UNOFFICIAL COPY AS OF 11/14/1811 REG. SESS.11 RS BR 431
AN ACT relating to the angel investor tax credit.
Be it enacted by the General Assembly of the Commonwealth of Kentucky:
SECTION 1. A NEW SECTION OF SUBCHAPTER 20 OF KRS CHAPTER 154 IS CREATED TO READ AS FOLLOWS:
As used in Sections 1 to 6 of this Act:
(1)"Application" means a document submitted by a qualified investor, on a form supplied by the authority, for the purpose of requesting a credit;
(2)"Authority" means the Kentucky Economic Development Finance Authority;
(3)"Commonwealth" means the Commonwealth of Kentucky;
(4)"Credit" means the nonrefundable angel investor tax credit established by Section 9 of this Act and awarded by the authority pursuant to Section 4 of this Act;
(5)"Department" means the Department of Revenue;
(6)"Entity" means any corporation, limited liability company, business development corporation, partnership, limited partnership, sole proprietorship, association, joint stock company, receivership, trust, professional service organization, or other legal entity through which business is conducted;
(7)"Fee" means a nonrefundable certification fee in one of the following amounts:
(a)For individual investors, two hundred fifty dollars ($250);
(b)For investment funds, one thousand dollars ($1,000); or
(c)For small businesses, one hundred fifty dollars ($150);
(8)"ICC" means the Kentucky Innovation and Commercialization Center;
(9)"Pass-through entity" has the same meaning as in KRS 141.010;
(10)"Qualified activity" means any knowledge-based activity related to the new economy focus areas of the Department of Commercialization and Innovation, including but not limited to:
(a)Bioscience;
(b)Environmental and energy technology;
(c)Health and human development;
(d)Information technology and communications; and
(e)Materials science and advanced manufacturing.
A "qualified activity" does not include any activity principally engaged in by financial institutions, commercial development companies, credit companies, financial or investment advisors, brokerage or financial firms, other investment funds or investment fund managers, charitable and religious institutions, oil and gas exploration companies, insurance companies, residential housing developers, retail establishments, or any activity that the authority determines in its discretion to be against the public interest, against the purposes of Sections 1 to 6 of this Act, or in violation of any law;
(11)"Qualified investor" means an individual investor or investment fund meeting the requirements of Section 3 of this Act for qualified investors, and certified pursuant to Section 4 of this Act;
(12)"Qualified small business" means an entity meeting the requirements of Section 3 of this Act for qualified small businesses, and certified pursuant to Section 4 of this Act; and
(13)"Rural area" has the same meaning as in 7 U.S.C. sec. 1991, in effect as of the effective date of this Act.
SECTION 2. A NEW SECTION OF SUBCHAPTER 20 OF KRS CHAPTER 154 IS CREATED TO READ AS FOLLOWS:
(1)The purposes of Sections 1 to 6, and Section 9 of this Act is to create an angel investor program that will encourage capital investment in the Commonwealth by individual investors and investment funds that will further the establishment or expansion of small businesses, create additional jobs, and foster the development of new products and technologies.
(2)The intent of Sections 1 to 6, and Section 9 of this Act is to provide investment preference for small businesses located in the Commonwealth, operating in the fields of knowledge-based high-tech research and development, and showing a potential for rapid growth.
(3)To participate in the program created by Sections 1 to 6, and Section 9 of this Act:
(a)Small businesses, individual investors and investment funds shall request certification from the ICC and the authority pursuant to Section 4 of this Act. To be qualified, the small businesses, individual investors and investment funds must fulfill the requirements outlined in Section 3 of this Act; and
(b)Once certified, qualified investors may make investments in qualified small businesses, and may apply to the authority for a credit in return for making the investment if that investment qualifies under the provisions of Section 3 of this Act.
(4)Insofar as possible, any investment made in a Kentucky small business under the provisions of Sections 1 to 6 of this Act shall be used by that business to leverage additional capital investments from other sources.
