SENATE BILL REPORT

EHB 1423

BYRepresentatives Day, Cantwell, Wineberry, Schoon, Rasmussen, Doty, Kremen, McLean, Rayburn, Jesernig, Ferguson, Jacobsen, Rector and P. King 

Authorizing the creation of local seed capital pools.

House Committe on Trade & Economic Development

Senate Committee on Economic Development & Labor

Senate Hearing Date(s):March 27, 1989; March 31, 1989

Majority Report:  Do pass as amended.

      Signed by Senators Lee, Chairman; Anderson, Vice Chairman; McMullen, Murray, Saling, Smitherman.

Senate Staff:Jack Brummel (786-786-7428)

                  March 31, 1989

AS REPORTED BY COMMITTEE ON ECONOMIC DEVELOPMENT & LABOR, MARCH 31, 1989

BACKGROUND:

The availability of seed and start-up capital is critical for companies to commercialize new products and for the creation of new business enterprises by entrepreneurs.  Many financial institutions, however, are reluctant to provide start-up financing because the start-ups do not meet the financial institution's basic underwriting criteria.  Most business start-ups are undercapitalized, have an insufficient cash flow, and lack sufficient collateral.  Although United States Small Business Administration loan guarantees are available for business start-ups, many entrepreneurs cannot meet the requirements associated with the federal loan programs.

It is suggested that the establishment of seed capital pools at the local level may enable new enterprises to be successfully created and help finance new product development.

SUMMARY:

A city or county may establish a local seed capital pool to finance new enterprises or assist in the development of new products.  The finance assistance may be provided in the form of loans or by purchasing equity in the small business.

Funding for the local seed capital pools is to come entirely from private donations.  Each utility providing either water distribution or sewerage collection services, upon request of the city or county legislative authority, must include in its billings printed material which allows the customer to make monthly contributions to the local seed capital pool.  A utility is authorized to charge the local seed capital pool a fee of up to 7 percent of the funds collected in order to defray the utility's costs of collecting and processing the donations.

In order to be eligible for funding from a local seed capital pool, a small business must be primarily located and operated in the city or county, and must be engaged in research and development, manufacturing, technology, or the production of goods and services with high potential for expansion and trade outside the state. A small business is defined as having less than 50 full-time employees.  The legislative authority of the city or county is required to establish procedures for determining which businesses qualify for assistance either by ordinance or resolution.

Local seed capital pools must be governed by a seven member board of directors appointed by the local legislative authority.  The board of directors of an industrial development corporation may be designated as the board of directors of the local seed capital pool.  Appointees to the board of directors must have expertise in small business, new business development, and business finance.

A local seed capital pool may not be created by both a city and a county within the same county.  A city and county may enter into an interlocal agreement to operate a local seed capital pool.

A local seed capital pool may purchase qualified securities of eligible businesses.  Any stock, note, or other instrument commonly known as a security constitutes an eligible investment.  No seed capital funds may be used for real estate investments.

Appropriation:    none

Revenue:    none

Fiscal Note:      available

SUMMARY OF PROPOSED SENATE AMENDMENT:

The Industrial Development Corporation Act of 1963 is amended.  The requirement that financial institutions be members and have voting control is eliminated.  Business and industrial development corporations' (BIDCO) investments are to be in firms with a majority of their workforce in Washington State.

A certification requirement prior to approval of corporate documents is added.  Such certification may be revoked if the BIDCO fails to act in a sound manner or fails to comply with the intent of the act to make capital available to moderate risk firms.

Fewer people are required to form a corporation and they are given greater flexibility in operation.  The amount of capital necessary to start a BIDCO is $1 million in equity and $1 million in lendable funds.  Detailed reporting requirements on BIDCO performance are required.  Reserve requirements for BIDCOs may be established by the Supervisor of Banking.

The Department of Trade and Economic Development provides technical assistance to BIDCOs in formation.  BIDCOs may contract with the department to deliver management assistance to firms.  BIDCOs contracting with the department will enter first-source hiring agreements and one half of their firms will be in distressed areas.

Investors are given credit against state B&O, utility, or insurance premium taxes for their investment in a BIDCO.  The tax credits available to investors start at 25 percent in fiscal year 1990 and decline by 5 percent per year to a 0 percent tax credit in 1995.  The cumulative total of B&O tax credits available to private investors in BIDCOs is capped at $4 million.

Investment in BIDCOs by insurance companies, banks, savings and loan associations and public utilities is subject to control by the appropriate regulatory bodies.

The Legislative Budget Committee will evaluate the BIDCO program by January 1, 1992 and January 1, 1994 and assess its accomplishments and its benefits and costs to the state.

Senate Committee - Testified: Representative Bill Day, prime sponsor