BILL REQ. #:  H-1112.1 

Read first time 01/25/2007.   Referred to Committee on Community & Economic Development & Trade.

     AN ACT Relating to the creation of certified capital companies to promote economic development through investment in start-up and emerging Washington businesses; adding a new section to chapter 48.14 RCW; adding a new chapter to Title 43 RCW; creating a new section; and declaring an emergency.

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

NEW SECTION.  Sec. 1   (1) Washington has many world class companies within its borders producing family wage jobs and benefits. Growing and retaining small businesses that are currently located within the state are the most expedient forms of economic development. Small businesses employ over fifty percent of nonfarm private sector employees in the state, and are an important source of new job creation. Washington continues to be home to entrepreneurs and innovative technologies. However, according to the United States small business administration, only two-thirds of small businesses are still operating after three years. The future success and development of many of the state's emerging businesses depends on access to capital.
     (2) The legislature finds that new sources of prudently targeted private equity investments would promote economic development by strengthening the local venture capital infrastructure, increasing access to capital for local companies, supporting emerging businesses, and creating jobs for Washington citizens. Targeted venture capital has the potential to hasten the transformation of research and development concepts into commercially viable products and services, expedite the expansion of small Washington firms, enlarge the state's tax base, and develop these businesses into significant contributors to the Washington economy. This act is intended to assist small start-up enterprises to succeed in their business and to contribute to the future of Washington.

