2009 Public Chapter 610, Section 3(16), provides that “TNInvestco” means “a partnership, corporation, trust, or limited liability company, whether organized on a for-profit or not-for-profit basis that completes the application process … and that is certified by the Department of Economic and Community Development as meeting the established criteria.”
Any partnership, corporation, trust or limited liability company may apply for certification as a TNInvestco by completing the following requirements by October 1, 2009. The Department of Economic and Community Development will review the application for certification and determine an entity’s eligibility. Entities wishing to be certified as a TN Investco must:
• File an application with the Department of Economic and Community Development along with a nonrefundable application fee of $7,500 payable to the “State of Tennessee” at the time of filing the application.
• Submit as part of the application an audited balance sheet that contains an unqualified opinion of an independent certified public accountant issued within 60 days of the application date that states that the applicant has an equity capitalization of $500,000 or more in the form of unencumbered cash, marketable securities, or other liquid asset.
TNInvestco is a state-sponsored, “venture capital type” program in which the state, using a competitive process, has picked ten different firms to provide capital to high-growth, transformational businesses in Tennessee.
The goals of TNInvestco are to develop Tennessee’s entrepreneurial infrastructure, bring additional capital into the state, diversify the state’s economy and create “anchors,” or “clusters,” of business innovation that result in the creation or spin off of new companies and the attraction of new talent to Tennessee.
The state offered $200 million in gross premium tax credits for future years use to insurance companies that invest in companies qualified by the State of Tennessee as a “TNInvestco”. The TNInvestcos have sold the future years tax credits for up-front capital to invest in Tennessee businesses. The TNInvestco program is administratively housed in the Department of Economic and Community Development.
Businesses interested in seeking funding from a TNInvestco are encouraged to view the program requirements and fill out the Web form here. All applications will be submitted directly to the TNInvestcos for consideration.
After recognizing a need to attract more seed and early-stage capital for Tennessee businesses and entrepreneurs, Governor Phil Bredesen and the Tennessee General Assembly worked to enact the Tennessee Small Business Investment Company Credit Act that created the TNInvestco program on July 9, 2009.
The state has picked ten firms as award winners that are qualified TNInvestcos and two firms that are alternate winners. To view the TNInvestco list click here.
The purpose of the TNInvestco Act is to encourage and support investments in qualified small businesses that have the potential to transform the State of Tennessee’s economy. Companies like FedEx and HCA were founded by entrepreneurs and eventually backed by venture capital investors. These companies have had a transformational impact on the state’s economy through the jobs, wealth and tax revenues made possible, directly or indirectly, by the efforts of the entrepreneurs that turned vision into reality and the investors that fueled their ambition. The goal of this program is to create opportunities for such economic growth in Tennessee, and the TNInvestco program will only invest in businesses that meet the program’s aforementioned goals.
No, there are no fees that need to be paid to a TNInvestco in order to apply for consideration of funding. Businesses interested in being funded by a TNInvestco can fill out the webform and have their information sent directly to TNInvestco investment managers here.
Yes. However, there is no requirement that a participating investor take an equity interest in the TNInvestco.
No. The amount of the tax credit is 100% of the amount allocated to the participating investor by the TNInvestco. The amount of the tax credit is not equal to 100% of the amount invested.
No. The participating investor’s investment tax credit is earned and vested upon making its investment in the qualified TNInvestco. The subsequent performance of the TNInvestco has no bearing on the investor’s entitlement to the tax credit.
A participating investor must be an insurance company that is required to pay the gross premiums tax pursuant to Tenn. Code Ann. § 56-4-205. Therefore, if an entity is subject to the gross premiums tax under any other section of the Tennessee Code, then it is not eligible to invest in a TNInvestco as a participating investor and cannot receive an allocation of investment tax credits.
he Internal Revenue Service is the sole arbiter with respect to federal tax matters. The state will support TNInvestcos seeking clarification from the IRS regarding the proper federal tax treatment of the credit allocation. The state recognizes that federal tax liabilities could reduce the effectiveness of this economic development initiative and will accordingly work with TNInvestcos to minimize any adverse federal tax implications.
The purpose of the TNInvestco Act is to encourage and support investments in qualified small businesses that have the potential to transform the State of Tennessee’s economy. Companies like FedEx and HCA were founded by entrepreneurs and eventually backed by venture capital investors. These companies have had a transformational impact on the state’s economy through the jobs, wealth and tax revenues made possible, directly or indirectly, by the efforts of the entrepreneurs that turned vision into reality and the investors that fueled their ambition. The goal of this program is to create opportunities for such economic growth in Tennessee. TNInvestcos that receive an allocation of tax credits must propose an investment strategy to make seed and early stage investments in Tennessee small businesses that could potentially transform the state’s economy. It is the responsibility of the TNInvestco to communicate its strategy and explain how a successful implementation of its strategy will yield transformational outcomes.
