House File 615 - Reprinted HOUSE FILE 615 BY COMMITTEE ON WAYS AND MEANS (SUCCESSOR TO HF 585) (SUCCESSOR TO HSB 198) (As Amended and Passed by the House April 3, 2013 ) 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 HF 615 (3) 85 mm/sc/md

H.F. 615 Section 1. Section 15.107A, Code 2013, is amended by adding 1 the following new subsection: 2 NEW SUBSECTION . 3. The corporation may establish one or 3 more innovation funds for purposes of stimulating early-stage 4 and seed capital investment in the state. If a 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 an 10 innovation fund, such an entity shall be chosen according to 11 an open and competitive proposal process. The corporation 12 may contract with a different entity for the provision of 13 investment management services for each innovation fund. 14 b. The compensation package provided to an entity under 15 paragraph “a” shall be at or below the market rate for such 16 services as determined by at least one independent investment 17 management evaluation group. 18 c. Any contract entered into for services pursuant to 19 this subsection shall be made available, upon request, to the 20 authority, the general assembly, the auditor of state, and the 21 governor’s office. 22 Sec. 2. Section 15E.52, Code 2013, is amended to read as 23 follows: 24 15E.52 Innovation fund investment tax credits. 25 1. For purposes of this section, unless the context 26 otherwise requires: 27 a. “Board” means the same as defined in section 15.102 . 28 b. “Innovation fund” means one or more early-stage capital 29 funds certified by the board. 30 c. “Innovative business” means a business applying novel 31 or original methods to the manufacture of a product or the 32 delivery of a service. “Innovative business” includes but is 33 not limited to a business engaged in the industries of advanced 34 manufacturing, biosciences, and information technology. 35 -1- HF 615 (3) 85 mm/sc/md 1/ 8

H.F. 615 d. “Nonprofit corporation” means a corporation organized 1 under chapter 504 and qualifying under section 501(c)(3) of the 2 Internal Revenue Code as an organization exempt from federal 3 income tax under section 501(a) of the Internal Revenue Code. 4 2. a. A tax credit shall be allowed against the taxes 5 imposed in chapter 422, divisions II, III, and V , and in 6 chapter 432 , and against the moneys and credits tax imposed 7 in section 533.329 , for a portion of a taxpayer’s equity 8 investment in the form of cash in an innovation fund. 9 b. An individual may claim a tax credit under this section 10 of a partnership, limited liability company, S corporation, 11 estate, or trust electing to have income taxed directly to 12 the individual. The amount claimed by the individual shall 13 be based upon the pro rata share of the individual’s earnings 14 from the partnership, limited liability company, S corporation, 15 estate, or trust. 16 3. a. The amount of a tax credit allowed under this section 17 shall equal twenty percent of the taxpayer’s equity investment 18 in an innovation fund tax credits issued under this section 19 for a fiscal year shall equal the amount allocated in section 20 15.119, subsection 2, paragraph “e” . 21 b. (1) The authority shall issue one or more certificates 22 totaling the amount allowed per fiscal year under paragraph “a” 23 to one or more nonprofit corporations operating an innovation 24 fund. 25 (2) In order to receive a certificate pursuant to this 26 paragraph, a nonprofit corporation shall be functioning as an 27 innovation intermediary that is aligning local technologies, 28 assets, and resources to collaborate on advancing innovation 29 in this state, shall be in compliance with the requirements 30 of section 15.107A, subsection 3, and shall not be controlled 31 by a financial institution as defined in section 422.61 or a 32 credit union as defined in section 533.102. For purposes of 33 this subparagraph (2), “controlled” means the ability, either 34 directly or indirectly through an affiliate of the financial 35 -2- HF 615 (3) 85 mm/sc/md 2/ 8