NEW SECTION.  Sec. 2   DEFINITIONS. The following definitions apply to this chapter and section 3 of this act:
     (1) "Affiliate" means:
     (a) Any person who, directly or indirectly, beneficially owns, controls, or holds power to vote fifteen percent or more of the outstanding voting securities or other voting ownership interests of the certified capital company or insurance company;
     (b) Any person, fifteen percent or more of whose outstanding voting securities or other voting ownership interests are directly or indirectly beneficially owned, controlled, or held with power to vote by the certified capital company or insurance company;
     (c) Any person who, directly or indirectly, controls, is controlled by, or is under common control with the certified capital company or insurance company;
     (d) A partnership or limited liability company in which the certified capital company or insurance company is a general partner, manager, or managing member; or
     (e) Any person who is an officer, director, employee, or agent of the certified capital company or insurance company, or an immediate family member of such officer, director, employee, or agent.
     (2) "Allocation date" means the date on which the certified capital is allocated by the department to the investors of a certified capital company under section 5 of this act.
     (3) "Certified capital" means an amount of cash that:
     (a) Is invested by a certified investor in a certified capital company; and
     (b) Fully funds the purchase price of either or both a certified investor's equity interest in the certified capital company or a qualified debt instrument issued by the certified capital company.
     (4) "Certified capital company" means a partnership, corporation, trust, or limited liability company, organized on a for-profit basis, that: (a) Has its principal office located or is headquartered in Washington; (b) has as its primary business activity the investment of cash in qualified businesses; and (c) is certified by the department as meeting the provisions of this act.
     (5) "Certified investor" means any insurer as defined in RCW 48.01.050 that invests certified capital pursuant to an allocation by the department under section 5 of this act.
     (6) "Department" means the department of community, trade, and economic development.
     (7) "Director" means the director of community, trade, and economic development.
     (8) "Person" means any natural person or entity, including but not limited to a corporation, general or limited partnership, trust, or limited liability company.
     (9)(a) "Qualified business" means a business that is independently owned and operated and meets the requirements of (a)(i) through (vi) of this subsection:
     (i) It is headquartered in Washington, its principal business operations are located in Washington, and at least fifty percent of its employees are in Washington;
     (ii) That has no more than one hundred employees;
     (iii) It is unable to obtain conventional financing, which means that the business has failed in an attempt to obtain funding for a loan from a bank or other commercial lender, or that the business cannot reasonably be expected to qualify for such financing under the standards of commercial lending;
     (iv) Is not predominantly engaged in: (A) Professional services provided by accountants, doctors, or lawyers; (B) banking or lending; (C) real estate development; (D) insurance; (E) oil and gas exploration; (F) direct gambling activities; (G) making loans to or investments in a certified capital company or an affiliate;
     (v) Is not a franchise of and has not been organized by a certified capital company or an affiliate of a certified capital company; and has no financial relationship with the certified capital company or any affiliate of the certified capital company prior to the certified capital company's first qualified investment in the business and will not have any such relationship after the initial qualified investment other than as created by that investment and any subsequent investments in the business made by the certified capital company or its affiliates;
     (vi) Any business that is classified as a qualified business at the time of the first qualified investment in the business shall remain classified as a qualified business, may receive continuing qualified investments from any certified capital company, and such continuing investments shall be qualified investments even though the business may not meet the definition of a qualified business at the time of such continuing investments; except the business shall not be eligible to receive further qualified investments if:
     (A) It has relocated its headquarters or principal business operations outside of Washington; or
     (B) Less than seventy-five percent of the funds expended from its prior qualified investments have been used to establish and support its Washington operations, except for advertising, promotions, and sales purposes, which may be conducted outside of Washington.
     (b) A qualified business shall also include a qualified microenterprise development organization that also meets the requirements of (a)(v) of this subsection.
     (c) An entity shall be considered "independently owned and operated" unless more than fifty percent of the entity's equity interests are owned directly or indirectly by another business entity except if such other business entity itself meets the requirements of being a qualified business.
     (10) "Qualified debt instrument" means a debt instrument issued by a certified capital company, at par value or a premium, with an original maturity date of at least five years from the date of issuance, a repayment schedule which is not faster than a level principal amortization over five years, and interest, distribution, or payment features which are not related to the profitability of the certified capital company or the performance of the certified capital company's investment portfolio. In addition, the qualified debt instrument shall not allow for the cash prepayment of interest on the debt instrument unless the qualified debt instrument or the issuer thereof is in default with respect to the terms of the investment and must be rated within the top two rating categories of a rating agency that has been designated as a nationally recognized statistical rating agency by the United States securities and exchange commission.
     (11) "Qualified distribution" means any distribution or payment by a certified capital company in connection with the following, provided that no distribution or payment permitted by (a) or (b) of this subsection be made to a certified investor or an affiliate of a certified investor:
     (a) Reasonable costs and expenses of forming, syndicating, and organizing the certified capital company, including reasonable and necessary fees paid for professional services, including, but not limited to, legal and accounting services, related to the formation of the certified capital company, and the costs of financing and insuring the obligations of the certified capital company so long as, at the time the certified capital company initially receives its investment of certified capital from its certified investors, the certified capital company has cash equal to at least fifty percent of the amount of certified capital such certified capital company initially received as investment from its certified investors;
     (b) Reasonable costs and expenses of managing and operating the certified capital company, including any management fee, which in the aggregate must not exceed two percent of certified capital.
     (c) Reasonable and necessary fees in accordance with industry custom for professional services, including but not limited to legal and accounting services, related to the operation of the certified capital company; except that such professional services shall not be construed to include lobbying or governmental relations;
     (d) Any increase or projected increase in federal or state taxes, including penalties and related interest, of the equity owners of a certified capital company resulting from the earnings or other tax liability of the certified capital company to the extent that the increase is related to the ownership, management, or operation of a certified capital company;
     (e) Payments to debt holders of a certified capital company may be made without restriction with respect to repayments of principal and interest on indebtedness owed to them by a certified capital company, including indebtedness of the certified capital company on which certified investors earned tax credits. A debt holder that is also a certified investor or equity holder of a certified capital company may receive payments with respect to such debt without any restriction whatsoever.
     (12) "Qualified investment" means the investment of cash by a certified capital company in a qualified business or a qualified microenterprise development organization for the purchase of any debt, debt participation, equity, or hybrid security, of any nature and description whatsoever, including a debt instrument or security which has the characteristics of debt but which provides for conversion into equity or equity participation instruments such as options or warrants. Any qualified investment in the form of a debt instrument, including those owned through debt participations, must have a final stated maturity of at least two years from the date of issuance and a repayment schedule that is no faster than level principal amortization over two years, however, this does not prohibit (a) the qualified business from voluntarily prepaying a qualified investment at any time; or (b) the certified capital company from exercising any of its rights as a creditor, including the acceleration of the debt owed upon a default by the qualified business under the terms of the debt instrument or upon the acquisition, merger, or the sale of all or substantially all of the assets of the qualified business. With respect to an investment in a qualified microenterprise development organization, a certified capital company may only make such investment after the structure, terms, conditions and use of proceeds of such investment has been approved by the department.
     (13) "Qualified microenterprise development organization" means a community development corporation or a nonprofit development organization that has filed a certification with the department that:
     (a) The organization is headquartered in Washington;
     (b) The organization or its principals have a minimum of two years' experience in providing access to capital and business education services to entrepreneurs who are low income at point of intake; and
     (c) Capital investments from the certified capital company will only be used to provide for the capital needs of businesses licensed in Washington.
     (14) "State premium tax liability" means any liability incurred by an insurance company under the provisions of RCW 48.14.020 or in the case of a repeal or a reduction by the state of the liability imposed by RCW 48.14.020, any other tax liability imposed upon an insurance company by the state.