Tenn. Code Ann. § 4-28-102 (15), provides that “seed or early stage investment” means an investment in a company that has a product or service in testing or pilot production that may or may not be commercially available. The company may or may not be generating revenues and may have been in business less than three years at the time of investment. It is the responsibility of the TNInvestco to demonstrate that a company in which it invests deserves classification as a seed or early stage investment (and thereby receives a 300% multiplier for purposes of meeting the pacing requirements outlined in Section 7 of the TNInvestco Act). Common sense guidelines should apply. For example, an investment in a small business created when an uncommercialized technology was spun out of a large company would most likely merit classification as a seed or early stage investment. In contrast, an investment in a small business created when an established business unit was spun out of a large company would most likely not count as a seed or early stage investment.
The restrictions on the types of investments a TNInvestco is permitted to make are intended to deter investment in businesses that typically have ready access to funding. The TNInvestco program is intended to have a transformational impact on the state’s economy through the jobs, wealth, and tax revenues of the businesses that are created. Any specific questions regarding types of businesses that could or should be funded through the TNInvestco program should be addressed to the Department of Economic and Community Development.
Tenn. Code Ann. § 4-28-106 (a)(1)(B) reads, “Not more than twenty-five percent (25%) of the investment amounts required by subdivisions (a)(1)(A)(i)-(iv) shall be attributable to the three hundred percent (300%) seed or early-stage multiplier.” This means that a TNInvestco would have a statutory cap of $3,150,000 to count toward the investment thresholds. In order to get to the $3,150,000 cap, the TNInvestco would need to invest $1,050,000 in approved seed or early stage qualified businesses that would be multiplied by the 300% multiplier for purposes of calculating the investment thresholds.
Ex, Base investment amount: $14,000,000
X 90%: $12,600,000 = minimum to be invested by year 6
X 25%: $ 3,150,000 = cap attributable to multiplier
/ 300%: $ 1,050,000 = max. seed & early stage cash invested for multiplier
Yes. The Department of Commerce & Insurance issued a bulletin dated August 7, 2009, confirming this treatment.
Since participating funds may structure their deals with insurance companies separately, they should consult with legal counsel regarding this issue.
Yes. However, a minimum amount must be maintained equivalent to the base investment amount.
No. However, the capital may be reinvested during the one year redeployment period in order to meet the benchmarks set out in the Tenn. Code Ann. § 4-28-106. In order to comply with the program, the investment levels laid out Tenn. Code Ann. § 4-28-106 must be maintained at all times.
Yes, provided that the benchmarks set out in Tenn. Code Ann. § 4-28-106, are met. This issue potentially impacts federal tax liabilities associated with this transaction. By statute, funds awarded tax credits will work with the state to structure the award of the credit to minimize federal tax obligations.
“Cash equivalents” is a commonly used financial term that refers to assets that are readily convertible into cash, such as money market holdings, short-term government bonds or Treasury bills, marketable securities, and commercial paper. The Financial Accounting Standards Board defines “cash equivalents” as highly liquid securities with maturities of less than three months.
There is no requirement that designated capital be in the form of equity. Rather, a participating investor may invest money in the form of either debt or equity.
The qualified distribution cannot exceed the actual tax liability due and payable as shown on the investor’s actual return. The request for a qualified distribution related to tax liabilities should be made with supporting documentation, including tax returns, verifying the need.
Investments that result in a liquidity event may potentially result in the fund dropping below the investment threshold in any given year. A one-year period is provided to redeploy funds to maintain compliance with program requirements.
Tenn. Code Ann. § 4-28-102 (12) (E) shall apply, such that a qualified distribution includes any distribution or payment to a participating investor that is in excess of the base investment amount, including any gains from the investment of such base investment amount.
Distributions qualifying under Tenn. Code Ann. § 4-28-102 (12) (E) are not subject to the State Profit Share Percentage.
No. As used in this section, “any amounts” refers to any amount less than 100% of the base investment amount. If a TNInvestco elects to not invest the full $14 million of the base investment amount, the entire uninvested amount must be returned to the state prior to profit-sharing distributions to investors.
The TNInvestco must maintain the percentage investment thresholds in Tenn. Code Ann. § 4-28-106. Any non-qualified distributions may not reduce the base investment amount during any calendar year according to Tenn. Code Ann. § 4-28-108. Investment capital liquidated during a liquidity event will be given a one-year redeployment period for purposes of calculating the investment thresholds in Tenn. Code Ann. § 4-28-106.
Example. If an investment was liquidated and put the TNInvestco theoretically below a statutory investment threshold then they would in reality have one year from the date they liquidated the qualified investment to be back in compliance for purposes of calculating the statutory thresholds. Also important to note, according to Tenn. Code Ann. § 4-28-109, at any time that the TNInvestco makes distributions, other than qualified distributions or distributions representing repayments of capital contributions, to its equity investors, the qualified TNInvestco shall pay to the state the profit share percentage (50%).
There is no specific requirement regarding who performs what functions in the investment partnership, however, experience in investing in Tennessee-based companies will be given substantial weight in the decision process.
Yes. However, funds must be available to pay any noncompliance fines or penalties, as these penalties may not be paid for out of tax credit proceeds or gains from investments funded by tax credits.