H.F. 615 institution or credit union, to direct or cause the direction 1 of the management and policies of the nonprofit corporation, 2 and includes but is not limited to instances in which fifty 3 percent or more of the directors, officers, or members of the 4 nonprofit corporation are also a director, officer, member, 5 owner, employee, or agent of the financial institution, credit 6 union, or of an affiliate of the financial institution or 7 credit union. “Affiliate” includes any entity that owns or 8 holds fifty percent or more of the equity interest or voting 9 power in a financial institution or credit union, or any entity 10 in which fifty percent or more of the entity’s equity interest 11 or voting power is owned or held by a financial institution or 12 credit union. 13 (3) (a) If in a fiscal year multiple nonprofit corporations 14 qualify to receive certificates issued pursuant to this 15 paragraph, certificates shall be issued in such a way that each 16 nonprofit corporation operating an innovation fund receives 17 a pro rata share of the total tax credits equal to the same 18 proportion that the outstanding certified binding investment 19 commitments to that nonprofit corporation bears to the total 20 outstanding certified binding investment commitments to all 21 qualified nonprofit corporations being issued a certificate 22 under this paragraph. 23 (b) Upon the request of the authority, a nonprofit 24 corporation operating one or more innovation funds shall 25 certify to the authority the outstanding amount of binding 26 investment commitments it has received to invest in innovation 27 funds it operates. 28 c. Notwithstanding subsection 9, a nonprofit corporation 29 to which a certificate has been issued pursuant to paragraph 30 “b” shall only transfer the amount of tax credits represented 31 on the certificate to taxpayers who make an equity investment 32 in the form of cash in an innovation fund operated by the 33 nonprofit corporation. In transferring such tax credits, the 34 nonprofit corporation shall ensure that the total amount of tax 35 -3- HF 615 (3) 85 mm/sc/md 3/ 8

H.F. 615 credits transferred by the nonprofit corporation to a taxpayer 1 equals fifty percent of the taxpayer’s investment in the 2 innovation fund. Notwithstanding any other provision of law to 3 the contrary, a nonprofit corporation operating an innovation 4 fund shall not be allowed to make an equity investment in such 5 innovation fund. 6 d. A nonprofit corporation to which a certificate has been 7 issued pursuant to paragraph “b” shall ensure that an investor 8 in an innovation fund operated by the nonprofit corporation 9 shall not be permitted to vote for or participate in a decision 10 to invest moneys from the innovation fund in a business in 11 which the investor has a controlling interest. 12 e. A certificate and related tax credit issued pursuant to 13 this section shall be deemed a vested right of the original 14 holder or any transferee thereof, and the state shall not cause 15 either to be redeemed in such a way that amends or rescinds the 16 certificate or that curtails, limits, or withdraws the related 17 tax credit, except as otherwise provided in this section or 18 upon consent of the proper holder. A certificate issued 19 pursuant to this section cannot pledge the credit of the state 20 and any such certificate so pledged to secure the debt of the 21 original holder or a transferee shall not constitute a contract 22 binding the state. 23 4. A taxpayer shall not claim a tax credit under this 24 section if the taxpayer is a venture capital investment fund 25 allocation manager for the Iowa fund of funds created in 26 section 15E.65 or an investor that receives a tax credit for 27 the same investment in a qualifying business as described in 28 section 15E.44 or in a community-based seed capital fund as 29 described in section 15E.45 . 30 5. a. The board shall issue certificates under this section 31 which may be redeemed for tax credits. The board shall issue 32 such certificates so that not more than the amount allocated 33 for such tax credits under section 15.119, subsection 2 , may be 34 claimed. The certificates shall not be transferable. 35 -4- HF 615 (3) 85 mm/sc/md 4/ 8

H.F. 615 b. The board shall, in cooperation with the department of 1 revenue, establish criteria and procedures for the allocation 2 and issuance of tax credits by means of certificates issued 3 by the board. The criteria shall include the contingencies 4 that must be met for a certificate to be redeemable in order 5 to receive a tax credit. The procedures established by the 6 board, in cooperation with the department of revenue, shall 7 relate to the procedures for the issuance and transfer of 8 the certificates and for the redemption of a certificate and 9 related tax credit. 10 6. The department of revenue in conjunction with the 11 authority shall by February 15 of each year issue an annual 12 report to the general assembly containing the name of 13 each person to whom a tax credit certificate was issued or 14 transferred pursuant to this section during the previous 15 calendar year. 16 6. 7. A taxpayer shall not redeem a certificate and related 17 tax credit prior to the third tax year following the tax year 18 in which the investment is made. Any tax credit in excess of 19 the taxpayer’s liability for the tax year in which the taxpayer 20 claims the credit may be credited to the tax liability for the 21 following five years or until depleted, whichever is earlier. 22 A tax credit shall not be carried back to a tax year prior to 23 the tax year in which the taxpayer claims the tax credit. 24 7. 8. a. An A nonprofit corporation establishing an 25 innovation fund shall submit an application for certification 26 to the board. The board shall may approve the application and 27 certify the innovation fund if all of the following criteria 28 are met: 29 a. (1) The fund is organized for the purposes of making 30 investments in promising early-stage companies which have a 31 principal place of business in the state. 32 b. (2) The fund proposes to make investments in innovative 33 businesses. 34 c. (3) The fund seeks to secure private funding sources for 35 -5- HF 615 (3) 85 mm/sc/md 5/ 8