NEW SECTION.  Sec. 3   A new section is added to chapter 48.14 RCW to read as follows:
     PREMIUM TAX CREDIT. (1) Any certified investor who invests certified capital pursuant to an allocation of tax credits under section 5 of this act shall, at the time of investment, earn a vested tax credit against the certified investor's state premium tax liability due under RCW 48.14.020, equal to seventy-five percent of the certified investor's investment of certified capital. A certified investor shall be entitled to take the vested tax credit according to the following schedule:
     (a) Year 2008 - Twenty percent of the certified investor's investment of certified capital.
     (b) Year 2009 - Twenty percent of the certified investor's investment of certified capital.
     (c) Year 2010 - Twenty percent of the certified investor's investment of certified capital.
     (d) Year 2011 - Five percent of the certified investor's investment of certified capital.
     (e) Year 2012 - Five percent of the certified investor's investment of certified capital.
     (f) Year 2013 - Five percent of the certified investor's investment of certified capital.
     In any tax year, a certified investor shall also be entitled to take any amount of unused tax credits carried forward pursuant to this section. Credits may be used in connection with both final payments and prepayments of a certified investor's state premium tax liability but may not be used in connection with prepayments until the first prepayment of its 2009 state premium tax liability due on June 15, 2009.
     (2) A certified investor taking the credit under this section is subject to all the requirements of chapter 82.32 RCW. The tax credit that may be applied against state premium tax liability in any one tax year may not exceed the state premium tax liability of the certified investor for such tax year. All unused tax credits against state premium tax liability may be carried forward indefinitely and used in any subsequent year until the tax credits are utilized in full.
     (3) A certified investor claiming a tax credit against state premium tax liability earned through an investment in a certified capital company shall not be required to pay any additional retaliatory tax levied pursuant to RCW 48.14.040 as a result of claiming that tax credit.
     (4) A certified investor is not required to reduce the amount of tax pursuant to the state premium tax liability included by the certified investor in connection with ratemaking for any insurance contract written in Washington because of a reduction in the certified investor's tax liability based on the tax credit allowed under this act.
     (5) If the taxes paid by a certified investor with respect to its state premium tax liability constitute a credit against any other tax which is imposed by Washington, the certified investor's credit against such other tax shall not be reduced by virtue of the reduction in the certified investor's tax liability based on the tax credit allowed under this act.
     (6) Decertification of a certified capital company shall cause the disallowance and the recapture of the credit allowed under subsection (1) of this section. The amount to be disallowed and recaptured shall be assessed as follows:
     (a) Decertification of a certified capital company within two years of its allocation date and prior to meeting the requirements of section 6(1)(a) of this act shall cause the disallowance of one hundred percent of the credit allowed under subsection (1) of this section and the tax for which the credit was used shall be immediately due.
     (b) Decertification of a certified capital company that has met all the requirements of section 6(1)(a) of this act but that subsequently fails to meet the requirements of section 6(1)(b) of this act shall cause the disallowance of seventy percent of the credit allowed under subsection (1) of this section and any portion of such credit in excess of thirty percent that was previously taken shall be immediately due.
     (c) Decertification of a certified capital company which, having met all the requirements of section 6(1) of this act, shall not cause the disallowance of any credits allowed under subsection (1) of this section nor the recapture of any portion of such credits that was previously taken.
     (d) If, after twelve years after its allocation date, a certified capital company has failed to invest at least one hundred percent, on a cumulative basis, of its certified capital in qualified investments, the percentage of distributions that the certified capital company shall be required to pay to the department under section 8(3) of this act shall increase prospectively to fifty percent.
     (7) Revocation of certification from a certified capital company, before the later of (a) the third anniversary of the allocation date of the certified capital company or (b) the date on which the certified capital company satisfies the requirements of section 6(1)(b) of this act, shall cause the disallowance of one hundred percent of the credits allowed under subsection (1) of this section and the tax for which the credit was given is immediately due.
     (8) A certified investor, or subsequent transferee, may only transfer credits earned under this act to an affiliate unless the state premium tax liability of the certified investor in the year immediately preceding the proposed transfer is less than seventy-five percent of the certified investor's state premium tax liability for the tax year in which it earned the vested premium tax credit. Any transfer or sale shall not affect the time schedule for claiming the premium tax credits. Any tax credits recaptured under this section shall be the liability of the certified investor that actually claimed the premium tax credits.

