HBA-TYH S.B. 899 76(R) BILL ANALYSIS Office of House Bill AnalysisS.B. 899 By: Sibley Insurance 5/21/1999 Engrossed BACKGROUND AND PURPOSE Currently, Texas does not offer insurance companies a premium tax credit for investing in small business venture capital funds. S.B. 899 creates certified capital companies, which are small business venture capital funds that are licensed by the Texas Department of Insurance and invest in small, including early-stage, businesses. Under this bill, insurance companies fund certified capital companies in exchange for receiving certain premium tax credits. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the comptroller of public accounts in SECTION 1 (Articles 4.52, 4.53, 4.64, and 4.72, Insurance Code) and SECTION 4 of this bill. SECTION BY SECTION ANALYSIS SECTION 1. Amends Chapter 4, Insurance Code, by adding Subchapter B, as follows: SUBCHAPTER B. PREMIUM TAX CREDIT FOR INVESTMENT IN CERTIFIED CAPITAL COMPANY Art. 4.51. DEFINITIONS. Defines "affiliate," "certification date," "certified capital," "certified capital company," "certified investor," "early stage business," "person," "premium tax credit allocation claim," "qualified business," "qualified debt instrument," "qualified distribution," "qualified investment," and "state premium tax liability." Art. 4.52. DUTIES OF COMPTROLLER; RULES. Requires the comptroller of public accounts to administer this subchapter and to adopt rules and forms as necessary to implement this subchapter. Art. 4.53. CERTIFICATION. Requires the comptroller, by rule, to establish the application procedures for certified capital companies. Provides that an applicant must file an application not later than April 17, 2000, in the form prescribed by the comptroller accompanied by a nonrefundable application fee of $7,500. Provides that the application must include the specified audited balance sheet. Sets forth terms and conditions to qualify as a certified capital company. Requires the comptroller to review the application, organizational documents, and business history of each applicant, and ensure that the applicant satisfies the requirements of this subchapter. Requires the comptroller, within 30 days of the filing of the application, to issue the certification or to refuse to issue the certification and communicate in detail to the applicant the grounds for the refusal. Art. 4.54. MANAGEMENT BY CERTAIN ENTITIES PROHIBITED. Prohibits an insurance company, group of insurance companies, or other persons who may have state premium tax liability or the affiliates of the insurance companies or other persons from the specified involvements in a capital company. Provides that this article applies without regard to whether the insurance company or the affiliate of the insurance company or other person is licensed by or transacts business in this state. Provides that this article does not preclude certain companies and parties from exercising their legal rights and remedies. Art. 4.55. OFFERING MATERIAL USED BY CERTIFIED CAPITAL COMPANY. Sets forth required language for any offering material involving the sale of securities of a certified capital company. Art. 4.56. REQUIREMENTS FOR CONTINUANCE OF CERTIFICATION. (a) Sets forth required schedule according to which a certified capital company is required to make qualified investments. (b) Provides that at least 50 percent of qualified investments required by Subsection (a) must be placed in early stage businesses. (c) Requires the aggregate cumulative amount of all qualified investments made by the certified capital company after its certification date to be considered in the computation of the percentage requirements under this subchapter. Authorizes any proceeds received from a qualified investment to be invested in another qualified investment and count toward any requirement in this subchapter with respect to investments of certified capital. (d) Provides that a business that is classified as a qualified business at the time of the first investment in the business by a certified capital company remains classified as a qualified business and is authorized to receive follow-on investments from any certified capital company. Provides that except as provided by this subsection, a follow-on investment made under this subsection is a qualified investment even though the business may not meet the definition of a qualified business at the time of the follow-on investment. Provides that a follow-on investment does not qualify as a qualified investment if, at the time of the follow-on investment, the qualified business no longer has its principal business operations in this state. (e) Prohibits a qualified investment from being made at a cost to a certified capital company greater than 15 percent of the total certified capital of the company at the time of investment. (f) Provides that if, before the first anniversary of the date that a certified capital company makes an investment in a qualified business, the qualified business moves its principal business operations from this state, the investment is prohibited from being considered a qualified investment for purposes of the percentage requirements under this subchapter. (g) Requires a certified capital company to invest any certified capital not invested in qualified investments in: _cash deposited with a federally insured financial institution; _certificates of deposit in a federally insured financial institution; _investment