AN ACT Relating to economic development; adding a new section to chapter 48.14 RCW; adding a new chapter to Title 43 RCW; prescribing penalties; and providing an expiration date.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION. Sec. 1. This chapter may be known and cited as the Washington partnership for innovation act.

NEW SECTION. Sec. 2. The legislature finds that the diversification of the state's economic base and the reduction of unemployment is one of its highest priorities. The state economy is highly susceptible to fluctuations in the United States economy and is experiencing its highest rates of unemployment since the great depression. One of the key avenues to diversify the economy is to assist in the development of businesses and the generation of new products which can be traded outside of the state's borders. Entrepreneurs represent a valuable state resource which, if provided capital and technical assistance, can contribute to long-term job generation. The private sector has substantial expertise to identify emerging companies and potential marketable products. The state finds it a public purpose to work as a partner with private investors to locate and provide financial assistance to worthy entrepreneurs for early state development of new products and companies.

NEW SECTION. Sec. 3. As used in this chapter, the following terms have the meanings indicated unless the context clearly requires otherwise.

(1) "Department" means the department of revenue.

(2) "Eligible enterprise" means a small business that is primarily located and operated in Washington and that is or proposes to be engaged in this state in research and development, in commercial product development, or in manufacturing, technology, or the production of goods and services with high potential for expansion and trade outside the state's borders.

(3) "Seed capital corporation" means any private corporation, licensee under the federal small business investment act of 1958 (15 U.S.C. Sec. 661 et seq.), or other private entity whose resources are primarily dedicated to investing in product development, managing venture capital funds, and developing new successful companies and that shows net worth in excess of five hundred thousand dollars.

(4) "Qualified security" means any note, stock, treasury stock bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, preorganization certificate or subscription, transferable share, investment contract, certificate of deposit for a security, certificate of interest or participation in a patent or application therefor, or in royalty or other payments under such a patent or application, or, in general, any interest or instrument commonly known as a "security" or any certificate for, receipt for, guarantee of, or option, warrant, or right to subscribe to or purchase any of the foregoing.

(5) "Seed capital" means financing that is provided for the initial development, refinement, testing, marketing, and commercialization of a product, service, or process to an enterprise with a high potential for long-term commercial sales and that is provided before any substantial commercial sales have been made by the enterprise of the product or service being developed.

(6) "Small business" means any business that has fewer than fifty full-time employees or its equivalent.

NEW SECTION. Sec. 4. This chapter shall serve as a resource to entrepreneurs to provide needed seed capital in the early development stages of a product or service. The primary emphasis of this chapter is to generate new, successful commercial products in cases where capital is currently not adequately available. It is the intent of this chapter to provide companies with a source of seed capital which shall be invested for a minimum of three years. This chapter shall encourage the investment in companies and innovators in all of the geographic regions in the state.

NEW SECTION. Sec. 5. To be eligible for a tax credit, the seed capital corporation shall comply with the requirements of this section.

(1) The purpose of the seed capital corporation shall be to raise funds to be used to provide seed capital to eligible enterprises in a manner that will encourage capital investment in the state, encourage the establishment or expansion of business and industry, provide additional jobs within the state, and encourage research and development activities in the state. No seed capital funds may be used for real estate investments.

(2) The seed capital corporation shall be registered in the state of Washington as a Washington corporation.

(3) The seed capital corporation shall provide financing to eligible enterprises. The seed capital corporation may establish and regulate terms and conditions, consistent with this chapter, with respect to financing. In no event may the seed capital corporation's investment in any one eligible enterprise or its subsidiaries exceed two hundred fifty thousand dollars. The financing may include any combination of qualified securities, but no more than twenty percent of the stated capital of the seed capital corporation may be invested in any one eligible enterprise.

(4) No business may be transacted or indebtedness incurred by the seed capital corporation, except as is incidental to the seed capital corporation's organization or to obtaining subscriptions to or payment for its shares, until the seed capital corporation receives consideration for such shares equal to at least five hundred thousand dollars, which amount is the initial stated capital of the seed capital corporation.

(5) All consideration received from the sale of shares shall be placed in an escrow account in a bank or trust company doing business in this state, except that up to ten percent of the proceeds may be withheld for use in activities incidental to the seed capital corporation's organization or to obtaining subscriptions to or payment for its shares.

(6) If at any time within one year of the issuance of the certificate of incorporation of the seed capital corporation its capital equals at least five hundred thousand dollars, or such greater amount established by the articles of incorporation or bylaws of the seed capital corporation, the funds held in escrow pursuant to subsection (5) of this section shall be released to the seed capital corporation for use and disposition according to its articles of incorporation and bylaws.

(7) If within one year of the issuance of the certificate of incorporation of the seed capital corporation, its stated capital has not at any time equaled at least five hundred thousand dollars, or such greater amount established by the articles of incorporation or bylaws of the seed capital corporation, its certificate of incorporation shall be terminated, the seed capital corporation must be dissolved, and all funds held in escrow pursuant to subsection (5) of this section, and all other remaining funds must be returned to the investors in proportion to their investments.

(8) Prior to any investment in the seed capital corporation, the seed capital corporation shall make written disclosure of the provisions contained in subsections (4) through (7) of this section to the potential investor.