NEW SECTION.  Sec. 4   CERTIFICATION. (1) The department shall establish by rule the procedures for making an application to become a certified capital company.
     (2) An applicant is required to:
     (a) File an application with the department;
     (b) Pay a nonrefundable application fee in the amount of twenty thousand dollars as described in section 13 of this act at the time of filing the application, which the department shall deposit in the certified capital company revolving fund;
     (c) Have an equity capitalization at the time of seeking certification of five hundred thousand dollars or more in the form of unencumbered cash, marketable securities, or other liquid assets. The applicant shall submit as part of its application an audited balance sheet that contains an unqualified opinion of an independent certified public accountant issued not more than thirty-five days before the application date that states whether the applicant satisfies this equity capitalization requirement; and
     (d) Have at least two principals or at least two persons employed to manage the funds who have at least two years of money management experience in the venture capital industry.
     (3) The department may certify partnerships, corporations, trusts, or limited liability companies, organized on a for-profit basis, which submit an application to be designated as a certified capital company if such applicant is located, headquartered, and licensed or registered to conduct business in Washington, has as its primary business activity the investment of cash in qualified businesses and qualified microenterprise development organizations, and meets the other criteria set forth in this act.
     (4) The department shall review the organizational documents of each applicant for certification and the business history of each applicant, determine that the applicant has satisfied the requirements of this section, and determine that the officers and the board of directors, general partners, managers, or members are thoroughly acquainted with the requirements of this section, and have not been convicted of, or entered a plea of guilty or nolo contendere to, a crime against the laws of Washington or any other state or of the United States or any other country or government, involving a fraudulent act in connection with the operation of a certified capital company, or in connection with the performance of fiduciary duties in another capacity.
     (5) Any offering material involving the sale of securities of the certified capital company shall include the following statement:
     "By authorizing the formation of a certified capital company, the state does not necessarily endorse the quality of management or the potential for earnings of such company and is not liable for damages or losses to a certified investor in the company. Use of the word "certified" in an offering does not constitute a recommendation or endorsement of the investment by the director of the department of community, trade, and economic development. If any applicable provisions of the "certified capital company act" are violated, the state may require forfeiture of unused premium tax credits and repayment of used premium tax credits."
     (6) Within sixty days after the receipt of an application, the department shall issue the certification or refuse the certification and communicate in detail to the applicant the grounds for refusal, including suggestions for the removal of such grounds. The department shall begin accepting applications to become a certified capital company in the certified capital company program on January 30, 2008.
     (7)(a) No insurance company or affiliate of an insurance company shall, directly or indirectly:
     (i) Beneficially own, whether through rights, options, convertible interests, or otherwise, fifteen percent or more of the voting securities or other voting ownership interest of a certified capital company;
     (ii) Manage a certified capital company; or
     (iii) Control the direction of investments for a certified capital company.
     (b) A certified capital company may obtain one or more guaranties, indemnities, bonds, insurance policies, or other payment undertakings for the benefit of its certified investors from any entity; except that in no case shall more than one certified investor of such certified capital company on an aggregate basis with all affiliates of such certified investor be entitled to provide such guaranties, indemnities, bonds, insurance policies, or other payment undertakings in favor of the certified investors of the certified capital company and its affiliates in Washington.
     (c) This subsection shall not preclude a certified investor, insurance company, or other party from exercising its legal rights and remedies, including, without limitation, interim management of a certified capital company, in the event that a certified capital company is in default of its statutory obligations or its contractual obligations to such certified investor, insurance company, or other party, or from monitoring the certified capital company to ensure its compliance with section 6 of this act or disallowing any investments that have not been approved by the department under section 6(2) of this act.
     (8) The department may contract with an independent third party to review, investigate, and certify that the applications comply with the provisions of this section.