SECTION 3. A NEW SECTION OF SUBCHAPTER 20 OF KRS CHAPTER 154 IS CREATED TO READ AS FOLLOWS:
The requirements for small businesses, investors, and investments to be qualified for participation in the angel investor program are as follows:
(1)To be certified as a qualified small business, the business must be an entity which, at the time a qualified investment is made by a qualified investor:
(a)Has a net worth of ten million dollars ($10,000,000) or less or net income after federal income taxes for each of the two (2) preceding fiscal years of three million dollars ($3,000,000) or less;
(b)Is actively and principally engaged in a qualified activity within the Commonwealth, or will be actively and principally engaged in a qualified activity within the Commonwealth after the receipt of a qualified investment by a qualified investor;
(c)Has no more than one hundred (100) full-time employees;
(d)Has more than fifty percent (50%) of its assets, operations, and employees located in the Commonwealth; and
(e)Has at no time received an aggregate amount of qualified investments that has allowed qualified investors to receive more than one million dollars ($1,000,000) in angel investor credits.
(2)A qualified investor may be either an individual investor or an investment fund, as follows:
(a)To be certified as a qualified investor, an investment fund shall be a pass-through entity operating in the Commonwealth that:
1.Seeks to invest capital in small businesses in the Commonwealth in furtherance of the purposes and intent provided in Section 2 of this Act;
2.Has a minimum of three (3) partners, members, or shareholders, each holding equity interests in the fund and each independently qualifying as a qualified individual investor under the requirements of paragraph (b) of this subsection; and
3.Has a total minimum investment of thirty thousand dollars ($30,000) from all partners, members, and shareholders; and
(b)To be certified as a qualified investor, an individual investor shall:
1.Be an individual natural person;
2.Qualify as an accredited investor pursuant to Regulation D of the United States Securities and Exchange Commission, 17 C.F.R. sec. 230.501, in effect as of the effective date of this Act;
3.Not hold in excess of twenty percent (20%) ownership interest in, or be employed by, the qualified small business prior to making the qualified investment in that qualified small business; and
4.Not be closely related to an individual who holds in excess of twenty percent (20%) ownership interest in, or is employed by, the qualified small business prior to making the qualified investment in that qualified small business. For purposes of this subparagraph, "closely related" means the parent, spouse, or child of an individual.
(3)To be certified as a qualified investment, the investment shall:
(a)Be a cash investment in a qualified small business by a qualified investor of at least ten thousand dollars ($10,000);
(b)Be offered and executed in compliance with applicable state and federal securities laws and regulations;
(c)Provide the qualified investor, as consideration for the investment, with an equity interest in the qualified small business, such as a general or limited partnership interest, common or preferred stock with or without voting rights and without regard to seniority position, forms of subordinate or convertible unsecured debt, or both, with warrants, rights, or other means of equity conversion attached;
(d)Seek a financial return based upon that consideration; and
(e)Not enable any individual qualified investor that is:
1.A partner, member, or shareholder of an investment fund qualifying under the requirements of subsection (2)(a) of this section; or
2.An individual investor qualifying under the requirements of subsection (2)(b) of this section;
to be awarded in excess of two hundred thousand dollars ($200,000) in total credit in any calendar year.
SECTION 4. A NEW SECTION OF SUBCHAPTER 20 OF KRS CHAPTER 154 IS CREATED TO READ AS FOLLOWS:
(1)The total amount of tax credit that may be awarded by the authority to:
(a)All qualified investors pursuant to Sections 1 to 6 of this Act; and
(b)All investors in all investment funds pursuant to KRS 154.20-250 to 154.20-284;
shall be no more than forty million dollars ($40,000,000) in total. Once this total amount of tax credit has been awarded by the authority pursuant to Sections 1 to 6 of this Act and KRS 154.20-250 to 154.20-284, no further awards of any tax credit shall be made.