NEW SECTION. Sec. 6. (1) At the request of a seed capital corporation, the department shall certify whether a business meets the requirements of an eligible enterprise. All businesses shall receive certification as eligible by the department before a seed capital corporation may invest in them. The department shall establish the necessary forms and procedures for certifying eligible enterprises. Within fourteen days of making any investment, the seed capital corporation shall give notice of the investment to the department. The notice shall contain the name of the business in which the seed capital corporation invested, the dollar amount of the investment, and the date on which the investment was made.

(2) The department shall notify the attorney general of any investment made by a seed capital corporation in a business not certified under subsection (1) of this section. The attorney general shall assess a civil penalty for the investment and collect the civil penalty by a civil proceeding in any appropriate court. The civil penalty shall be equal to twenty-five percent of the amount invested by the seed capital corporation in the business not certified under subsection (1) of this section.

NEW SECTION. Sec. 7. A new section is added to chapter 48.14 RCW to read as follows:

(1) Subject to the limitations provided in this section, a tax credit is allowed against any taxes imposed upon any insurer under RCW 48.14.020(1) and (2) equal to the amount that is invested by the insurer in a seed capital corporation and that is used as seed capital in accordance with chapter 43.-- RCW (sections 1 through 6 and 8 through 13 of this act).

(2) The maximum amount of tax credit for taxes owed under RCW 48.14.020(1) and (2) is the difference between the amount of tax owed by the insurer under RCW 48.14.020(1) and (2), including any amount that may be credited pursuant to this section, and the amount of tax that would be owed by the insurer under RCW 48.14.020(1) and (2), including any amount that may be credited pursuant to this section, if the tax rate under that section were one and nine-tenths percent of the taxable amount: PROVIDED, That any insurer which is subject to RCW 48.14.040 shall be allowed a tax credit under this section in an amount not to exceed the difference between the amount of tax paid without a tax credit pursuant to this section and the amount of tax that would be paid if the tax rate paid by the insurer were reduced by fifteen one-hundredths percent.

(3) The insurer is eligible for a tax credit under this section on the date the seed capital corporation receives full consideration for the investment purchased by the insurer in the seed capital corporation. If the seed capital corporation must return the insurer's investment pursuant to section 5(7) of this act, any tax credit taken by any insurer for the investment under this section, plus interest, shall be paid to the department of revenue; however, the taxpayer is entitled to retain a percentage of the tax credit equal to the percentage of the taxpayer's investment not returned by the seed capital corporation, up to a maximum of ten percent.

(4) Tax credits approved under this section may be used by the insurer against any taxes imposed upon the insurer under RCW 48.14.020 (1) and (2) after the date of the investment upon which the credit is based. All of the credit shall be used within three years of the date of the investment, provided that the investment made under this section is still invested in the enterprise.

(5) Within thirty days of the date on which an investment in a seed capital corporation is purchased, the seed capital corporation shall file with the department of revenue and provide to the insurer completed forms prescribed by the department which show as to each investment in the seed capital corporation the following:

(a) The name, address, and identification number of the insurer who purchased the investment;

(b) The dollar amount paid for the investment by the insurer; and

(6) The insurer shall claim the tax credit in the manner prescribed by the department of revenue and include with that submission a copy of the form issued by the seed capital corporation evidencing the insurer's investment in the seed capital corporation.

(7) This section shall expire July 1, 1994.

NEW SECTION. Sec. 8. An application for a tax credit pursuant to section 7 of this act shall be filed with the department by the insurer and the seed capital corporation. The application shall include the following information:

(1) A statement that the investment is in the form of a qualified security;

(2) A statement that the enterprise has or will raise funds for seed capital in an amount equal to or greater than the amount of the investment for which credit is granted under section 7 of this act;

(3) A statement that the investment in any one enterprise does not exceed two hundred thousand dollars during any one year;

(4) A statement that the enterprise, through its course of development, has no access to adequate seed capital by virtue of the early stage of the product, service, or process development and is in need of seed capital to improve the commercial value of the product;

(5) A statement that the enterprise has not generated more than one million dollars in gross commercial sales in the current calendar year or previous calendar years from the product or service in which an investment is sought, excluding sales from prototypes or market testing;

(6) A statement that the investment in the enterprise is for a Washington company;

(7) A statement that the investment will not result in the seed capital corporation acquiring a controlling interest in the enterprise, except upon the occurrence of insolvency, bankruptcy, or dissolution of the enterprise.

NEW SECTION. Sec. 9. The department shall report annually by January 1 to the governor and legislature on tax credits and seed capital investments made under this chapter including but not limited to the amount of investments made, the amount of tax credits granted, types of products invested in, and the locations of the enterprises.

NEW SECTION. Sec. 10. Decisions on investments in qualified securities shall at all times be within the sole discretion of the seed capital corporation.

NEW SECTION. Sec. 11. No credit may be granted for investments made after July 1, 1991.

NEW SECTION. Sec. 12. The department shall adopt rules to implement this chapter.

NEW SECTION. Sec. 13. This chapter shall expire July 1, 1994.

NEW SECTION. Sec. 14. Sections 1 through 6 and 8 through 13 of this act constitute a new chapter in Title 43 RCW.