NEW SECTION.  Sec. 5   AGGREGATE LIMITATIONS ON TAX CREDITS--ALLOCATION. (1) The aggregate amount of certified capital for which tax credits will be allocated to all certified investors under this act shall not exceed the amount that would entitle all certified investors of certified capital companies to take aggregate tax credits of one hundred million dollars. No certified capital company, on an aggregate basis with its affiliates, may file tax credit allocation claims that exceed the maximum amount of certified capital for which tax credits will be allocated as provided in this subsection (1).
     (2) Tax credits shall be allocated to certified investors in the order that the tax credit allocation claims are filed with the department. All tax credit allocation claims filed with the department on the same day shall be treated as having been filed contemporaneously. Any tax credit allocation claims filed with the department prior to the tax credit allocation claim filing date will be deemed to have been filed on the tax credit allocation claim filing date. The department will set the initial tax credit allocation claim filing date to be ninety days after the department begins to accept applications under section 4 of this act.
     (3) In the event that two or more certified capital companies file tax credit allocation claims with the department on behalf of their respective certified investors on the same day, and the aggregate amount of such tax credit allocation claims exceeds the aggregate limit of tax credits under this section or such lesser amount of tax credits that remain unallocated on such day, then the tax credits shall be allocated among the certified investors who filed on that day on a pro rata basis with respect to the amounts claimed. The pro rata allocation for any one certified investor shall be the product obtained by multiplying a fraction, the numerator of which is the amount of the tax credit allocation claim filed on behalf of such certified investor and the denominator of which is the total of all tax credit allocation claims filed on behalf of all certified investors on such day, by the aggregate limit of tax credits under this section or such lesser amount of tax credits that remain unallocated on such day.
     (4) Within ten business days after the department receives a tax credit allocation claim filed by a certified capital company on behalf of one or more of its certified investors, the department shall notify the certified capital company of the amount of tax credits allocated to each of the certified investors of such certified capital company.
     (5) In the event a certified capital company does not receive aggregate investments of certified capital equaling the amount of tax credits allocated to its certified investors within ten business days of the certified capital company's receipt of notice of allocation, then it shall so notify the department on or before the next business day and that portion of the tax credits allocated to the certified investors of such certified capital company in excess of the amount of certified capital invested in such certified capital company by such date will be forfeited. The department shall then reallocate those forfeited tax credits among the certified investors of the other certified capital companies on a pro rata basis with respect to the tax credit allocation claims filed on behalf of such certified investors. The department is authorized to levy a fine of not more than fifty thousand dollars, to be placed in the certified capital company revolving fund, on any certified investor that does not invest the full amount of certified capital allocated by the department to such investor in accordance with the premium tax credit allocation claim filed on its behalf.
     (6) The maximum amount of tax credit allocation claims that may be filed on behalf of any one certified investor, on an aggregate basis with its affiliates, in one or more certified capital companies, shall not exceed the greater of ten million dollars of certified capital or fifteen percent of the aggregate limitation on certified capital allocations as provided in this section.

