Senate Study Bill 1112 - Introduced SENATE FILE _____ BY (PROPOSED COMMITTEE ON ECONOMIC GROWTH BILL BY CHAIRPERSON SODDERS) A BILL FOR An Act relating to economic development by modifying the 1 innovation fund investment tax credit and the authority and 2 duties of the Iowa innovation corporation, and including 3 effective date and retroactive applicability provisions. 4 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 5 TLSB 1204XC (1) 85 mm/sc

S.F. _____ 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 15.119, subsection 2, paragraph e, Code 21 2013, is amended by striking the paragraph. 22 Sec. 3. Section 15.411, subsection 1, paragraph a, Code 23 2013, is amended to read as follows: 24 a. “Innovative business” means the same as defined in 25 section 15E.52 a business applying novel or original methods 26 to the manufacture of a product or the delivery of a service . 27 “Innovative business” includes but is not limited to a 28 business engaged in the industries of advanced manufacturing, 29 biosciences, and information technology. 30 Sec. 4. Section 15E.52, Code 2013, is amended to read as 31 follows: 32 15E.52 Innovation fund investment tax credits. 33 1. For purposes of this section, unless the context 34 otherwise requires: 35 -1- LSB 1204XC (1) 85 mm/sc 1/ 8

S.F. _____ a. “Board” means the same as defined in section 15.102 . 1 b. “Innovation fund” means one or more early-stage capital 2 funds certified by the board. 3 c. “Innovative business” means a business applying novel 4 or original innovative methods to the manufacture of a product 5 or the delivery of a service. “Innovative business” includes 6 but is not limited to a business engaged in the industries 7 of advanced manufacturing, biosciences, and information 8 technology. 9 2. a. A tax credit shall be allowed against the taxes 10 imposed in chapter 422, divisions II, III, and V , and in 11 chapter 432 , and against the moneys and credits tax imposed 12 in section 533.329 , for a portion of a taxpayer’s equity 13 investment in the form of cash in an innovation fund. 14 b. An individual may claim a tax credit under this section 15 of a partnership, limited liability company, S corporation, 16 estate, or trust electing to have income taxed directly to 17 the individual. The amount claimed by the individual shall 18 be based upon the pro rata share of the individual’s earnings 19 from the partnership, limited liability company, S corporation, 20 estate, or trust. 21 3. a. The amount of a tax credit allowed tax credits 22 issued by the authority under this section shall equal twenty 23 fifty percent of the taxpayer’s equity investment certified 24 binding investment commitments to invest in an innovation fund. 25 However, the total amount of all certificates issued by the 26 authority pursuant to this section shall not exceed, in the 27 aggregate, fifty million dollars. 28 b. A nonprofit corporation operating an innovation fund 29 shall certify to the authority the amount of binding investment 30 commitments it receives to invest in the innovation fund. Upon 31 receiving certification of an amount of binding investment 32 commitments, the authority shall issue one or more certificates 33 totaling fifty percent of the amount of the certified binding 34 investment commitments to the nonprofit corporation operating 35 -2- LSB 1204XC (1) 85 mm/sc 2/ 8

S.F. _____ the innovation fund. Certificates shall be issued in the order 1 in which the authority receives certification of the amounts of 2 binding investment commitments. 3 c. Notwithstanding subsection 8, a nonprofit corporation 4 to which a certificate has been issued pursuant to paragraph 5 “b” shall only transfer the amount of tax credits represented 6 on the certificate to taxpayers who make an equity investment 7 in the form of cash in an innovation fund operated by the 8 nonprofit corporation. In transferring such tax credits, 9 the nonprofit corporation shall ensure that the total amount 10 of tax credits transferred by the nonprofit corporation to a 11 taxpayer equals fifty percent of the taxpayer’s investment in 12 the innovation fund. 13 d. Notwithstanding subsection 8, all the nonprofit 14 corporations to which certificates have been issued pursuant to 15 paragraph “b” shall not transfer, in the aggregate, an amount of 16 tax credits in excess of eight million dollars per fiscal year. 17 e. A nonprofit corporation to which a certificate has been 18 issued pursuant to paragraph “b” shall ensure that an investor 19 in an innovation fund operated by the nonprofit corporation 20 shall not be permitted to vote for or participate in a decision 21 to invest moneys from the innovation fund in a business in 22 which the investor has an equity interest of greater than fifty 23 percent if that investor has received or will receive a tax 24 credit pursuant to this section. 25 f. A certificate and related tax credit issued pursuant to 26 this section shall be deemed a vested right of the original 27 holder or any transferee thereof, and the state shall not cause 28 either to be redeemed in such a way that amends or rescinds the 29 certificate or that curtails, limits, or withdraws the related 30 tax credit, except as otherwise provided in this section or 31 upon consent of the proper holder. A certificate issued 32 pursuant to this section cannot pledge the credit of the state 33 and any such certificate so pledged to secure the debt of the 34 original holder or a transferee shall not constitute a contract 35 -3- LSB 1204XC (1) 85 mm/sc 3/ 8