securities that are obligations of the United States or its agencies or instrumentalities or obligations that are guaranteed fully as to principal and interest by the United States; _investment-grade instruments rated at least "A" or its equivalent by a nationally recognized rating organization; _obligations of this state or any municipality or political subdivision of this state; or _any other investments approved in advance and in writing by the comptroller. Art. 4.57. EVALUATION OF BUSINESS BY COMPTROLLER. Authorizes a certified capital company, before making an investment in a business, to request from the comptroller a written opinion as to whether a business is a qualified business or an early stage business. Requires the comptroller to, not later than the 15th business day after the date of the receipt of a request, determine whether the business meets the definition of a qualified business or an early stage business, as applicable, and notify the certified capital company of the determination and an explanation of its determination, or notify the certified capital company that an additional 15 days will be needed to review and make the determination. Provides that if the comptroller fails to notify the certified capital company with respect to the proposed investment within the period specified, the business in which the company proposes to invest is considered to be a qualified business or early stage business, as appropriate. Art. 4.58. REPORTS TO COMPTROLLER; AUDITED FINANCIAL STATEMENT. Requires each certified capital company to report to the comptroller the specified investment information and financial statements about the company as soon as practicable after the receipt of certified capital. Requires each certified capital company, not later than January 31 of each year, to report the enumerated information to the comptroller. Requires the company, not later than April 1 of each year, to provide to the comptroller an annual audited financial statement that includes the opinion of an independent certified public accountant. Requires the audit to address the methods of operation and conduct of the business of the company to determine the enumerated conditions. Art. 4.59. RENEWAL. Requires each certified capital company to pay a nonrefundable fee of $5,000 to the comptroller by January 31 of each year. Provides that a renewal fee is not required within six months of the initial certification date of a certified capital company. Art. 4.60. DISTRIBUTIONS; REPAYMENT OF DEBT. Authorizes a certified capital company to make a qualified distribution at any time. Provides that to make a distribution or payment, other than a qualified distribution, a company must have made qualified investments in an amount cumulatively equal to 100 percent of its certified capital. Authorizes a company to make repayments of principal and interest on its indebtedness without any restriction, including repayments of indebtedness of the company on which certified investors earned premium tax credits. Art. 4.61. ANNUAL REVIEW; DECERTIFICATION. (a) Requires the comptroller to conduct an annual review of each certified capital company to ensure compliance and to determine eligibility status. (b) Requires the cost of the annual review to be paid by each certified capital company. (c) Provides that a material violation of Article 4.56, 4.58, or 4.59 is grounds for decertification of the certified capital company. Provides that if the comptroller determines that a company is not in compliance with Article 4.56, 4.58, or 4.59. the comptroller is required to notify the officers of the company in writing that the company may be subject to decertification after the 120th day after the date of mailing of the notice, unless the deficiencies are corrected and the company returns to compliance with those articles. (d) Authorizes the comptroller to decertify a certified capital company, after opportunity for hearing, if the comptroller finds that the company is not in compliance with Article 4.56, 4.58, or 4.59 at the end of the period established by Subsection (c) of this article. Provides that decertification under this subsection is effective on receipt of notice of decertification by the company. Requires the comptroller to notify any appropriate state agency of the decertification. Art. 4.62 ADMINISTRATIVE PENALTY. Authorizes the comptroller to impose an administrative penalty on a certified capital company that violates this subchapter. Prohibits the amount of the penalty from exceeding $25,000, and each day a violation continues or occurs is a separate violation for the purpose of imposing a penalty. Requires the amount of the penalty to be based on the specified criteria. Authorizes certified capital companies assessed penalties under this subchapter to request a redetermination as provided in Chapter 111 (Collection Procedures), Tax Code. Authorizes the attorney general to sue to collect the penalty. Provides that a proceeding to impose the penalty is considered to be a contested case under Chapter 2001 (Administrative Procedure), Government Code. Art. 4.63. RECAPTURE AND FORFEITURE OF PREMIUM TAX CREDITS: DECERTIFICATION OF COMPANY. Authorizes a decertification to cause the recapture of premium tax credits previously claimed and the forfeiture of future premium tax credits to be claimed by certified investors with respect to the company. Sets forth procedures for the recapture. Requires the comptroller