1 South Carolina General Assembly 2 118th Session, 2009-2010 3 4 H. 3870 5 6 STATUS INFORMATION 7 8 General Bill 9 Sponsors: Rep. Harrell 10 Document Path: l:\council\bills\gjk\20204sd09.docx 11 12 Introduced in the House on April 2, 2009 13 Currently residing in the House Committee on Ways and Means 14 15 Summary: Entrepreneurial Success Fund Act 16 17 18 HISTORY OF LEGISLATIVE ACTIONS 19 20 Date Body Action Description with journal page number 21 4/2/2009 House Introduced and read first time HJ30 22 4/2/2009 House Referred to Committee on Ways and Means HJ30 23 24 25 VERSIONS OF THIS BILL 26 27 4/2/2009 28 1 2 3 4 5 6 7 8 9 A BILL 10 11 TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 12 1976, BY ADDING CHAPTER 44 TO TITLE 11 SO AS TO 13 PROVIDE FOR THE “SOUTH CAROLINA 14 ENTREPRENEURIAL SUCCESS FUND ACT” TO BE 15 ADMINISTERED BY THE SOUTH CAROLINA VENTURE 16 CAPITAL AUTHORITY, TO PROVIDE DEFINITIONS, TO 17 PROVIDE A STATE INCOME TAX CREDIT FOR QUALIFIED 18 INVESTMENTS IN A FUND, TO PROVIDE FOR THE 19 AMOUNT OF ANNUAL AVAILABLE CREDIT, TO 20 DETERMINE THE AMOUNT OF A TAXPAYER’S CREDIT, 21 TO PROVIDE FOR THE FORMATION OF A FUND, TO 22 PROVIDE THAT THE PURPOSE OF A FUND IS TO MAKE 23 SEED CAPITAL INVESTMENTS IN HIGH GROWTH- 24 ORIENTED BUSINESSES, AND TO PROVIDE REPORTING 25 REQUIREMENTS. 26 27 Be it enacted by the General Assembly of the State of South 28 Carolina: 29 30 SECTION 1. Title 11 of the 1976 Code is amended by adding: 31 32 “CHAPTER 44 33 34 South Carolina Entrepreneurial Success Fund Act 35 36 Section 114410. This chapter may be cited as the ‘South 37 Carolina Entrepreneurial Success Fund Act’. 38 39 Section 114420. For purpose of this chapter: 40 (1) ‘Authority’ means the South Carolina Venture Capital 41 Authority created pursuant to Chapter 45 of this title. 42 (2) ‘Department’ means the Department of Revenue.

[3870] 2 1 (3) ‘Fund’ means a legal entity established to pool investments 2 to provide seed capital pursuant to the provisions of this chapter. 3 (4) ‘High growth-oriented business’ means a corporation, 4 general partnership, limited partnership, joint venture, trust, 5 proprietorship, or other similar entity or organization that is 6 expected to experience significant sales revenue growth. 7 (5) ‘Manager’ means the manager of a fund. 8 (6) ‘Prestartup business’ means a South Carolina business that 9 is in the process of developing a product or service and before the 10 time the product or service is offered for sale in the ordinary 11 course of business. 12 (7) ‘Qualified investment’ means a share in a fund purchased 13 solely for cash. 14 (8) ‘Seed capital’ means investments in either the common 15 stock, preferred stock, or bonds convertible to either common or 16 preferred stock, or options, warrants, or rights to receive any of 17 these or any other similar investment in a South Carolina business. 18 (9) ‘South Carolina business’ means any corporation, limited 19 liability company, community development corporation or 20 unincorporated business organization, including a general or 21 limited partnership, that has its principal place of business located 22 in this State and has at least fifty percent of its gross assets and 23 fifty percent of its employees located in this State at the time of the 24 initial investment by a fund. If a corporation, limited liability 25 company, or unincorporated business organization is a member of 26 an affiliated group, the gross assets and the number of employees 27 of all of the members of the affiliated group, wherever those assets 28 and employees are located, is included for the purpose of 29 determining the percentage of the corporation’s, company’s, or 30 organization’s gross assets and employees located in this State. 31 (10) ‘Startup business’ means a South Carolina business that is 32 in the first thirtysix months of providing goods or services in the 33 ordinary course of business or any South Carolina business that 34 qualified as a startup business by this definition at the time it 35 entered the fund’s seed capital portfolio. 36 (11) ‘State income tax credit’ includes both the taxpayer’s 37 income tax or premium tax liability. 38 (12) ‘Taxpayer’ means any individual, corporation, partnership, 39 or other lawfully organized entity. 40 41 Section 114430. (A) A taxpayer is entitled to a refundable state 42 income tax credit for a qualified investment made pursuant to this

