 6. (a) The department shall revoke tax credits issued under Section 4 if any of the following occur before the Alabama small business investment fund exits the program in accordance with subsection (e).

(1) The Alabama small business investment fund does not invest 50 percent of its credit-eligible capital contribution authority in Alabama small business investments within four years of the closing date.

(2) The Alabama small business investment fund, before exiting the program in accordance subsection (e), makes a distribution or payment other than the following:

a. A distribution of cash to one or more equity owners of the Alabama small business investment fund to fully or partially offset a projected increase in the owner's federal or state tax liability, including any penalties and interest, related to the owner's ownership, management, or operation of the Alabama small business investment fund.

b. A distribution of cash as payment of interest and principal on the debt of the Alabama small business investment fund.

c. A distribution of cash related to the reasonable costs and expenses of forming and syndicating an Alabama small business investment fund, including reasonable and necessary fees paid for professional services, including legal and accounting services.

d. An annual management fee up to two percent of the Alabama small business investment fund's credit-eligible capital contribution authority.

(3) The Alabama small business investment fund invests more than 15 percent of its credit-eligible capital contribution authority in the same Alabama business concern, including amounts invested in affiliates of the Alabama business concern.

(b) Before revoking one or more tax credits under this section, the department shall notify the Alabama small business investment fund of the reasons for the pending revocation. An Alabama small business investment fund shall have 90 days from the date the notice was dispatched to correct the violations outlined in the notice to the satisfaction of the department and avoid revocation of the tax credits. The Alabama small business investment fund shall be charged five thousand dollars ($5,000) a day for each day taken to correct the violations outlined in the notice.

(c) If the department revokes a tax credit under subdivision (a), the Department of Insurance shall make an assessment for the amount of the credit claimed by the tax credit holder before the tax credit was revoked.

(d) If tax credits are revoked under this section, the associated credit-eligible capital contribution authority does not count toward the limit on total credit-eligible capital contributions described in subsection (b) of Section 4. The department shall first award reverted credit-eligible capital contribution authority pro rata to each Alabama small business investment fund that was awarded less than the requested credit-eligible capital contributions under subsection (b) of Section 4. The department may award any remaining credit-eligible capital contribution authority to new applicants.

(e)(1) Upon investing 100 percent of its credit-eligible capital contribution authority in Alabama small business investments, the department shall allow an Alabama small business investment fund to exit the program and no longer be subject to regulation under this act if no tax credits have been revoked with respect to the Alabama small business investment fund.

(2) The department shall not unreasonably deny an exit from the program and shall acknowledge a request to exit the program within 30 days. Upon exiting the program, the Alabama small business investment fund shall make the first two hundred fifty thousand dollars ($250,000) of distributions, excluding the distributions set forth in paragraph (a)(2)a., to the department if the Alabama small business investment fund's Alabama small business investments enable the creation or retention of between 85 percent and 60 percent of the jobs set forth in the Alabama small business investment fund's application and the first one million dollars ($1,000,000) of distributions, excluding the distributions set forth in paragraph (a)(2)a. to the department if less than 60 percent of the jobs set forth in the Alabama small business investment fund's application are created or retained.

(3) In determining job creation and retention numbers for Alabama small businesses that receive Alabama small business investments from more than one Alabama small business investment fund, the department shall apportion such jobs created or retained proportionally based on the amount invested by each Alabama small business investment fund absent an agreement among Alabama small business investment funds as to such apportionment.

(f) The department shall not revoke a tax credit due to any actions of an Alabama small business investment fund that occur after the date the department issues a confirmation to the Alabama small business investment fund pursuant to subdivision (b)(1) of Section 8 or acknowledges a fund's exit from the program under subsection (e). This subsection does not prohibit the department from revoking a tax credit due to the actions of an Alabama small business investment fund that occur between submission of the application to exit and the date the fund's application for exit is approved.

Section 7. (a) Each Alabama small business investment fund shall submit a report to the department on or before the last day of April of each year that includes all of the following:

(1) The Alabama small business investment fund's bank statements evidencing each Alabama small business investment.

(2) The name and location of each business receiving an Alabama small business investment, including evidence that the business qualified as an Alabama business concern at the time the investment was made and its North American Industry Classification System code.

(3) The number of employment positions created or retained as a result of the fund's Alabama small business investments as of the last day of the preceding calendar year.

(4) An audited financial statement of the Alabama small business investment fund.

(5) A description of the distributions made under subdivision (2) of subsection (a) of Section 6 in the previous year.

(6) Any other information reasonably requested by the department.

(b) The Alabama small business investment fund shall include an annual compliance fee of ten thousand dollars ($10,000) to the department with submission of each annual report. The fee shall increase to one hundred thousand dollars ($100,000) payable to the department for each annual report submitted after the tenth anniversary of the Alabama small business investment fund's closing date.

(c) The department shall summarize the information set forth in subdivisions (1) through (3) in the form of a report and shall provide the report to the Legislature by July 1 of each year.

Section 8. (a) An Alabama small business investment fund, before making an investment in a business, may request from the department a written opinion as to whether the business in which it proposes to invest is an Alabama business concern. The department, not later than the 15th business day after the date of receipt of the request, shall notify the Alabama small business investment fund of its determination. If the department fails to notify the Alabama small business investment fund of its determination within 15 business days, the business in which the Alabama small business investment fund proposes to invest shall be considered to be an Alabama business concern. An Alabama small business investment fund shall include a five hundred dollar ($500) determination fee with each request.

(b)(1) Upon achieving the milestone set forth in subdivision (1) of subsection (a) of Section 6 and provided that the Alabama small business investment fund has not received a revocation notice that has not been cured, the department shall provide written confirmation to the Alabama small business investment fund that prior tax credits are not subject to recapture and future tax credits are not subject to forfeiture.

(2) The department may rely on the Alabama small business investment fund's most recent annual report, supplemental information provided by the Alabama small business investment fund and any other information reasonably requested by the department. A business that is classified as an Alabama business concern at the time of the first investment in the business by an Alabama small business investment fund shall remain classified as an Alabama business concern and may receive follow-on investments from any Alabama small business investment fund provided the business's principal business operations remain in this state.

(c) The department shall administer this act and may adopt rules as necessary for the implementation and administration of this act in advance of receiving applications under this act.

Section 9. This act shall become effective on the first day of the third month following its passage and approval by the Governor, or its otherwise becoming law.

Taxation

Business and Commerce

Economic Development

Commerce Department

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