NEW SECTION.  Sec. 6   REQUIREMENTS FOR CONTINUANCE OF CERTIFICATION. (1) To continue to be eligible for certification, a certified capital company shall make qualified investments according to the following schedule:
     (a) Within two years after the allocation date, an amount equal to at least twenty-five percent of the certified capital allocable to such certified capital company must be placed in qualified investments.
     (b) Within five years after the allocation date, an amount equal to at least fifty percent of the certified capital allocable to such certified capital company must be placed in qualified investments.
     (2) Prior to making a proposed qualified investment in a specific business, a certified capital company shall request from the department a written opinion that the proposed investment will qualify as a qualified investment in a qualified business. The department shall have fifteen business days from the receipt of such a request to determine whether the proposed investment qualifies as a qualified investment in a qualified business and to notify the certified capital company of its determination and an explanation thereof. If the department fails to notify the certified capital company of its determination within the fifteen business day period, the proposed investment shall be deemed to be a qualified investment in a qualified business. If the department determines that the proposed investment does not meet the definition of a qualified investment or qualified business or both, the department may nevertheless consider the proposed investment a qualified investment, and if necessary the business a qualified business, if the department determines that the proposed investment will further state economic development.
     (3) All certified capital not placed in qualified investments by the certified capital company may be held or invested in such manner as the certified capital company, in its discretion, deems appropriate. The proceeds of all certified capital returned to a certified capital company after being originally placed in qualified investments may be placed again in qualified investments and shall count toward any requirement of this section with respect to placing certified capital in qualified investments.
     (4) If, within ten years after its allocation date, a certified capital company has not placed at least one hundred percent of the certified capital allocable to it in qualified investments, the certified capital company shall no longer be permitted to distribute management fees.
     (5) No certified capital company shall make a qualified investment without the specific approval of the department if after the certified capital company's qualified investment, on an aggregate basis with its affiliates, would own more than forty-nine percent of the common equity or voting interests of the qualified business; except that nothing in this subsection (5) shall preclude a certified capital company from exercising (a) any right or remedy upon a default by the qualified business pursuant to an investment contract or (b) any antidilution or preemptive rights it may have been granted in connection with an initial qualified investment that can be exercised upon an investment in the business by a party other than the certified capital company or an affiliate of the certified capital company.
     (6) No qualified investment may be made by a certified capital company to the extent such investment would cause the company's total qualified investment outstanding with respect to the qualified business receiving such investment to exceed fifteen percent of the total certified capital of the certified capital company at the time of such investment.
     (7) Documents and other materials submitted by certified capital companies or by businesses for the purpose of the continuance of certification shall not be public records if such records are determined by the department to be trade or business secrets and shall be maintained in a confidential manner by the department.
     (8) The cumulative amount of all qualified investments made by a certified capital company will be considered in the calculation of the percentage requirements under this section, provided that any amounts received by a certified capital company from a qualified business as (a) commitment fees, closing fees, or other similar fees, excluding reimbursement of out-of-pocket expenses, such as legal fees and accounting fees in excess of one percent of the certified capital company's investment in the qualified business or (b) license fees, royalties, or similar charges shall not be considered in any percentage calculations under this section.

NEW SECTION.  Sec. 7   CERTIFIED CAPITAL COMPANY REPORTING REQUIREMENTS. Each certified capital company shall report the following to the department:
     (1) As soon as practicable after the receipt of certified capital:
     (a) The name of each certified investor from which the certified capital was received, including such certified investor's insurance tax identification number;
     (b) The amount of each certified investor's investment of certified capital; and
     (c) The date on which the certified capital was received.
     (2) On an annual basis, on or before January 31st of each year:
     (a) The amount of the certified capital company's certified capital at the end of the immediately preceding taxable year;
     (b) Whether or not the certified capital company has invested more than fifteen percent of its total certified capital in any one business;
     (c) All qualified investments that the certified capital company has made in the previous taxable year, including the number of employees of each qualified business in which it has made investments at the time of such investment and as of December 1st of the preceding taxable year. For any qualified business where the certified capital company no longer has an investment, the certified capital company shall provide employment figures for such company as of the last day before the investment was terminated; and
     (d) Other information that the department may reasonably request that will help the department ascertain the impact of the certified capital companies both directly and indirectly on the economy of the state of Washington including but not limited to the number of jobs retained and created by qualified businesses that have received qualified investments.
     (3) Each certified capital company shall provide to the department: (a) Annual audited financial statements, which shall include the opinion of an independent certified public accountant, within ninety days of the close of its fiscal year; and (b) an "agreed upon procedures report" or equivalent regarding the operations of the certified capital company regarding section 6 of this act. Upon receiving notification and documentation by a certified capital company that it has satisfied the requirements of section 6 of this act that it has invested fifty percent of its certified capital, the department shall have sixty days to notify such certified capital company that it has or has not met such requirement. If the department does not provide such notification within sixty days, the certified capital company shall then be deemed to have met such a requirement.