S.F. _____ binding the state. 1 4. A taxpayer shall not claim a tax credit under this 2 section if the taxpayer is a venture capital investment fund 3 allocation manager for the Iowa fund of funds created in 4 section 15E.65 or an investor that receives a tax credit for 5 the same investment in a qualifying business as described in 6 section 15E.44 or in a community-based seed capital fund as 7 described in section 15E.45 . 8 5. a. The board shall issue certificates under this section 9 which may be redeemed for tax credits. The board shall issue 10 such certificates so that not more than the amount allocated 11 for such tax credits under section 15.119, subsection 2 , may be 12 claimed. The certificates shall not be transferable. 13 b. The board shall, in cooperation with the department of 14 revenue, establish criteria and procedures for the allocation 15 and issuance of tax credits by means of certificates issued 16 by the board. The criteria shall include the contingencies 17 that must be met for a certificate to be redeemable in order 18 to receive a tax credit. The procedures established by the 19 board, in cooperation with the department of revenue, shall 20 relate to the procedures for the issuance and transfer of 21 the certificates and for the redemption of a certificate and 22 related tax credit. 23 6. A taxpayer shall not redeem a certificate and related 24 tax credit prior to the third tax year following the tax year 25 in which the investment is made. Any tax credit in excess of 26 the taxpayer’s liability for the tax year in which the taxpayer 27 claims the credit may be credited to the tax liability for the 28 following five years or until depleted, whichever is earlier. 29 A tax credit shall not be carried back to a tax year prior to 30 the tax year in which the taxpayer claims the tax credit. 31 7. An innovation fund shall submit an application for 32 certification to the board. The board shall approve the 33 application and certify the innovation fund if all of the 34 following criteria are met: 35 -4- LSB 1204XC (1) 85 mm/sc 4/ 8

S.F. _____ a. The fund is organized for the purposes of making 1 investments in promising early-stage companies which have a 2 principal place of business in the state. 3 b. The fund proposes to make investments in innovative 4 businesses. 5 c. The fund seeks to secure private funding sources for 6 investment in such businesses. 7 d. The fund meets any other criteria adopted by the 8 authority by rule. 9 8. Tax credit certificates issued pursuant to this section 10 may be transferred, in whole or in part, to any person or 11 entity. Within ninety days of transfer, the transferee shall 12 submit the transferred tax credit certificate to the department 13 of revenue along with a statement containing the transferee’s 14 name, tax identification number, and address, the denomination 15 that each replacement tax credit certificate is to carry, and 16 any other information required by the department of revenue. 17 9. Within thirty days of receiving the transferred tax 18 credit certificate and the transferee’s statement, the 19 department of revenue shall issue one or more replacement 20 tax credit certificates to the transferee. Each replacement 21 tax credit certificate must contain the information required 22 for the original tax credit certificate. A replacement tax 23 credit certificate may designate a different tax than the tax 24 designated on the original tax credit certificate. A tax 25 credit shall not be claimed by a transferee under this section 26 until a replacement tax credit certificate identifying the 27 transferee as the proper holder has been issued. 28 10. The transferee may use the amount of the tax credit 29 transferred against the taxes imposed in chapter 422, divisions 30 II, III, and V, and in chapter 432, and against the moneys and 31 credits tax imposed in section 533.329, for any tax year the 32 original transferor could have claimed the tax credit. Any 33 consideration received for the transfer of the tax credit shall 34 not be included as income under chapter 422, divisions II, III, 35 -5- LSB 1204XC (1) 85 mm/sc 5/ 8

