House File 585 - Introduced HOUSE FILE 585 BY COMMITTEE ON ECONOMIC GROWTH (SUCCESSOR TO HSB 198) A BILL FOR An Act relating to the innovation fund investment tax credit 1 by modifying the tax credit and the authority and duties of 2 the Iowa innovation corporation relating to the tax credit, 3 and including effective date and retroactive applicability 4 provisions. 5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 6 TLSB 2327HV (2) 85 mm/sc

H.F. 585 Section 1. Section 15.107A, Code 2013, is amended by adding 1 the following new subsection: 2 NEW SUBSECTION . 3. The corporation may establish an 3 innovation fund for purposes of stimulating early-stage 4 and seed capital investment in the state. If the fund is 5 established to qualify for innovation fund investment tax 6 credits pursuant to section 15E.52, the corporation shall 7 ensure that the following requirements are met: 8 a. If the corporation seeks to enter into a contract with 9 an entity to provide investment management services to the 10 innovation fund, such an entity shall be chosen according to an 11 open and competitive proposal process. 12 b. The compensation package provided to an entity under 13 paragraph “a” shall be at or below the market rate for such 14 services as determined by at least one independent investment 15 management evaluation group. 16 c. Any contract entered into for services pursuant to 17 this subsection shall be made available, upon request, to the 18 authority, the general assembly, the auditor of state, and the 19 governor’s office. 20 Sec. 2. Section 15E.52, Code 2013, is amended to read as 21 follows: 22 15E.52 Innovation fund investment tax credits. 23 1. For purposes of this section, unless the context 24 otherwise requires: 25 a. “Board” means the same as defined in section 15.102 . 26 b. “Innovation fund” means one or more early-stage capital 27 funds certified by the board. 28 c. “Innovative business” means a business applying novel 29 or original methods to the manufacture of a product or the 30 delivery of a service. “Innovative business” includes but is 31 not limited to a business engaged in the industries of advanced 32 manufacturing, biosciences, and information technology. 33 2. a. A tax credit shall be allowed against the taxes 34 imposed in chapter 422, divisions II, III, and V , and in 35 -1- LSB 2327HV (2) 85 mm/sc 1/ 7

H.F. 585 chapter 432 , and against the moneys and credits tax imposed 1 in section 533.329 , for a portion of a taxpayer’s equity 2 investment in the form of cash in an innovation fund. 3 b. An individual may claim a tax credit under this section 4 of a partnership, limited liability company, S corporation, 5 estate, or trust electing to have income taxed directly to 6 the individual. The amount claimed by the individual shall 7 be based upon the pro rata share of the individual’s earnings 8 from the partnership, limited liability company, S corporation, 9 estate, or trust. 10 3. a. The amount of a tax credit allowed under this section 11 shall equal twenty percent of the taxpayer’s equity investment 12 in an innovation fund tax credits issued under this section 13 for a fiscal year shall equal the amount allocated in section 14 15.119, subsection 2, paragraph “e” . 15 b. The authority shall issue one or more certificates 16 totaling the amount allowed per fiscal year under paragraph “a” 17 to one or more nonprofit corporations operating an innovation 18 fund. 19 c. Notwithstanding subsection 9, a nonprofit corporation 20 to which a certificate has been issued pursuant to paragraph 21 “b” shall only transfer the amount of tax credits represented 22 on the certificate to taxpayers who make an equity investment 23 in the form of cash in an innovation fund operated by the 24 nonprofit corporation. In transferring such tax credits, 25 the nonprofit corporation shall ensure that the total amount 26 of tax credits transferred by the nonprofit corporation to a 27 taxpayer equals fifty percent of the taxpayer’s investment in 28 the innovation fund. 29 d. A nonprofit corporation to which a certificate has been 30 issued pursuant to paragraph “b” shall ensure that an investor 31 in an innovation fund operated by the nonprofit corporation 32 shall not be permitted to vote for or participate in a decision 33 to invest moneys from the innovation fund in a business in 34 which the investor has an equity interest of greater than fifty 35 -2- LSB 2327HV (2) 85 mm/sc 2/ 7