NEW SECTION.  Sec. 8   DISTRIBUTIONS. (1)(a) A certified capital company may make qualified distributions at any time. In order for a certified capital company to make a distribution other than a qualified distribution to its equity holders, the certified capital company must demonstrate the following:
     (i) The cumulative amount of all qualified investments of the certified capital company must equal or exceed an amount equal to one hundred percent of its certified capital;
     (ii) An amount equal to or exceeding twenty-five percent of its certified capital that has been invested in qualified businesses or qualified microenterprise development organizations which are either located in rural counties as defined in RCW 82.14.370, or for any other counties, in cities with a population of no greater than thirty thousand;
     (iii) An amount equal to or exceeding five percent of its certified capital that has been invested in qualified microenterprise development organizations inclusive of investments that also meet the requirements of (a)(ii) of this subsection.
     (b) In addition, certified capital companies are encouraged to make qualified investments in businesses that are certified by the office of minority and women's business enterprises.
     (2) In the event that a business in which a qualified investment is made relocates its principal business operations to another state either during such investment, or upon the earlier of: (a) The end of the investment holding period with respect to such investment by the certified capital company or (b) when the certified capital company reaches one hundred percent investment, the cumulative amount of qualified investments made by a certified capital company shall be reduced by the amount of such qualified investment for the purposes of satisfying the requirements of (b)(i) of this subsection only unless: (i) The certified capital company invests an amount at least equal to the investment of certified capital in the relocated business in a qualified business located in Washington within six months of the relocation or (ii) the business demonstrates that it has returned its principal business operations to Washington within three months of such relocation. A business shall be deemed to have relocated its principal business operations outside Washington, unless it maintains its headquarters or the primary workplace of more than fifty percent of the employees within the state.
     (3) A certified capital company shall pay to the department for deposit in the general fund an amount equal to five percent of all distributions to the equity holders of the certified capital company other than qualified distributions and distributions of all equity contributed to the certified capital company by such equity holders. Revenues collected under this subsection shall be distributed to and supplement state-funded programs which assist businesses with start-up, to commercialize research, business education, modernization services, and technical services including but not limited to Washington manufacturing services under chapter 24.50 RCW, Washington technology center under RCW 28B.20.285, Spokane intercollegiate research and technology institute under RCW 28B.38.010, and the microenterprise development program. A certified capital company shall make all payments required under this subsection concurrently with distributions to its equity owners; however, nothing contained in this subsection shall be construed to affect qualified distributions.

NEW SECTION.  Sec. 9   DECERTIFICATION. (1) The department shall conduct an annual review of each certified capital company to determine if the certified capital company is abiding by the requirements of certification, to advise the certified capital company as to the eligibility status of its qualified investments, and to ensure that no investment has been made in violation of this section.
     (2) Any material violation of section 6 or 7 of this act shall be grounds for decertification of the certified capital company and the disallowance of credits as set forth in section 3 of this act. Additionally, the department may decertify a certified capital company if any material representation to the department in connection with the application process proves to have been falsely made, or if the application materially violates any requirements established by the department pursuant to this act.
     (3) Once a certified capital company has invested an amount cumulatively equal to one hundred percent of its certified capital in qualified investments and has met all other requirements under this act, the certified capital company shall no longer be subject to regulation by the department and shall no longer be subject to section 7 of this act. Upon receiving documented certification by a certified capital company that it has invested an amount equal to one hundred percent of its certified capital, the department shall have sixty days to notify such certified capital company that it has or has not met the requirements with a reason for such determination if it has not, in the judgment of the director or the director's designee, met such requirement. If the department does not provide such notification within sixty days, the certified capital company shall be deemed to have met such requirements.
     (4) The department shall send written notice of such decertification to the commissioner and to the address of each certified investor whose tax credit has been subject to recapture or forfeiture, using the address shown on the last filing submitted to the department.

NEW SECTION.  Sec. 10   REGISTRATION REQUIREMENTS. All investments for which tax credits are allowable under section 3 of this act shall satisfy the conditions of being registered or specifically exempt from registration under section 6 of this act.