H.F. 615 investment in such businesses. 1 (4) The fund proposes to function as an innovation 2 intermediary by aligning local technologies, assets, and 3 resources to collaborate on advancing innovation in this state. 4 (5) The fund proposes to provide multiple rounds of funding 5 and early-stage private sector funding to innovative businesses 6 with a high growth potential, and proposes to focus such 7 funding on innovative businesses that show a clear potential 8 to produce commercially viable products or services within a 9 reasonable period of time. 10 (6) The fund proposes to operate in a manner designed 11 to complement the purposes and further the policy goals of 12 the demonstration fund and the state small business credit 13 initiative demonstration fund administered by the authority 14 pursuant to 261 IAC 105 and 261 IAC 117, respectively. 15 (7) The fund proposes to evaluate all prospective 16 innovative businesses using a rigorous, technology-based 17 approach and proposes to collaborate and coordinate with the 18 authority and other state and local entities in an effort to 19 achieve policy consistency. 20 (8) The fund proposes to collaborate with the regents 21 institutions of this state and to leverage relationships with 22 such institutions in order to commercialize research developed 23 at those institutions. 24 (9) The fund proposes a detailed plan to support the 25 continuum of innovation in this state by addressing the need 26 for early-stage venture capital investments. 27 (10) The fund meets any other criteria adopted by the 28 authority by rule. 29 b. The board shall certify funds in such a way that not more 30 than three funds are certified as innovation funds at any one 31 time. In determining whether to certify a fund the board shall 32 consider the following: 33 (1) The total available pool of innovation fund investment 34 tax credits. 35 -6- HF 615 (3) 85 mm/sc/md 6/ 8

H.F. 615 (2) The size of the prospective fund as compared to other 1 existing or prospective innovation funds. 2 (3) The impact that certification of the fund would have on 3 the available pool of investment capital for other existing or 4 prospective innovation funds. 5 (4) Whether certifying the fund as an innovation fund would 6 further the economic goals of the state. 7 9. Tax credit certificates issued pursuant to this section 8 may be transferred, in whole or in part, to any person. A 9 tax credit certificate shall only be transferred twice. For 10 purposes of this subsection, the two transfers shall include 11 the first transfer from the corporation to an investor and one 12 subsequent transfer from the investor to another transferee. 13 Within ninety days of transfer, the transferee shall submit the 14 transferred tax credit certificate to the department of revenue 15 along with a statement containing the transferee’s name, tax 16 identification number, and address, the denomination that each 17 replacement tax credit certificate is to carry, and any other 18 information required by the department of revenue. 19 10. Within thirty days of receiving the transferred 20 tax credit certificate and the transferee’s statement, the 21 department of revenue shall issue one or more replacement 22 tax credit certificates to the transferee. Each replacement 23 tax credit certificate must contain the information required 24 for the original tax credit certificate. A replacement tax 25 credit certificate may designate a different tax than the 26 tax designated on the original tax credit certificate. A 27 tax credit shall not be claimed by a transferee under this 28 section until a replacement tax credit certificate identifying 29 the transferee as the proper holder has been issued. The 30 department of revenue shall conspicuously label on the face of 31 the certificate any tax credit certificate that is ineligible 32 for transfer. 33 11. The transferee may use the amount of the tax credit 34 transferred against the taxes imposed in chapter 422, divisions 35 -7- HF 615 (3) 85 mm/sc/md 7/ 8

H.F. 615 II, III, and V, and in chapter 432, and against the moneys and 1 credits tax imposed in section 533.329, for any tax year the 2 original transferor could have claimed the tax credit. Any 3 consideration received for the transfer of the tax credit shall 4 not be included as income under chapter 422, divisions II, III, 5 and V. Any consideration paid for the transfer of the tax 6 credit shall not be deducted from income under chapter 422, 7 divisions II, III, and V. 8 Sec. 3. EFFECTIVE UPON ENACTMENT. This Act, being deemed of 9 immediate importance, takes effect upon enactment. 10 Sec. 4. RETROACTIVE APPLICABILITY. This Act 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- HF 615 (3) 85 mm/sc/md 8/ 8