to send written notice to the address of each certified investor whose premium tax credit is subject to recapture or forfeiture, using the address shown on the last premium tax filing. Art. 4.64. RECAPTURE AND FORFEITURE OF PREMIUM TAX CREDITS: QUALIFIED BUSINESS LEAVES STATE. Requires the comptroller to adopt rules under which premium tax credits previously claimed by certified investors are subject to recapture and future premium tax credits to be claimed by certified investors are subject to forfeiture with respect to an investment made by a certified capital company in a qualified business if the qualified business fails to maintain its principal business operations in this state as required by the rules. Provides that the rules adopted by the comptroller must specify the manner in which the recapture and forfeiture of premium tax credits under this article may be apportioned among certified investors in a certified capital company. Requires the comptroller to send written notice to the address of each certified investor whose premium tax credit is subject to recapture or forfeiture, using the address shown on the last premium tax filing. Art. 4.65. INDEMNITY AGREEMENTS AND INSURANCE AUTHORIZED. Authorizes a certified capital company to agree to indemnify, or purchase insurance for the benefit of, a certified investor for losses resulting from the recapture or forfeiture of premium tax credits under Article 4.63 or 4.64. Art. 4.66. PREMIUM TAX CREDIT. (a) Requires a certified investor who makes an investment of certified capital, in the year of investment, to earn a vested credit against state premium tax liability equal to 100 percent of the certified investor's investment of certified capital, subject to the limits imposed by this subchapter. Authorizes a certified investor to take up to 10 percent of the vested premium tax credit in any taxable year of the certified investor. (b) Prohibits the credit to be applied against state premium tax liability in any one year from exceeding the state premium tax liability of the certified investor for the taxable year. Authorizes any unused credit against state premium tax liability to be carried forward indefinitely until the premium tax credits are used. (c) Provides that a certified investor claiming a credit against state premium tax liability earned through an investment in a company is not required to pay any additional retaliatory tax levied under Article 21.46 (Retaliatory Provisions; Payment of Taxes, Fines, Penalties, Etc.; Conditions Precedent to Doing Business in State; Exemptions) of this code as a result of claiming that credit. Provides that an investment made under this subchapter is a "Texas investment" for purposes of Subchapter A (Imposition and Collection of Taxes and Fees) of this chapter (Taxes and Fees) and Article 9.59 (Title Insurance Companies; Tax on Premiums) of this code. Art. 4.67. PREMIUM TAX CREDIT ALLOCATION CLAIM FORM. Provides that a premium tax credit allocation claim must be prepared and executed by a certified investor on a form provided by the comptroller. Provides that the certified capital company must file the claim with the comptroller not later than August 17, 2000. Provides that the premium tax credit allocation claim form must include an affidavit of the certified investor under which the certified investor becomes legally bound and irrevocably committed to make an investment of certified capital in a certified capital company in the amount allocated even if the amount allocated is less than the amount of the claim, subject only to the receipt of an allocation under Article 4.69. Prohibits a certified investor from claiming a premium tax credit under Article 4.66 for an investment that has not been funded, even if the certified investor has committed to fund the investment. Art. 4.68. TOTAL LIMIT ON CREDITS. Authorizes the total amount of certified capital for which premium tax credits may be allowed for all years in which premium tax credits are allowed is $100 million. Prohibits the total amount of certified capital for which premium tax credits may be allowed for all certified investors from exceeding the amount that would entitle all certified investors in certified capital companies to take total credits of $10 million in a year. Prohibits a certified capital company and its affiliates from filing premium tax credit allocation claims in excess of the maximum amount of certified capital for which premium tax credits may be allowed as provided in this article. Art. 4.69. PRO RATA ALLOCATION OF CREDITS. (a) Provides that this article applies only if the total premium tax credits claimed by all certified investors exceeds the total limits on premium tax credits established by Article 4.68. (b) Requires the comptroller to allocate the total amount of premium tax credits allowed under this subchapter to certified investors in certified capital companies on a pro rata basis in accordance with this article. (c) Requires the pro rata allocation for each certified investor to be the product of: _a fraction, the numerator of which is the amount of the premium tax credit allocation claim filed on behalf of the investor and the denominator of which is the total amount of all premium tax credit allocation claims filed on behalf of all certified investors; and _the total amount of certified capital for which premium tax credits may be allowed under this subchapter. (d) Provides that if, as a result