H.F. 585 percent if that investor has received or will receive a tax 1 credit pursuant to this section. 2 e. A certificate and related tax credit issued pursuant to 3 this section shall be deemed a vested right of the original 4 holder or any transferee thereof, and the state shall not cause 5 either to be redeemed in such a way that amends or rescinds the 6 certificate or that curtails, limits, or withdraws the related 7 tax credit, except as otherwise provided in this section or 8 upon consent of the proper holder. A certificate issued 9 pursuant to this section cannot pledge the credit of the state 10 and any such certificate so pledged to secure the debt of the 11 original holder or a transferee shall not constitute a contract 12 binding the state. 13 4. A taxpayer shall not claim a tax credit under this 14 section if the taxpayer is a venture capital investment fund 15 allocation manager for the Iowa fund of funds created in 16 section 15E.65 or an investor that receives a tax credit for 17 the same investment in a qualifying business as described in 18 section 15E.44 or in a community-based seed capital fund as 19 described in section 15E.45 . 20 5. a. The board shall issue certificates under this section 21 which may be redeemed for tax credits. The board shall issue 22 such certificates so that not more than the amount allocated 23 for such tax credits under section 15.119, subsection 2 , may be 24 claimed. The certificates shall not be transferable. 25 b. The board shall, in cooperation with the department of 26 revenue, establish criteria and procedures for the allocation 27 and issuance of tax credits by means of certificates issued 28 by the board. The criteria shall include the contingencies 29 that must be met for a certificate to be redeemable in order 30 to receive a tax credit. The procedures established by the 31 board, in cooperation with the department of revenue, shall 32 relate to the procedures for the issuance and transfer of 33 the certificates and for the redemption of a certificate and 34 related tax credit. 35 -3- LSB 2327HV (2) 85 mm/sc 3/ 7

H.F. 585 6. The department of revenue in conjunction with the 1 authority shall by February 15 of each year issue an annual 2 report to the general assembly containing the name of 3 each person to whom a tax credit certificate was issued or 4 transferred pursuant to this section during the previous 5 calendar year. 6 6. 7. A taxpayer shall not redeem a certificate and related 7 tax credit prior to the third tax year following the tax year 8 in which the investment is made. Any tax credit in excess of 9 the taxpayer’s liability for the tax year in which the taxpayer 10 claims the credit may be credited to the tax liability for the 11 following five years or until depleted, whichever is earlier. 12 A tax credit shall not be carried back to a tax year prior to 13 the tax year in which the taxpayer claims the tax credit. 14 7. 8. An innovation fund shall submit an application 15 for certification to the board. The board shall approve the 16 application and certify the innovation fund if all of the 17 following criteria are met: 18 a. The fund is organized for the purposes of making 19 investments in promising early-stage companies which have a 20 principal place of business in the state. 21 b. The fund proposes to make investments in innovative 22 businesses. 23 c. The fund seeks to secure private funding sources for 24 investment in such businesses. 25 d. The fund meets any other criteria adopted by the 26 authority by rule. 27 9. Tax credit certificates issued pursuant to this section 28 may be transferred, in whole or in part, to any person. A 29 tax credit certificate shall only be transferred twice. For 30 purposes of this subsection, the two transfers shall include 31 the first transfer from the corporation to an investor and one 32 subsequent transfer from the investor to another transferee. 33 Within ninety days of transfer, the transferee shall submit the 34 transferred tax credit certificate to the department of revenue 35 -4- LSB 2327HV (2) 85 mm/sc 4/ 7

