Defines a "Minnesota small business investment company" as a partnership, corporation, trust, or limited liability company, organized on a for-profit basis, that has its principal office in Minnesota, invests cash in qualified businesses as its primary business activity, and is certified by the Department of Employment and Economic Development as meeting the criteria in the section.

Defines a "qualified business" as an independently owned and operated business that meets all of the following requirements:

• headquarters and principal place of business is in the state; at least 60 percent of its employees are in the state;
• less than 100 employees;
• is not predominantly engaged in professional services provided by accountants, doctors, or lawyers; banking or lending; real estate development; insurance; oil and gas exploration; direct gambling activities; or making loans to or investments in a Minnesota small business investment company or affiliate; and
• is not a franchise of, has not been organized by, and has no financial relationship with (other than the initial qualified investment) a Minnesota small business investment company or an affiliate.

Provides that a business qualified at the time of the first qualified investment will remain classified and may receive continuing qualified investments from any Minnesota small business investment company. Provides that a business will not be eligible to receive qualified investments if it relocates its headquarters or principal place of business out of state, or if it has not expended substantially all of its prior qualified investments to establish and support its Minnesota operations, except for advertising, promotions, and sales purposes.

Defines "qualified debt instrument" as a debt instrument issued by a Minnesota small business investment company that meets the following requirements:

• issued at par value or a premium;
• original maturity date of at least four years; and
• repayment schedule which is not faster than a level principal amortization over four years provided that the payments must not exceed, in any one year, 25 percent of Minnesota small business capital invested by the debt holder in a Minnesota small business company on the debt instrument. Makes an exception if the qualified debt instrument or the issuer is in default and must be rated within the top three rating categories of a specified rating agency.

Defines a "qualified investment" as an investment of money by a Minnesota small business investment company in a qualified business for the purchase of debt, debt participation, equity, or hybrid security. Any qualified investment in the form of a debt instrument must have a final stated maturity of at least two years and a repayment schedule that is no faster than level principal amortization over two years. Does not prohibit voluntary prepayment of a qualified investment or a Minnesota small business investment company to exercise its rights as a creditor.

Defines a "qualified underserved area business" as a business that would otherwise meet the criteria of a qualified business, but is located in a rural Minnesota county, the Iron Range, or a low-income community as defined by the IRS.

Subdivision 2 (Certification), paragraphs (a) and (b), requires the Commissioner of Employment and Economic Development to provide a standardized format for applying for the small business investment credit. Requires an applicant to:

• file an application with the department;
• pay a nonrefundable application fee of $7,500;
• submit an audited balance sheet, completed by a CPA, that states whether the applicant has an equity capitalization of $500,000 or more;
• have at least two principals employed to manage the funds (must have five years of money management experience in venture capital or small business investment).

Paragraph (c) authorizes the department to certify applicants that want to be designated Minnesota small business investment companies if the applicant is headquartered, and licensed or registered to conduct business in Minnesota, invests cash in qualified businesses as its primary business activity, and meets the criteria of the section.

Paragraph (d) requires the department to review the applicant's organizational documents and business history to determine if the requirements of the section are satisfied.

Paragraph (e) provides that the department must issue a certification or refusal within 60 days after receipt of an application.

Paragraph (f) requires the department to begin accepting applications to become a Minnesota small business investment company on September 30, 2008.

Subdivision 3 (Requirements), paragraph (a), provides that an insurance company or affiliate must not beneficially own 15 percent or more of the voting securities or other voting ownership interest, manage, or control the direction of investments of a Minnesota small business investment company.

Paragraph (b) authorizes a Minnesota small business investment company to obtain one or more guarantees, indemnities, bonds, insurance policies, or other payment undertakings for the benefit of certified investors from any entity.

Paragraph (c) provides that the subdivision does not preclude a certified investor, insurance company, or other party from exercising its legal rights and remedies; from monitoring a Minnesota small business investment company to ensure its compliance; or from disallowing any investments that have not been approved by the department.

Paragraph (d) authorizes the department to contract with an independent third party to review, investigate, and certify that the applications comply with the provisions of this section.

Subdivision 4 (Aggregate limitations on investment credits; allocation), paragraph (a) provides that the aggregate amount of designated capital for which investment credits will be allocated to all certified investors must not exceed the amount that would entitle all certified investors of Minnesota small business investment companies to take aggregate credits of $80,000.

Paragraph (b) specifies the way that credit allocations will be filed at the department.

Paragraph (c) specifies that in the event that two or more Minnesota small business investment companies file credit allocation claims on the same day, and the aggregate amount of the credit allocation claims exceeds the aggregate limit of credits or the lesser amount of credits that remain unallocated on that day, the credits will be allocated on a pro rata basis.

Paragraph (d) requires the department to notify the Minnesota small business investment company, within 10 days of receiving a credit allocation claim, about the amount of credits that will be allocated to each of the certified investors. If a Minnesota small business investment company does not receive aggregate investments of designated capital equaling the amount of credits allocated to its certified investors within 10 business days of the notice of allocation, then the excess amount of designated capital will be forfeited. The forfeited credits will be reallocated among certified investors of other Minnesota small business investment companies on a pro rata basis. Authorizes the Commissioner to levy a fine of not more than $50,000 on any certified investor who does not invest the full amount of designated capital allocated by the department.

Paragraph (e) provides that the maximum amount of credit allocation claims that may be filed on behalf of any one certified investor on an aggregate basis with its affiliates in one or more Minnesota small business investment companies, must not exceed ten times the largest annual state premium tax liability incurred by the approved investor on an aggregate basis with its affiliates during the three tax years preceding the year of the allocation date.