NEW SECTION.  Sec. 11   REPORTS TO THE GOVERNOR AND LEGISLATURE. Upon notification of a review of this act under the provisions of chapter 43.136 RCW, by the joint legislative audit and review committee, the department shall report to the governor:
     (1) The number of certified capital companies holding certified capital;
     (2) The amount of certified capital invested in each certified capital company;
     (3) The cumulative amount that each certified capital company has invested as of September 30, 2012, and the cumulative total each year thereafter;
     (4) The cumulative amount that the investments of each certified capital company have leveraged in terms of capital invested by other sources of capital in qualified businesses at the same time or subsequent to investments made by a certified capital company in such businesses;
     (5) The total amount of tax credits granted under this act for each year the credits have been awarded;
     (6) The performance of each certified capital company with regard to the requirements for continued certification;
     (7) The classification of the companies in which each certified capital company has invested according to industrial sector and size of company;
     (8) The total gross number of jobs created by investments made by each certified capital company using certified capital and the number of jobs retained;
     (9) The location of the companies in which each certified capital company has invested;
     (10) The total amount invested in qualified microenterprise development organizations, the number of small businesses that received financial assistance from these organizations and the number of jobs created and retained by such businesses;
     (11) The total amount invested in businesses that are certified minority and women-owned and controlled businesses;
     (12) Those certified capital companies that have been decertified, or have had their certification revoked, including the reasons for decertification or revocation; and
     (13) Other information as requested by the joint legislative audit and review committee.

NEW SECTION.  Sec. 12   CERTIFIED CAPITAL COMPANY REVOLVING FUND. There is created in the state treasury a certified capital company revolving fund. Regulatory fees payable by all certified capital companies shall be deposited to the credit of the certified capital company revolving fund. All expenses of operation of the certified capital company program by the department of community, trade, and economic development shall be payable out of the certified capital company revolving fund.

NEW SECTION.  Sec. 13   COMPANIES TO PAY FEES TO COVER APPROXIMATE REASONABLE COST OF REGULATION. It is the intent and purpose of the legislature that the certified capital companies shall each contribute sufficient fees to the department to pay the reasonable cost of regulating the several companies respectively.
     (1) Every capital company making application for certification as a certified capital company shall pay to the department an application fee in an amount of twenty thousand dollars to be deposited in the certified capital company revolving fund.
     (2) For ongoing expenses, the department shall annually estimate the cost of administering the program established in this act, including the expenses associated with the employment of one full-time equivalent to carry out the department's administration. The department shall annually assess a fee upon every certified capital company to recoup such expenses which shall be deposited in the certified capital company revolving fund. Fees shall be assessed among certified capital companies in accordance with the amount of certified capital raised by each certified capital company. In estimating the administration costs for each next fiscal year, the department shall consider all moneys then in the certified capital company revolving fund and adjust its assessment so that the nondedicated balance in the certified capital company revolving fund shall at no time exceed one-half of the estimated administration cost for the coming fiscal year. The department shall keep accurate records of the costs incurred in regulating and supervising the several companies subject to regulation or supervision, and such records shall be open record subject to inspection by all interested parties. No fee shall be assessed on a certified capital company that has been decertified or that has received or been deemed to have received notification under section 9(3) of this act.
     (3) Once a certified capital company has met the conditions of section 9(3) of this act and is no longer subject to regulation by the department, the certified capital company will no longer be required to pay regulatory fees under this section.

NEW SECTION.  Sec. 14   RULES. The department shall develop rules as deemed necessary to implement the provisions of this act.

NEW SECTION.  Sec. 15   CAPTIONS. Captions used in this act are not any part of the law.

NEW SECTION.  Sec. 16   Sections 1, 2, and 4 through 14 of this act constitute a new chapter in Title 43 RCW.

NEW SECTION.  Sec. 17   If any provision of this act or its application to any person or circumstance is held invalid, the remainder of the act or the application of the provision to other persons or circumstances is not affected.

NEW SECTION.  Sec. 18   This act is necessary for the immediate preservation of the public peace, health, or safety, or support of the state government and its existing public institutions, and takes effect immediately.