CHAPTER 20
SENATE BILL No. 65
An Act concerning the Kansas certified capital formation
company act; relating to certi-
fication of capital formation companies; tax credit revisions;
amending K.S.A. 74-8222,
74-8223, 74-8225 and 74-8226 and repealing the existing
sections.
Be it enacted by the Legislature of the State of Kansas:
Section 1. K.S.A. 74-8222 is hereby
amended to read as follows: 74-
8222. (a) Any investor that makes a certified capital investment
shall earn
a tax credit against state tax liability equal to 50% of the amount
of such
investor's certified capital investment. The investor, or a person
to whom
the credits were duly transferred, shall be entitled to claim
not more than
a percent of the credit proportional to the amount invested by
the CFC
in a qualified Kansas business, not to exceed 10% of the
credit per taxable
year for taxable years commencing on and after January 1, 2005.
The
investor, or a person to whom the credits were duly transferred,
shall be
entitled to claim in subsequent taxable years any credit
unclaimed in a
taxable year, provided the sum total of such credits does not
exceed an
average of 10% of the credits to which the investor is
entitled. If the
amount of the tax credit allowed under subsection (a) exceeds the
tax
liability of the taxpayer for any taxable year, such excess amount
shall be
refunded to the taxpayer.
(b) No certified capital investment in a
single CFC by any one person
shall be less than $25,000 or more than $2,000,000; nor shall any
one
person's combined investment be deemed in excess of $5,000,000 for
the
purpose of earning tax credits.
(c) The total amount of tax credits which
may be allowed shall not
exceed $20,000,000. The total amount of tax credits which may be
allowed
under this act shall not exceed $2,000,000 per fiscal year.
Sec. 2. K.S.A. 74-8225 is hereby
amended to read as follows: 74-
8225. (a) To continue to be certified, a CFC shall make qualified
venture
capital investments according to the following
schedule requirements:
(1) Within three years after the
date on which a CFC is certified at
least 33% of its capital originally certified shall be, or
have been, used for
making qualified venture capital
investments;
(2) within four years after the
date on which a CFC is certified at
least 66% of its capital originally certified shall be, or
have been, used for
making qualified venture capital
investments;
(3) within five years after the
date on which a CFC is certified at least
100% of its total capital originally certified shall be, or
have been, used
for making qualified venture capital
investments;
(4) (1) a CFC
shall not make an investment in an affiliate of the CFC
or an affiliate of an investor. For the purposes of this
subsection, if a
company is not an affiliate before a CFC initially invests in the
company,
it shall not be deemed to be an affiliate if such CFC provides
additional
qualified venture capital investment to such company subsequent to
its
initial investment. No corporate officer, employee or shareholder,
no lim-
ited or general partner or other person personally affiliated with
any CFC
shall personally invest in any portfolio company regardless of
whether the
portfolio company is affiliated with the CFC; and
(5) (2) all
certified capital which is not then required to be invested
in qualified venture capital investments or which has been
previously
invested in qualified venture capital investments and returned by
the
company, may be held or invested in such manner as the CFC, in
its
discretion, deems appropriate. The proceeds of all certified
capital which
is returned to a CFC after it was originally invested in qualified
venture
capital investments, may be invested in other qualified venture
capital
investments and shall be credited toward any requirement in this
act with
respect to placing certified capital in qualified venture capital
invest-
ments.
(b) A CFC may make qualified
distributions at any time. In order to
lawfully make liquidating distributions, a CFC must have invested
an
aggregate amount equal to 100% of its certified capital in
qualified ven-
ture capital investments or the fair value of its assets plus any
prior qual-
ified and liquidating distributions which equal or exceed 110% of
its cer-
tified capital. In addition, to the extent that marketable
securities have
been received in liquidation of a qualified venture capital
investment,
such securities may be distributed as liquidating distributions.
Notwith-
standing any other provisions of this act, cash liquidating
distributions are
permitted solely for the purpose of providing funds to investors to
pay
income taxes attributable to earnings of the CFC.
(c) Liquidating distributions in excess
of the certified capital forma-
tion company's original certified capital and any additional
capital contri-
butions to the certified capital formation company shall be subject
to audit
by a certified public accounting firm acceptable to the secretary,
at the
expense of the certified capital formation company.