Subdivision 5 (Requirements for continuance of certification), paragraph (a), specifies the qualified investments that a Minnesota small business investment company must make to continue to be eligible for certification.

Paragraph (b) requires a Minnesota small business investment company to request a written determination from the department that the proposed investment will qualify prior to making the investment. Specifies the notice requirements. Authorizes the department to consider the proposed investment a qualified investment, even if it does not meet the definition of a qualified investment or a qualified business.

Paragraph (c) provides that the designated capital not placed in qualified investments by a Minnesota small business investment company may be held or invested in the manner that the company deems appropriate. Authorizes the proceeds of all designated capital returned to the company after being placed in qualified investments to be placed again in qualified investments.

Paragraph (d) provides that a Minnesota small business investment company will not be able to receive management fees if, within five years after its allocation date, the company has not placed at least 60 percent of the designated capital allocable to it in qualified investments.

Paragraph (e) provides that a Minnesota small business investment company will not be able to receive management fees if, within ten years after its allocation date, the company has not placed at least 100 percent of the designated capital allocable to it in qualified investments.

Paragraph (f) prohibits a Minnesota small business investment company from making a qualified investment without department approval if after the company's investment, on an aggregate basis with its affiliates, it would own more than 49 percent of the common equity or voting interests of the qualified business. Provides that nothing in the subdivision precludes a Minnesota small business investment company from exercising any right or remedy upon default.

Paragraph (g) prohibits a Minnesota small business investment company from investing where it would cause the company's total qualified investment outstanding to exceed 15 percent of the total designated capital of the company at the time of the investment.

Paragraph (h) specifies how the percentage calculation is determined.

Subdivision 6 (Minnesota small business investment company reporting requirements), paragraph (a), specifies the information that a Minnesota small business investment company must report to the department.

Paragraph (b) requires a Minnesota small business investment company to pay the department an annual, nonrefundable certification fee of $5,000 on or before April 1, or $10,000 if later.

Paragraph (c) specifies that the department must notify the Minnesota small business investment company within 60 days of receiving notification and documentation that the company has met the requirements and has invested 50 percent of its designated capital.

Subdivision 7 (Distributions), paragraph (a), authorizes a Minnesota small business investment company to make qualified distributions at any time and specifies the circumstances under which it can make a distribution that is not qualified.

Paragraph (b) provides that a business is deemed to have relocated outside of Minnesota unless it maintains its headquarters or primary workplace with more than 50 percent of the employees within the state. If a business in which a qualified investment is made, relocates to another state, the cumulative amount of qualified investments made by a Minnesota small business investment company must be reduced by the amount of the qualified investment, with specified exceptions.

Paragraph (c) requires a Minnesota small business investment company to pay to a qualified seed fund an amount equal to five percent of all distributions to the equity holders of the company, other than qualified distributions and distributions of all equity contributed to the company by the equity holders.

Subdivision 8 (Decertification), paragraph (a), requires the department to conduct an annual review of each Minnesota small business investment company. The cost will be paid by each company according to the fee schedule.

Paragraph (b) provides that any material violation of the section is grounds for decertification and disallowance of credits.

Paragraph (c) provides that once a Minnesota small business investment company has invested an amount cumulatively equal to 100 percent of its designated capital in qualified investments and has met the requirements of the section, it is no longer subject to regulation or reporting. If the company has not met the requirements, the department must provide notice within 60 days.

Paragraph (d) requires the department to send notice of decertification to the Commissioner of Revenue and to each certified investor whose tax credit was subject to recapture or forfeiture.

Subdivision 9 (Revocation of certification) authorizes the department to revoke certification of a Minnesota small business investment company if there is a misrepresentation in the application or if there is a violation of the requirements.

Subdivision 10 (Registration requirements) requires all investments for which tax credits are allowed to be registered or specifically exempt from registration.

Subdivision 11 (Reports to governor and legislature) requires the department to make an annual report to the Governor and the committees with jurisdiction over taxes and economic development. Specifies the requirements of the report.

Section 2 [Minnesota Small Business Investment Company Credit], paragraph (a), authorizes a certified investor to acquire a credit against the tax imposed in this chapter equal to 80 percent of the investment of designated capital. Specifies the credit claim schedule.

Paragraph (b) prohibits the credit for the taxable year to exceed the liability for tax. If there is an excess, it must be an investment carryover to each of the succeeding taxable years.

Paragraph (c) provides that a certified investor claiming a credit is not required to pay an additional retaliatory tax.

Paragraph (d) provides that a certified investor is not required to reduce the amount of tax pursuant to the state premium tax liability included by the investor in connection with ratemaking for an insurance contract written in the state because of a reduction in the investor's tax liability based on the tax credit.

Paragraph (e) provides that if the taxes paid by a certified investor with respect to its state premium tax liability constitute a credit against any other tax imposed by the state, the investor's credit against the other tax will not be reduced by virtue of the reduction in the liability based on the tax credit.

Paragraph (f) provides that decertification of a Minnesota small business investment company will result in the disallowance and recapture of the credit. Specifies how the amount to be disallowed and recaptured must be assessed.

Paragraph (g) specifies when revocation of certification must occur.

Paragraph (h) provides that a certified investor may not transfer, agree to transfer, sell, or agree to sell the credit until two years from the date that designated capital is invested. Specifies how an investor may transfer credits after two years.

DS/syl cc: John Fuller

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