June 5, 2013
By Adam G. Kirk, HunterMaclean
Special to the Savannah Morning News
In April, Georgia Governor Nathan Deal signed House Bill 318, a landmark bill creating the Invest Georgia Fund, which adopts a venture capital model for state investment in qualified Georgia-based businesses. The bill, sponsored by our own Ron Stephens, also extends investment tax credits for qualified businesses which were due to expire this year through 2015.
The Invest Georgia Fund is intended to increase private investment in Georgia-based start-up businesses, as well as in established Georgia businesses developing “new methods or technologies” through research and development. The state will deposit public monies into the fund, which will then be invested in venture capital funds selected by the fund’s administrator. Venture capital funds receiving funds are, in turn, required to invest an amount that matches or exceeds the funds they receive from the Invest Georgia Fund into qualified Georgia-based businesses. The state will be entitled to 80 percent of any profits from such investments.
The fund will be overseen by a newly created Invest Georgia Board with five members—three appointed by the governor, one by the lieutenant governor and one by the speaker of the House. The board’s primary duties will be to set investment policy and select the fund administrator. The fund administrator must be a qualified investment advisory firm selected through an open bid process.
The range of permitted investments in Georgia ventures by recipient venture capital funds is broad. Qualified businesses include both “early stage” and “growth stage” businesses that are headquartered in Georgia and have their principal business operations in Georgia. With limited exceptions, the fund administrator has broad discretion under the investment policy established by the Invest Georgia Board to identify investments which meet the stated purpose of the bill. The funds cannot be invested in ventures that engage substantially in retail sales, real estate development, entertainment, finance, natural resource extractions, law firms, accounting firms and medical practices.
The bill also provides for the return of funds invested in companies that relocate outside of Georgia within three years from the date of an investment, unless the company maintains a significant presence in Georgia.
Venture capital funds wishing to receive and invest funds from the Invest Georgia Fund will be selected through an open bid process, which will require them to demonstrate significant investment experience, a successful track record in job creation, and a commitment to making investments which foster the development of technology and industry in Georgia.
The state may invest up to $10 million in the fund in its first year and up to $35 million in its fifth year. The fund must start accepting qualifications from venture capital funds within 60 days of the appointment of the Invest Georgia Board.
The Invest Georgia Fund provides a vehicle for needed investment in Georgia’s emerging companies. The success of the fund will depend upon the priorities of the Invest Georgia Board in establishing investment policy and the diligence of the fund administrator in selecting venture capital firms to with which to partner.
House Bill 318 also extends the tax credit available for investments in certain qualified businesses. An individual or a pass-through entity making a direct investment in a qualified business in 2014 or 2015 can claim a 35 percent tax credit against state taxes in the second year after the investment is made.
Qualified businesses include early stage companies with less than 20 employees, less than $1 million in gross annual revenue and no more than $2 million in cash from investments or growth stage businesses with less than 100 employees and more than $1 million in gross annual revenue. Like investments from the Invest Georgia Fund, qualified businesses cannot engage substantially in real estate, construction, finance or professional services.
In addition, the qualified business must register and be approved by Department of Revenue, and the investor must apply to the Department of Revenue for the credit between September 1 and October 31 of the year the credit will be claimed. House Bill 318 also includes new provisions expanding targeted sales tax relief to zoos, aquariums and tourism attractions.
All in all, House Bill 318 represents a significant investment by the state in the types of businesses that typically generate high quality job growth. According to the National Venture Capital Association, one job is created for every $17,000 in venture capital invested in Georgia, and public companies in Georgia that were once venture capital backed account for over 571,000 jobs.
The structure of the fund places the selection and monitoring of investment performance in the hands of venture capital professionals experienced in the nurturing of startup businesses. Like all ideas which look good on paper, however, the test will be in the execution. The bill calls for detailed reporting to the Invest Georgia Board on investments made by the fund, so we should be able to measure their results.
Those interested in utilizing the tax credit for qualified investments or receiving funds from the Invest Georgia Fund should consult with tax counsel and an investment advisor.
