HOUSE BILL REPORT

HB 973

BYRepresentatives Day, Schoon, Vekich, Beck, McMullen, Walker, Hargrove, Amondson, Rasmussen, Fuhrman, Wineberry, Rayburn, Jesernig, R. King, Brough, P. King, May, Doty, Ferguson, Moyer, Bumgarner, Holm and Todd

Providing seed capital for entrepreneurs.

House Committe on Trade & Economic Development

Majority Report:     Do pass.  (16)

     Signed by Representatives Wineberry, Vice Chair; Amondson, Beck, Cantwell, Doty, Grant, Hargrove, Holm, Kremen, McLean, McMullen, Moyer, Rasmussen, Schoon, B. Williams and J. Williams.

Minority Report:     Do not pass.  (3)

     Signed by Representatives Vekich, Chair; Belcher and Braddock.

House Staff:Stephen Hodes (786-7092)

AS REPORTED BY COMMITTEE ON TRADE & ECONOMIC DEVELOPMENT

MARCH 2, 1987

BACKGROUND:

The rate at which new enterprises are created in a regional economy and the survival rate of new firms are among the most significant factors differentiating those state economies which have performed well in recent years and those which have not.  Job creation is a key factor in regional economic health in the current period, and the start-up of new enterprises and the introduction of new products into commercial markets are major sources of new employment opportunities.

One of the most important factors for the development of new enterprises is the availability of the appropriate forms of capital at the appropriate time.  In the 1970s, the availability of venture capital for equity investments in new firms was geographically restricted to only a few states in the country.  Venture capital became more widely available in many areas in the 1980s, including Washington state, in part as a result of more generous tax treatment afforded to capital gains. Venture capital investments tended to be heavily concentrated in high technology firms, while less technology-intensive ventures found capital more difficult to obtain.  There has been a growing tendency toward on the part of venture capital firms and partnerships toward greater risk aversion, and a rapid growth in venture capital investments to finance leveraged corporate acquisitions and buy-outs.  The Tax Reform Act of 1986 may have significant negative impacts on the level of investment in venture capital as a result of the lower return on capital gains resulting from the provisions of the act.

There has also been a widespread shortage of funds for initial financing for the initial stages of new enterprises and for financing new product development.  Such financing involves more risk than venture capital, which is most often provided to firms with longer track records requiring a second major capital infusion to increase their scale of production for broader commercialization.  The most important source of funds for new enterprise start-ups is the savings of family and friends.  In general, there is very little financing available for the high risk and extremely patient seed and start-up capital market which is critical for long-term job creation in state and local economies.

SUMMARY:

The Washington Partnership for Innovation Act is established.  An alternative tax rate is provided for insurance companies who invest through seed capital corporations in qualified investments in start-up firms and new product development.  A seed capital corporation is a private corporation whose resources are primarily dedicated to investing in product development, managing venture capital funds, and in the development of new successful companies with a net worth exceeding $500,000. Seed capital investments are encouraged in all geographic regions of the state.  Investments must be maintained for a minimum of three years.

A tax credit is allowed against the insurance premium tax authorized in 48.14.020 RCW for the full investment in a seed capital corporation.  The maximum tax credit allowed is the difference between a tax rate of 2.05 percent and 1.9 percent on insurance premiums for all insurers. In order to receive a tax credit, the seed capital corporation must request the Department of Revenue to certify whether a business it is proposing to invest in meets the requirements of an eligible enterprise.  Penalties for investments in firms not certified are specified.

The Department of Revenue shall grant the tax credit within thirty days if it meets the following criteria:

o Investments must be the form of qualified securities;

o An equal or greater amount of capital must be raised to match the funds against which the tax credit is applied;

o Tax credit investment in an enterprise must not exceed $200,000 in any one year;

o Enterprises must not have access to adequate seed capital and must be in need of seed capital to improve the commercial value of the product;

o Enterprises must not have generated more than one million dollars in gross commercial sales in the current or previous calendar year(s) from the product or service in which the investment is made, excluding prototype and market testing;

o Investments must be in Washington companies;

o Investments must not allow the seed capital company to acquire a controlling interest in a firm except upon insolvency, bankruptcy or dissolution.

No credits shall be granted for investments made after July 1, 1991.  The Department of Revenue shall report annually to the governor and legislature on the tax credits utilized under the chapter.  The chapter terminates July 1, 1994.

Fiscal Note:    Requested February 25, 1987.

House Committee ‑ Testified For:     Representative Day.

House Committee - Testified Against: None Presented.

House Committee - Testimony For:     Good tool for local government to encourage investment in new goods and services.

House Committee - Testimony Against: None Presented.