Yes, provided that the entity continues to fulfill its fiduciary duty to the program.
The state realizes that the majority of these entities will be newly formed; we will look at the primary place of business of the individuals managing the investment decisions to make this determination. In the alternative, if the manager is a non-Tennessee resident, we will look to see whether he has five years of experience managing investments in Tennessee companies.
Yes. The respective $125,000 and $50,000 caps for organizational expenses and annual professional service fees are per tax credit allocation. Therefore, the caps are doubled in the event a TNInvestco receives an allocation of two tax credits.
No. The base investment amount is not reduced by qualified distributions. The definition of "base investment amount" states that the term "means fourteen million dollars in the case of a qualified TNInvestco receiving one allocation ... which must be available in cash or cash equivalents immediately following the investment by a TNInvestco's participating investors and its owners." The definition does not provide a deduction from the base investment amount for management fees, professional services fees, and startup costs.
No. The definition of "qualified investment" states that "seed or early stage investments shall be increased by three hundred percent (300%) for purposes of determining if a qualified TNInvestco meets the investment thresholds in Tenn. Code Ann. § 4-28-106." It does not mention using the multiplier for considering the management fee as discussed in Tenn. Code Ann. § 4-28-102 (12) (B).
Yes. Note that the TNInvestco may not invest more than fifteen percent of its designated capital in any one qualified business without the approval of the Department of Economic and Community Development. However, there is no similar limitation on the investment of capital received from investors other than participating investors.
A manager or affiliate of a TNInvestco is permitted to be employed by a qualified business in which the TNInvestco makes a qualified investment. Remuneration paid by the qualified business to the manager or affiliate is not considered to be a qualified distribution. However, if the TNInvestco compensates the manager or affiliate directly for services rendered to the qualified business, such compensation will be treated as a qualified distribution.
Yes. The qualified business is permitted to compensate the affiliate for services rendered, provided that such compensation does not exceed fair market value. Also, the TNInvestco affiliate is required to report any payment for interim management services that it receives from the qualified business prior to receiving the first payment for approval. Additionally, the TNInvestco affiliate is required to meet with ECD every quarter after a payment was reported for review and if necessary, present the case on why an additional (quarterly) approval is needed.
The anniversary of the fund falls on the allocation date. The allocation date is the date on which the investment tax credits were allocated to the participating investor(s).
Yes, assuming that the company in which the qualified investment is made is a qualified business.
Yes, a company can be a legally organized entity in another state and be eligible for a qualified investment as long as they are headquartered in Tennessee and meet the definitions of a “qualified business” in § 4-28-102(10)(A) and § 4-28-102(10)(B).
The State of Tennessee is not a party to the transaction which is just between the qualified TNInvestco and the qualified business however, the transaction must comply with the terms or guidelines laid forth in the TNInvestco statute. A qualified business shall not pay any commitment, finders, broker or other similar type-fee as a term of closing to any qualified TNInvestco. However, a qualified business may pay reasonable and prudent fees normally associated with a venture capital transaction at closing such as legal fees. Any payments from a qualified business to a TNInvestco or its managers should be disclosed to ECD.
The term “employee” means any officer of a corporation, or any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee. A company seeking a qualified business designation would need to include an employee if they pay FICA taxes, employee benefits, have the right to hire or terminate or they are controlled solely by the company. Additionally, an employee may be considered for the purposes of this act if the company seeking qualified business designation is part of a subsidiary or has a parent company. Common sense rules should apply and the structure of the deal and flow of funds to company subsidiaries and parent companies should be disclosed to the state for the purposes of determining if the business meets the qualified business definition.
A. Professional services are infrequent, technical, or unique functions performed by independent contractors or by consultants whose occupation is the rendering of such services. Examples are accounting, legal, public relations and any other fee that is in accordance with industry custom for ongoing professional service.
Tenn. Code Ann. § 4-28-106 (b) states “If the department determines that the proposed investment does not meet the definition of a qualified investment, qualified business, or seed or early stage investment, the department may nevertheless consider the proposed investment a qualified investment, or a seed or early stage investment, and if necessary, the business a qualified business, if the department determines that the proposed investment will further state economic development".
The department will utilize the following criteria as the initial basis for considering granting exceptions, but is not limited to this criteria and does not guarantee an exception will be granted in all situations if these criteria are met. The criteria are as follows: 1) Executive leadership in the company is committed to remaining within the state 2) Majority of investors in the company are based in Tennessee 3) Board structure and board members are committed to remaining in Tennessee 3) Company addresses an industry or sector need for the state that may help to recruit or retain certain types of talent and skill sets in which the state is lacking 4) Addresses job needs for rural areas within the state 5) Addresses women and minority participation 6) Capitalizes on strategic partnerships with existing Tennessee businesses 7) The company will produce additional investments through other venture organizations within the state (excluding TNInvestco firms) 8) Company shows promise for high-growth in employment and revenues. Once the Commissioner of Economic and Community Development has reviewed all available information and documentation submitted by a TNInvestco, a determination will be made.as to whether a exception will be granted.