[3870] 3 1 chapter. Except for the credit provided by this section, a fund and 2 a manager are otherwise subject to tax as provided for by law. 3 (B) Subject to Section 114440, the amount of the credit that a 4 taxpayer may receive under this chapter for a particular taxable 5 year is equal to the lesser of: 6 (1) the taxpayer’s state income tax liability for that taxable 7 year; 8 (2) the amount determined in Step Three of the following 9 steps: 10 Step One: Add the consideration paid for all qualified 11 investments of the taxpayer during the taxable year of the taxpayer. 12 Step Two: Multiply the amount determined in Step One by 13 threetenths. 14 Step Three: Add the product determined in Step Two to the 15 credit carryover, if any, to which the taxpayer is entitled for the 16 taxable year pursuant to Section 114440; or 17 (3) onehalf of all the qualified investments of the taxpayer 18 multiplied by threetenths. 19 (C) A corporation which files or is required to file a 20 consolidated return is entitled to the income tax credit allowed by 21 this section on a consolidated basis. The tax credit may be 22 determined on a consolidated basis regardless of whether or not the 23 corporation entitled to the credit contributed to the tax liability of 24 the consolidated group. 25 (D) The merger, consolidation, or reorganization of a 26 corporation where tax attributes survive does not create new 27 eligibility in a succeeding corporation but unused credits may be 28 transferred and continued by the succeeding corporation. In 29 addition, a corporation may assign its rights to its unused credit to 30 another qualifying entity if it transfers all, or substantially all, of 31 the assets of the corporation or all, or substantially all, of the assets 32 of a trade or business or operating division of a corporation to 33 another qualifying entity. 34 (E) The total amount of credits allowed pursuant to this chapter 35 may not exceed in the aggregate five million dollars for all 36 taxpayers for any one taxable year. 37 38 Section 114440. If the amount of the credit determined pursuant 39 to Section 114430(B) exceeds the credit allowed pursuant to 40 Section 114430 for that taxable year, then the taxpayer may carry 41 the excess over to the immediately succeeding taxable years. 42 However, the credit carryover may not be used for any taxable 43 year that begins on or after ten years from the date of the qualified

[3870] 4 1 investment. The amount of the credit carryover from a taxable year 2 must be reduced to the extent that the carryover is used by the 3 taxpayer to obtain a credit under this chapter for any subsequent 4 taxable year. 5 6 Section 114450. (A)(1) The South Carolina Venture Capital 7 Authority shall be responsible for administering the provisions of 8 this chapter in the same manner it administers the provisions of 9 Chapter 45 of this title mutatis mutandis. The authority shall 10 solicit as necessary from time to time investment plans for the 11 raising and investing of capital in accordance with the 12 requirements of this chapter. 13 (2) The authority shall consider the investment plans 14 submitted pursuant to this section and shall select one or more 15 designated investor groups deemed best qualified to capitalize one 16 or more private funds in accordance with this chapter. 17 (B)(1) Each designated investor group selected pursuant to 18 subsection (A) of this section shall enter into a designated investor 19 contract with the authority, which designated investor contract 20 must contain any investment guidelines and other terms and 21 conditions the authority considers necessary, advisable, or 22 appropriate. 23 (2) The authority may charge a fee under each designated 24 investor contract as compensation. 25 (C) A fund formed by a selected investor group must have as a 26 manager a taxpayer who is a resident of this State, or if the 27 manager is a legal entity, that entity must be a South Carolina 28 business and at least one taxpayer who is an executive officer 29 actively involved in the management of the entity must be a 30 resident of this State. 31 (D) The fund shall receive binding commitments from investors 32 to provide a minimum of five million dollars of seed capital. 33 (E) After the investor group has formed a fund, the manager 34 must apply to the department to certify the amount of binding 35 commitments made to the fund. All commitments must be cash 36 commitments. The manager must provide the director of the 37 department with satisfactory evidence demonstrating the amount 38 and binding nature of the commitments. The director has sole 39 discretion to determine the appropriate amount to certify and his 40 decision is binding upon the fund. Upon certification, the amount 41 of annual available credit must be reduced in an amount equal to 42 thirty percent of the certified amount of the fund. The amount of 43 annual available credit must be reduced in order of certification