of the pro rata allocation of premium tax credits under Subsection (c), certified investors in any certified capital company that submitted premium tax credit allocation claims would not be allocated at least $7.5 million in premium tax credits for all years for which credits are allowed, the comptroller: _is prohibited from making any allocation to the certified investors of the certified capital company that would receive the lowest pro rata allocation and that company is prohibited from continuing to operate as a certified capital company and that company's certification under this subchapter terminates; _is required to continue to apply the allocation formula established under Subsection (c), without considering the premium tax credit allocation claims filed on behalf of the certified investors in the company that was denied an allocation under this subsection; and _is required to continue application of the allocation formula, as provided by this subsection, until the allocation process results in the allocation of at least $7.5 million in premium tax credits to the certified investors of each company receiving an allocation under this article. (e) Requires the comptroller, not later than September 15, 2000, to notify each certified capital company of the amount of tax credits allocated to each certified investor. Requires each certified capital company to notify each certified investor of their premium tax credit allocation. (f) Provides that if a certified capital company does not receive an investment of certified capital equaling the amount of premium tax credits allocated to a certified investor for which it filed a premium tax credit allocation claim before the end of the 10th business day after the date of receipt of notice of allocation, the company is required to notify the comptroller by overnight common carrier delivery service and that portion of capital allocated to the certified investor shall be forfeited. Requires the comptroller to reallocate the forfeited capital among the certified investors in the other certified capital companies that originally received an allocation so that the result after reallocation is the same as if the initial allocation had been performed without considering the premium tax credit allocation claims that were subsequently forfeited. (g) Prohibits the maximum amount of certified capital for which a premium tax credit allocation may be allowed on behalf of any one certified investor and its affiliates, whether by one or more certified capital companies, from exceeding $2 million a year. Art. 4.70. TREATMENT OF CREDITS AND CAPITAL. Authorizes the certified capital, in any case under this code or another insurance law of this state in which the assets of a certified investor are examined or considered, to be treated as an admitted asset, subject to the applicable statutory valuation procedures. Art. 4.71. IMPACT OF TAX CREDITS CLAIMED BY A CERTIFIED INVESTOR ON INSURANCE RATES. Provides that the certified investor is not required to reduce the amount of premium tax included by the investor in connection with ratemaking for any insurance contract because of a reduction in the investor's Texas premium tax derived from the credit granted. Art. 4.72. TRANSFERABILITY OF CREDIT. Authorizes a certified investor to transfer or assign premium tax credits to the specified entities. Requires the comptroller to adopt rules to facilitate the transfer or assignment of premium tax credits. Authorizes the investor to transfer or assign premium tax credits only in compliance with the rules. Provides that the transfer or assignment does not affect the schedule for taking the premium tax credit. Art. 4.73. PROMOTION. Requires the Texas Department of Economic Development to promote the program established under this subchapter in the Business and Community Economic Development Clearinghouse. Art. 4.74. REPORT TO LEGISLATURE. Requires the comptroller to prepare a biennial report with respect to results of the implementation of this subchapter. Sets forth information that the report must include. Requires the comptroller to file the report with the governor, the lieutenant governor, and the speaker of the house of representatives not later than December 15 of each even-numbered year. SECTION 2. Amends Section 6, Article 5.131, Insurance Code, to provide that each rate resulting from the reduction required under Section 3 (Rate Rollback) of this article remains in effect until January 1, 2003, rather than 2001. SECTION 3. Redesignates Articles 4.01-4.08, 4.10, 4.11, 4.11A, 4.11B, 4.11C, 4.12, and 4.17-4.19, Insurance Code, as Chapter 4A, Insurance Code, and adds a new subchapter heading, as follows: SUBCHAPTER A. IMPOSITION AND COLLECTION OF TAXES AND FEES SECTION 4. Requires the comptroller to adopt the rules necessary to implement Subchapter B, Chapter 4, Insurance Code, not later than the 60th day after the effective date of this Act. Requires the comptroller to begin to accept applications for certification as a certified capital company on the 90th day after the effective date of this Act. Prohibits a certified investor from making an investment with a certified capital company under Subchapter B, Chapter 4, Insurance Code, before January 1, 2001. SECTION 5. Provides that this act does not take effect unless the legislature appropriates money specifically for the purpose of administering this Act. SECTION 4.Emergency clause. Effective date: upon passage.