(2)The following procedure shall be followed by small businesses and investors, whether individual investors or investment funds, to request certification of their qualification for participation in the program, and also for qualified investors to apply for credit based on a qualified investment:
(a)1.Prior to making or receiving any investment that may qualify for a credit, all small businesses and investors shall submit written requests for certification to the ICC affiliate, or its satellite office, whose geographic area of activity includes the area in which the small business or investor is located, for preliminary review. The request shall:
aUse a form supplied by the authority;
b.Include all information required by the authority relevant to determining if the small business or investor complies with all relevant requirements of Section 3 of this Act;
c.In the case of small businesses, state whether the business is located inside or outside a rural area;
d.Include the required fee; and
e.Be submitted in the manner prescribed by the authority.
2.Within thirty (30) business days of its receipt of the request for certification, the ICC shall determine if it is complete and shall:
a.Pre-approve the request;
b.Disapprove the request; or
c.Request additional information from the small business or investor. If any additional information is supplied, the ICC shall have thirty (30) days from the receipt of that information to make a determination.
The ICC shall notify the small business or investor of the outcome of the preliminary review, and shall retain the fee to offset the cost of the review.
3.If the ICC pre-approves the certification, it shall forward the request to the authority for final review and consideration.
4.The authority shall receive and consider requests on a first-come, first-served basis. In considering whether to approve or deny certification, the authority shall determine that the small business or investor satisfies all requirements of Section 3 of this Act.
5.If the authority determines that the application:
a.Fails to fully satisfy all requirements for any reason, it shall deny the request and give written notice to the small business or investor explaining the reasons for the denial.
b.Fully satisfies all requirements for a small business or investor under Section 3 of this Act, it shall approve the request and provide written notice of the certification to the small business or investor.
6.All certifications granted pursuant to this section shall expire one (1) calendar year following the date of certification. The provisions for requesting certification under this section shall apply to all requests for recertification in any subsequent year.
(b)1.Prior to making an investment that may qualify for a credit, a qualified investor shall submit an application for credit to the ICC affiliate or satellite office that reviewed its request for certification. Applications shall be processed and reviewed in the same manner in which requests for certification are processed and reviewed under paragraph (a) of this subsection, to determine if the proposed investment is a qualified investment and whether a credit shall be awarded.
2.Applications shall:
a.Use a form supplied by the authority;
b.Demonstrate that both the small business and the investor have been certified pursuant to subsection (1) of this section;
c.State the name and social security number of all individuals that will receive all or a portion of the credit;
d.Include all information required by the authority relevant to determining if the investment complies with all relevant requirements of Section 3 of this Act to qualify as a qualified investment; and
e.Be submitted in the manner prescribed by the authority.
3.If the authority determines that the application:
a.Fails to fully satisfy all requirements for any reason, it shall deny the request and give written notice to the qualified investor explaining the reasons for the denial.
b.Fully satisfies all requirements for a qualifying investment, it shall approve the credit, subject to the limitation in paragraph (b) of this subsection, and shall provide written notice of approval for credit to the qualified investor, including the credit amount. The credit amount shall be equal to:
i.Forty-percent (40%) of the amount of the investment, if the principal place of business of the qualified small business is outside a rural area; or
ii.Fifty-percent (50%) of the amount of the investment, if the principal place of business of the qualified small business is in a rural area.
4.Upon approval of a credit, the authority shall reduce the amount of available credit for the taxable year by the amount of credit approved to the qualified investor.
(c)To facilitate the certification and credit application processes, the authority shall generate and make available:
1.A standardized form for use by small businesses and investors in requesting certification; and
2.A standardized application for use by qualified investors seeking a credit.
SECTION 5. A NEW SECTION OF SUBCHAPTER 20 OF KRS CHAPTER 154 IS CREATED TO READ AS FOLLOWS:
(1)No later than the earlier of:
(a)Sixty (60) days of the date of credit approval, including weekends and holidays; or
(b)December 31 of the calendar year of the approval,
the qualified investor shall make the actual investment. Within twenty (20) days of making the investment, including weekends and holidays, the qualified investor shall provide proof of the investment to the authority in the manner required by the authority.