S.F. _____ and V. Any consideration paid for the transfer of the tax 1 credit shall not be deducted from income under chapter 422, 2 divisions II, III, and V. 3 Sec. 5. EFFECTIVE UPON ENACTMENT. This Act, being deemed of 4 immediate importance, takes effect upon enactment. 5 Sec. 6. RETROACTIVE APPLICABILITY. This Act applies 6 retroactively to January 1, 2013, for tax years beginning on 7 or after that date and for equity investments in an innovation 8 fund made on or after that date. 9 EXPLANATION 10 This bill relates to economic development by modifying the 11 innovation fund investment tax credit and allowing the Iowa 12 innovation corporation to establish an innovation fund. 13 Under current law, the economic development authority is 14 required to issue nontransferable tax credit certificates 15 equal to 20 percent of a taxpayer’s equity investment in an 16 innovation fund. The tax credits available for issuance are 17 under the aggregate tax credit limit for certain economic 18 development programs in Code section 15.119, and are limited to 19 a total of $8 million per fiscal year. 20 The bill modifies the credit by removing the credit from 21 the aggregate tax credit limit and thereby removing the $8 22 million allocation limit, removing the 20 percent limitation, 23 and specifying that innovation fund investment tax certificates 24 shall be issued according to the following procedure. First, 25 when a nonprofit corporation receives binding investment 26 commitments to invest in an innovation fund it shall certify 27 those amounts to the economic development authority. After 28 receiving certification of an amount of binding investment 29 commitments, the economic development authority shall issue to 30 the nonprofit corporation operating the innovation fund one or 31 more certificates totaling an amount of tax credits equal to 50 32 percent of the amount of the binding investment commitments. 33 Certificates are to be issued by the economic development 34 authority in the order in which the authority receives 35 -6- LSB 1204XC (1) 85 mm/sc 6/ 8

S.F. _____ certification of the amounts of binding investment commitments. 1 The bill provides that the aggregate amount of tax credits 2 that may be issued by the economic development authority 3 shall not exceed $50 million. The bill makes the tax credit 4 certificates transferable and establishes procedures for 5 transferring the credit to another person or entity. A 6 nonprofit corporation which receives a tax credit certificate 7 from the authority shall only transfer the certificate to 8 taxpayers who make an equity investment in the form of cash in 9 an innovation fund operated by the nonprofit corporation, which 10 taxpayer shall receive a total amount of tax credits equal to 11 50 percent of the taxpayer’s investment in the innovation fund. 12 However, the nonprofit corporations to which certificates have 13 been issued shall not transfer an amount of tax credits that, 14 in the aggregate, exceed $8 million per fiscal year. 15 The bill provides that any innovation tax credit 16 certificates issued by the authority are deemed to be a vested 17 right of the original holder or transferee and the state shall 18 not cause them to be redeemed in such a way that amends, 19 rescinds, curtails, limits, or withdraws the tax credits, 20 except as provided in Code section 15E.52 as amended in the 21 bill. The certificates cannot pledge the credit of the state 22 and shall not constitute a contract binding the state if a 23 certificate is pledged to secure the debt of the original 24 holder or a transferee. 25 The bill adds an additional requirement for certification of 26 an innovation fund by requiring an applicant fund to meet any 27 other criteria adopted by the economic development authority 28 by rule. 29 The bill amends the definition of “innovative business” as 30 specified in the bill and makes a conforming change to the same 31 definition in Code section 15.411 to keep the language of the 32 latter definition the same as current law. 33 The bill allows the Iowa innovation corporation to establish 34 an innovation fund for purposes of stimulating early-stage 35 -7- LSB 1204XC (1) 85 mm/sc 7/ 8

S.F. _____ and seed capital investment in the state. If the fund is 1 established to qualify for innovation fund tax credits, 2 it must meet certain requirements as described in the bill 3 relating to contracts for investment management services. In 4 addition, any investor in an innovation fund operated by the 5 Iowa innovation corporation is not permitted to vote on or 6 participate in investment decisions of the innovation fund 7 related to businesses in which the investor has a greater than 8 50 percent equity interest if that investor has or will receive 9 an innovation fund tax credit. 10 The bill is effective upon enactment and applies 11 retroactively to January 1, 2013, for tax years beginning on 12 or after that date and for equity investments in an innovation 13 fund made on or after that date. 14 -8- LSB 1204XC (1) 85 mm/sc 8/ 8