(d) If at the time any liquidating
distribution is made by a CFC, the
aggregate sum of all liquidating distributions of the CFC exceeds
the
aggregate sum of the CFC's original certified capital and any
subsequent
qualified venture capital contributions to the CFC, as determined
by au-
dit, the CFC, prior to any additional distributions, shall pay to
the state
treasurer's office 10% of the proportion of the distribution in
excess of
such amount.
(e) Documents and other materials
submitted by CFC's or by busi-
nesses for purposes of authorization or original certification or
the con-
tinuance of certification as a CFC shall not be public records if
it is
determined by the secretary that disclosure of such information
would
compromise trade secrets of qualified Kansas businesses unless
otherwise
specified in this act.
(f) Each CFC shall report the following
to the secretary:
(1) Within 90 days of the close of the
CFC's fiscal year, annual au-
dited financial statements. The audit shall address the methods of
oper-
ation and conduct of business of the CFC to determine if the CFC
is
complying with the statutes and program rules and that the funds
received
by the CFC have been invested in accordance with the time limits
pro-
vided by this act.
(2) At the end of each quarter, that no
more than 20% of the greater
of: (A) The original certified capital investment in the CFC; or
(B) the
original certified capital investment plus the amount equal to the
net
gains, losses, income and expenses realized by the CFC at such time
shall
be invested by a CFC in a single qualified Kansas business at any
one
time unless the CFC can demonstrate that a greater percentage in a
single
qualified Kansas business at any one time is the result of losses
suffered
by the CFC in other qualified venture capital investments.
(g) Any material related to the sale of
ownership in a CFC or soliciting
investment in a CFC shall include the following statement: ``By
author-
izing or certifying a certified capital formation company, the
State of Kan-
sas does not endorse the quality of management or the potential for
earn-
ings of a particular company. The use of the word ``certified''
or
``authorized'' in an offering does not constitute a recommendation
or en-
dorsement of an investment by the Kansas Securities Commission or
any
other State Official.''
(h) The secretary may establish
reasonable initial filing fees for ap-
plications for authorization and certification pursuant to this act
and may
also establish an annual nonrefundable fee for CFC's seeking
continued
certification.
Sec. 3. K.S.A. 74-8226 is hereby
amended to read as follows: 74-
8226. (a) To ensure that no qualified venture capital investment or
in-
vestor's certified capital investment has been made in violation of
this act,
the secretary shall conduct an annual review of each CFC to
determine
if the CFC is complying with the requirements of certification. The
costs
of the annual review shall be paid by each CFC according to a
reasonable
fee schedule adopted by the secretary.
(b) Any material violation of this act by
a CFC shall be grounds for
decertification under this section. If the secretary determines
that a CFC
is not in compliance with the requirements for continuing
certification,
the secretary, by written notice, shall inform the officers of the
CFC and
the board of directors, managers, trustees or general partners that
they
shall be decertified within 120 days from the date of mailing of
the notice,
unless they correct the deficiencies detailed in the notice and
demon-
strate to the secretary's satisfaction that the CFC is again in
compliance
with the requirements for certification as determined by the
secretary.
(c) At the end of the 120 day grace
period, if the CFC is still not in
compliance, the secretary may send a notice of decertification to
the CFC
and to the secretary of revenue including a list of the decertified
capital
investments by investor and transferee.
(d) Decertification of a CFC
prior to the CFC meeting all require-
ments of paragraphs (1) through (4) of subsection (a) of
K.S.A. 74-8225,
and amendments thereto, shall cause the recapture of all
tax credits pre-
viously allowed to an investor or transferee and the
forfeiture of all future
tax credits to otherwise be claimed by an investor or
transferee with re-
spect to any certified capital investment in the
decertified CFC.
(e)
(d) Decertification of a CFC after it has met all
requirements of
paragraphs paragraph (1) through
(4) of subsection (a) of K.S.A. 74-8225,
and amendments thereto, shall cause the forfeiture of tax credits
com-
mencing with the taxable year of the investor or transferee in
which the
decertification arose and for all future taxable years with
no recapture of
tax credits allowed to an investor or transferee with
respect to the taxable
years which ended before the decertification occurred. Once
a CFC has
invested 100% of its certified capital in qualified Kansas
businesses, all
future tax credits to be claimed pursuant to this act by
investors or trans-
ferees with respect to such CFC shall not be subject to
recapture.