[3870] 5 1 until all remaining credit is exhausted. The department must 2 maintain a current balance of available credit and provide the 3 amount upon request to any person interested in forming a fund. A 4 manager may apply in subsequent years for certification of 5 additional binding commitments made to the fund above those 6 certified in a previous year that would qualify the fund for 7 additional credit. 8 (F) The general nature of the business of the fund must be to 9 provide financing to high growth-oriented businesses, to provide 10 seed capital to South Carolina businesses, and to undertake any 11 acts appropriate or necessary to carry out these obligations. 12 (G) The fund shall raise capital to provide financing to high 13 growth oriented businesses. All investments made by a fund must 14 be to provide seed capital to South Carolina businesses, this seed 15 capital to be used primarily for the purpose of enhancing the 16 production capacity of these businesses or their ability to do 17 business in South Carolina. However, to the extent that a fund 18 directly induces seed capital monies from outside the State to be 19 invested in South Carolina businesses in which it is also investing, 20 a fund may substitute up to twothirds of these outside monies for 21 its own capital in fulfillment of the requirements of this section. 22 Seventy percent of qualified investments in a fund for which the 23 tax credit is allowed and investment monies induced into the State 24 by a fund to meet its capital commitment, must be invested to 25 provide seed capital financing of either startup businesses or 26 prestartup businesses. The remaining thirty percent may be 27 invested as the manager of the fund determines to provide capital 28 to South Carolina businesses. Any qualified investments in the 29 fund that exceed the amount for which a credit is allowed may be 30 invested in the fund manager’s discretion. 31 (H) When making investments by a fund, the manager must 32 give preference to South Carolina businesses that support the goals 33 of a regional or statewide economic development plan, and that 34 together with their affiliates, have on or before the date of the 35 fund’s investment commitment, aggregate capital or capital 36 commitments of at least thirty percent of the amount to be 37 invested. Capital or capital commitments for purposes of this 38 preference include private, federal, or other nonstate funds secured 39 by the South Carolina business and its affiliates. 40 (I) The aggregate amount of investments by a fund in any one 41 South Carolina business and its affiliates in any one year may not 42 exceed ten percent of the fund’s value. 43

[3870] 6 1 Section 114460. (A) If a taxpayer redeems a qualified 2 investment which is the basis for a credit under this chapter within 3 five years of the date it is purchased, the credit provided by this 4 chapter for the qualified investment is disallowed, and any credit 5 previously claimed and allowed with respect to the qualified 6 investment so redeemed must be paid to the department with the 7 appropriate return of the taxpayer covering the period in which the 8 redemption occurred. When payments are made to the department 9 under this section, the amount collected must be handled in the 10 same manner as if no credit had been allowed. However, the credit 11 is not disallowed pursuant to this section if a taxpayer who 12 redeemed the qualified investment within the fiveyear period 13 reinvests the redeemed amount in a qualified investment in the 14 same year of redemption. A taxpayer offsetting a redeemed 15 amount may not claim an additional credit for the reinvested 16 amount in the same taxable year or carryover any credit to a 17 succeeding tax year. 18 (B) Notwithstanding the provisions of subsection (A) of this 19 section, neither a distribution by a fund nor dividends or other 20 distributions by the manager are considered to be redemption of a 21 qualified investment unless the amount of the qualified investment 22 held by the taxpayer, after the distribution or dividend, is less than 23 the amount of the qualified investment held by the taxpayer 24 immediately prior to the distribution or dividend. 25 26 Section 114470. To receive the credit provided by this chapter, 27 a taxpayer shall: 28 (1) invest up to one million dollars but no less than one 29 hundred thousand dollars in the fund to qualify for the tax credit; 30 (2) claim the credit on the taxpayer’s annual state income or 31 premium tax return in the manner prescribed by the department; 32 and 33 (3) file with the taxpayer’s annual state income or premium tax 34 return a copy of the form issued by the fund as to the qualified 35 investment by the taxpayer, including any redemption of the 36 qualified investment within the meaning of Section 114480. 37 38 Section 114480. (A) A fund shall complete forms prescribed by 39 the department that show: 40 (1) as to each qualified investment in the fund: 41 (a) the name, address, and identification number of the 42 taxpayer who purchased a qualified investment; and

[3870] 7 1 (b) the nature of the qualified investment purchased by the 2 taxpayer and the amount paid for it; 3 (2) as to each investment made by the fund: 4 (a) the name, address, and tax identification number of the 5 entity receiving the seed capital; 6 (b) the amount of the investment; 7 (c) the aggregate amount of investments by the fund in the 8 entity at the time of the investment; and 9 (d) the amount of capital or capital commitments of the 10 entity at the time of the investment. 11 (B) These forms must be filed with the department on or before 12 the fifteenth day of the third month following the month in which 13 the qualified investment is purchased or an investment by the fund 14 is made. Copies of the forms reporting a qualified investment 15 must be mailed to the taxpayer on or before the fifteenth day of the 16 second month following the month in which the qualified 17 investment is purchased. 18 (C) The investment must be held for two years before it is 19 eligible for a tax credit. 20 21 Section 11-44-90. No investment in a fund established pursuant 22 to this chapter or the tax credits generated as a result of these 23 investments are considered securities under the laws of this State.” 24 25 SECTION 2. This act takes effect upon approval by the 26 Governor. 27 XX 28

[3870] 8