H.F. 585 along with a statement containing the transferee’s name, tax 1 identification number, and address, the denomination that each 2 replacement tax credit certificate is to carry, and any other 3 information required by the department of revenue. 4 10. Within thirty days of receiving the transferred 5 tax credit certificate and the transferee’s statement, the 6 department of revenue shall issue one or more replacement 7 tax credit certificates to the transferee. Each replacement 8 tax credit certificate must contain the information required 9 for the original tax credit certificate. A replacement tax 10 credit certificate may designate a different tax than the 11 tax designated on the original tax credit certificate. A 12 tax credit shall not be claimed by a transferee under this 13 section until a replacement tax credit certificate identifying 14 the transferee as the proper holder has been issued. The 15 department of revenue shall conspicuously label on the face of 16 the certificate any tax credit certificate that is ineligible 17 for transfer. 18 11. The transferee may use the amount of the tax credit 19 transferred against the taxes imposed in chapter 422, divisions 20 II, III, and V, and in chapter 432, and against the moneys and 21 credits tax imposed in section 533.329, for any tax year the 22 original transferor could have claimed the tax credit. Any 23 consideration received for the transfer of the tax credit shall 24 not be included as income under chapter 422, divisions II, III, 25 and V. Any consideration paid for the transfer of the tax 26 credit shall not be deducted from income under chapter 422, 27 divisions II, III, and V. 28 Sec. 3. EFFECTIVE UPON ENACTMENT. This Act, being deemed of 29 immediate importance, takes effect upon enactment. 30 Sec. 4. RETROACTIVE APPLICABILITY. This Act applies 31 retroactively to January 1, 2013, for tax years beginning on 32 or after that date and for equity investments in an innovation 33 fund made on or after that date. 34 EXPLANATION 35 -5- LSB 2327HV (2) 85 mm/sc 5/ 7

H.F. 585 This bill modifies the innovation fund investment tax credit 1 and allows the Iowa innovation corporation to establish an 2 innovation fund. 3 Under current law, the economic development authority is 4 required to issue nontransferable tax credit certificates 5 equal to 20 percent of a taxpayer’s equity investment in an 6 innovation fund. The tax credits available for issuance are 7 under the aggregate tax credit limit for certain economic 8 development programs in Code section 15.119, and are limited to 9 a total of $8 million per fiscal year. 10 The bill modifies the credit by removing the 20 percent 11 limitation and specifying that for each fiscal year a total 12 of $8 million in innovation fund investment tax credit 13 certificates shall be issued by the authority to one or more 14 nonprofit corporations operating an innovation fund. 15 The bill provides that tax credit certificates may be 16 transferred no more than two times and establishes procedures 17 for transferring the credit to another person. A nonprofit 18 corporation which receives a tax credit certificate from the 19 authority shall only transfer the certificate to taxpayers who 20 make an equity investment in the form of cash in an innovation 21 fund operated by the nonprofit corporation, which taxpayer 22 shall receive a total amount of tax credits equal to 50 percent 23 of the taxpayer’s investment in the innovation fund. The 24 department of revenue and the economic development authority 25 are required to publish an annual report listing the name of 26 each person who has been issued or transferred a tax credit 27 certificate. 28 The bill provides that any innovation tax credit 29 certificates issued by the authority are deemed to be a vested 30 right of the original holder or transferee and the state shall 31 not cause them to be redeemed in such a way that amends, 32 rescinds, curtails, limits, or withdraws the tax credits, 33 except as provided in Code section 15E.52 as amended in the 34 bill. The certificates cannot pledge the credit of the state 35 -6- LSB 2327HV (2) 85 mm/sc 6/ 7

H.F. 585 and shall not constitute a contract binding the state if a 1 certificate is pledged to secure the debt of the original 2 holder or a transferee. 3 The bill adds an additional requirement for certification of 4 an innovation fund by requiring an applicant fund to meet any 5 other criteria adopted by the economic development authority 6 by rule. 7 The bill allows the Iowa innovation corporation to establish 8 an innovation fund for purposes of stimulating early-stage 9 and seed capital investment in the state. If the fund is 10 established to qualify for innovation fund tax credits, 11 it must meet certain requirements as described in the bill 12 relating to contracts for investment management services. In 13 addition, any investor in an innovation fund operated by the 14 Iowa innovation corporation is not permitted to vote on or 15 participate in investment decisions of the innovation fund 16 related to businesses in which the investor has a greater than 17 50 percent equity interest if that investor has or will receive 18 an innovation fund tax credit. 19 The bill is effective upon enactment and applies 20 retroactively to January 1, 2013, for tax years beginning on 21 or after that date and for equity investments in an innovation 22 fund made on or after that date. 23 -7- LSB 2327HV (2) 85 mm/sc 7/ 7