Sec. 4. K.S.A. 74-8223 is hereby
amended to read as follows: 74-
8223. (a) The secretary may authorize and subsequently certify
profit or
not-for-profit entities which meet the requirements of this act.
The sec-
retary shall compile a list of every certified CFC, including the
address
and telephone number of the certified CFC's principal place of
business.
The secretary shall publicize the list in order to inform Kansas
companies
of the availability of potential investment capital.
(b) The secretary shall review the
organizational documents for each
applicant for authorization as a CFC and the business history of
the ap-
plicant to determine:
(1) That at the time of application, the
applicant owns cash, market-
able securities and other liquid assets valued at no less than
$500,000; or
that prior to January 1, 2000, the applicant was designated as an
inno-
vation and commercialization corporation or an affiliate innovation
and
commercialization corporation created under the Kansas technology
en-
terprise corporation innovation and commercialization corporation
pro-
gram; and
(2) that the officers and the board of
directors, general partners, trus-
tees, managing members or managers, as the case may be, are
thoroughly
acquainted with the requirements of this act and acknowledge such
by a
signed certification.
(c) To continue to be certified, the CFC
must own and shall peri-
odically demonstrate to the secretary, as the secretary may
require, that
the liquid asset base for the certified capital formation company
is at least
$500,000 at all times during the CFC's participation in the program
au-
thorized by this act.
(d) With respect to any person who
submits or has submitted an
application for authorization as a CFC, the commissioner shall
investigate
to determine and report to the secretary whether any of the
directors,
trustees, managers, officers, general partners, beneficial owners
of 10%
or more of any class of equity securities or any promoters employed
or
otherwise associated with that person at the time of such
application:
(1) Has been affiliated with any company
that has filed a registration
statement which is subject to a currently effective stop order
entered
pursuant to any state law;
(2) has been convicted of or pleaded
nolo contendere to any felony
or misdemeanor in connection with the purchase or sale of any
security
or any felony involving fraud or deceit including, but not limited
to, for-
gery, embezzlement of money under false pretenses, larceny or
conspir-
acy to defraud;
(3) is currently subject to any state
administrative order or judgment
entered by a state securities administrator or is subject to any
state ad-
ministrative order or judgment in which fraud or deceit was found
and
an order or judgment was entered;
(4) is currently subject to any state
administrative order or judgment
which prohibits the use of any exemption from registration in
connection
with the purchase or sale of securities; and
(5) is subject to any order, judgment or
decree of any court of com-
petent jurisdiction temporarily or preliminarily restraining or
enjoining,
or is subject to any order, judgment or decree of any court of
competent
jurisdiction permanently restraining or enjoining that person from
engag-
ing in or continuing any conduct or practice in connection with the
pur-
chase or sale of any security, rendering investment advice or
involving the
making or any false filing with any state;
and.
(6) has been convicted of or
pleaded nolo contendere to any criminal
offense other than a misdemeanor involving motor vehicle
violations.
(e) The secretary shall not authorize any
CFC if the commissioner's
report includes any affirmative findings pursuant to subsection
(d).
(f) The secretary shall review
documentation regarding the qualifi-
cations of the persons who will actively manage the CFC and make
a
determination as to whether such persons possessed sufficient
knowledge
and professional experience in the areas of investment, venture
capital,
business management and evaluation, portfolio management, and
such
other area of expertise to the degree that a reasonable person
would be
confident in such manager's ability to manage the CFC. No
authorization
shall be issued when it is the opinion of the secretary that such
persons
do not possess this requisite degree of knowledge and
expertise.
(g) No investor shall individually, or
collectively with or through one
or more affiliates, by means of ownership, agreement or otherwise,
own,
control or possess the power or ability to cause or direct the
making of
any qualified venture capital investments by a CFC.
(h) Within a period of time established
by the secretary after receiv-
ing an application for authorization as a CFC, the secretary shall
either
issue or deny the authorization and communicate in detail to the
applicant
the grounds for the denial, including any suggestions for the
removal of
those grounds.
Sec. 5. K.S.A. 74-8222, 74-8223, 74-8225 and
74-8226 are hereby
repealed.
Sec. 6. This act shall take effect and be in force
from and after its
publication in the statute book.
Approved March 26, 2003.
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