(2)Upon receipt of proof of the investment the authority shall immediately notify the department of the credit award, the amount of credit, the name of the qualified investor, and the name and social security number of all individuals that will receive all or a portion of the credit.
(3)If the qualified investor either fails to make the investment prior to the deadline or fails to provide the required proof of investment, the award of credit approval shall be null and void, and the authority shall notify the qualified investor of the nullification and readjust the amount of credit available.
(4)If the qualified investor receiving the credit is an investment fund, the amount of approved credit shall be applied against the tax imposed by KRS 141.0401 at the entity level, and shall also be distributed to each partner, member, or shareholder based on the partner's, member's, or shareholder's distributive share of the income of the fund.
(5)The authority shall maintain a Web site, that shall be publicly available, on which it shall report:
(a)A list of all qualified small businesses and qualified investors it has certified for the current calendar year;
(b)The total amount of credit it has awarded, and the amount of available credit remaining; and
(c)A complete list of credits awarded, identifying:
1.The qualified investor receiving the credit;
2.The amount of the credit and the date it was approved; and
3.The qualified small business receiving the investment.
This report shall be updated as new small businesses and investors are certified, and as new credits are awarded or the amount of available credit is otherwise adjusted.
(6)To facilitate the application process, the authority shall generate and make available a standardized application form for use by investors and investment funds.
SECTION 6. A NEW SECTION OF SUBCHAPTER 20 OF KRS CHAPTER 154 IS CREATED TO READ AS FOLLOWS:
(1)On or before February 1 of the calendar year succeeding the year in which a credit was awarded, and continuing for four (4) years thereafter, a qualified small business that has received a qualified investment shall file an annual written report with the authority. This report shall demonstrate that the small business:
(a)Continues to have more than fifty percent (50%) of its assets, operations, and employees in the Commonwealth;
(b)Has at no time received an aggregate amount of qualified investments that has allowed qualified investors to receive more than one million dollars ($1,000,000) in credits; and
(c)Continues to be actively and principally engaged in a qualified activity.
The report shall also provide additional information related to the success of the small business attributable to the investment, including but not limited to new jobs created, increased sales or other economic activity conducted, the degree of other private investment attracted, and any other information requested by the authority.
(2)A small business that fails to submit the report required by this section by the deadline shall be fined five hundred dollars ($500). Fines shall be rendered to the authority which shall use the funds to offset the costs of administering Sections 1 to 6 of this Act.
(3)If a qualified small business either:
(a)Fails to submit the report mandated by subsection (1) of this section by August 1 of any year; or
(b)Fails to meet any of the criteria listed in paragraphs (a), (b) or (c) of subsection (1) of this section at any time during any year of the reporting period,
the authority may recapture from the qualified small business any portion, or the full amount, of the credit awarded for qualified investments in that qualified small business. Any amounts collected from the recapture shall be deposited in the general fund.
(4)If a qualified small business becomes insolvent and ceases operations at any time before the final required annual report is due, it shall file a written report with the authority attesting to that fact and shall thereafter be exempt from the annual report required by this section, and shall not be subject to any recapture.
Section 7. KRS 154.12-305 is amended to read as follows:
(1)There is established the Kentucky Innovation and Commercialization Center Program within the Department of Commercialization and Innovation. The goal of the ICC program is to create products, new companies, and value-added jobs in communities throughout the Commonwealth. Strategies to achieve this goal include:
(a)Increasing quality deal flow of technology-based firms in Kentucky;
(b)Increasing understanding of start-up process and investment practices; and
(c)Providing value-added services to the start-up and investment community.
(2)The duties of the ICC program shall include but not be limited to:
(a)Identifying and linking entrepreneurs, faculty, scientists, venture capitalists, and other key individuals from the business sector, universities, community and technical colleges, local leaders, and government for the creation and expansion of knowledge-based companies;