This statutory database is current through the 2004 Regular Session of the South Carolina General Assembly. Changes to the statutes enacted by the 2005 General Assembly, which will convene in January 2005, will be incorporated as soon as possible. Some changes enacted by the 2005 General Assembly may take immediate effect. The State of South Carolina and the South Carolina Legislative Council make no warranty as to the accuracy of the data, and users rely on the data entirely at their own risk.
Title 11 - Public Finance
VENTURE CAPITAL INVESTMENT ACT OF SOUTH CAROLINA
This chapter may be cited as the "Venture Capital Investment Act of South Carolina".
The General Assembly desires to increase the availability of equity, near-equity, or seed capital in amounts of one hundred million dollars or more for emerging, expanding, relocating, and restructuring enterprises in the State, so as to help strengthen the state's economic base, and to support the economic development goals of this State as described in the strategic plan of the Department of Commerce to be published annually beginning in 2003. The General Assembly also desires to address the long-term capital needs of small-sized and medium-sized firms, to address the needs of micro enterprises, to expand availability of venture capital, and to increase international trade and export finance opportunities for South Carolina based companies.
For purposes of this chapter:
(1) "Authority" means the South Carolina Department of Commerce.
(2) "Certificate" means a document executed by the fund verifying a tax credit for any year to which a lender is entitled.
(3) "Equity, near-equity, or seed capital" means capital invested in common or preferred stock, debt with equity conversion rights, royalty rights, limited partnership interests, limited liability company interests, and any other securities or rights that evidence ownership in private business.
(4) "Fund" means the South Carolina Venture Capital Fund.
(5) "Investor" means any corporation, limited liability company, community development corporation, or unincorporated business entity, including a general or limited partnership, that is selected by the fund to receive investments from the fund and then make venture capital investments therewith that meet the requirements of this chapter. An investor or a senior member of its management team must be a legal resident of this State and have a minimum of five years' experience in venture capital investing. In addition, substantially all of an investor's business activity shall be venture capital investing.
(6) "Innovation fund" means the South Carolina Technology Innovation Fund.
(7) "Person" means any individual, corporation, partnership, or other lawfully organized entity.
(8) "Research and development" means laboratory, scientific, or experimental testing and development related to new products, new uses for existing products, or improvements to existing products. Research and development also includes intellectual property, information technology, or technology transfer endeavors. The term does not include efficiency surveys, management studies, consumer surveys, economic surveys, advertising, or promotion, or research in connection with literary, historical, or similar projects.
(9) "Tax credit" means a credit against a lender's bank tax liability pursuant to Chapter 11, Title 12, or insurance premium tax liability pursuant to Chapter 7, Title 38 or other tax liability under Title 38, as the case may be, or in the case of a repeal or reduction by the State of the tax liability imposed by these sections, any other tax imposed upon such a lender by this State.
(10) "Venture capital" means equity, near-equity, and seed capital financing including, without limitation, early stage research and development capital for startup enterprises, and other equity, near-equity, or seed capital for growth and expansion of entrepreneurial enterprises.
(11) "Lender" means a banking institution subject to the income tax on banks under Chapter 11 of Title 12, insurance and insurance companies subject to a state premium tax liability under Chapter 7 of Title 38, and a captive insurance company regulated under Chapter 90 of Title 38.
(12) "Capital commitment" means the amount of money committed by the fund to an investor for a term of up to ten years, which term may be extended to provide for an orderly liquidation of the investor's portfolio investments.
(13) "Community development corporation" is as defined in Section 34-43-20(2).
South Carolina Venture Capital Fund established; board of directors; conflicts of interest.
(A) There is created, within the authority, a separate and distinct fund to be an independent instrumentality exercising essential public functions, and to be known as the "fund" as defined in Section 11-45-30(4).
(B)(1) The fund must be governed by a board composed of seven directors one of whom must be appointed by the Speaker of the House of Representatives, one of whom must be appointed by the Chairman of the House Ways and Means Committee, one of whom must be appointed by the President Pro Tempore of the Senate, one of whom must be appointed by the Chairman of the Senate Finance Committee, and three of whom must be appointed by the Governor, one of whom shall serve as chairman. No sitting member of the General Assembly may be appointed to serve on the board in any capacity including an ex officio capacity. Directors must be selected based upon outstanding knowledge and leadership, must be knowledgeable in the management of money and finance, and must possess experience in the management of investments similar in nature and in value to those of the fund. Directors serve for a term of office of four years and until their successors are appointed and qualify, except that of the initial directors appointed, the member appointed by the Speaker of the House of Representatives shall serve for an initial term of two years, the members appointed by the President Pro Tempore of the Senate shall serve for an initial term of two years, and one member appointed by the Governor shall serve for an initial term of two years so as to allow the terms of the directors to be staggered.
(2) The directors have the authority to govern the fund in accordance with the requirements of this chapter.
(3) A conflict of interest is considered to exist if a director of the fund, an officer, agent, or employee thereof, or any for-profit firm or corporation in which a director, officer, agent, or employee of the fund, or any member of his immediate family, as defined in Section 2-17-10(7), is an officer, partner, or principal stockholder engages in business activity with the fund either directly or indirectly in which the director, officer, agent, employee, or firm would personally benefit. In this case, the director, officer, agent, or employee shall refrain from any involvement of any type in regard to the activity including, but not limited to, discussing the proposed activity with another person associated with the entity desiring to engage in the activity with the fund, negotiating any aspects of the proposed activity with the fund, voting on any matter pertaining to the activity, and communicating with other board members, officers, agents, or employees of the fund concerning the activity. When a conflict arises, the director, officer, agent, or employee involved in the conflict, at the discretion of the board, shall resolve the conflict or resign from the position creating the conflict. Directors, officers, agents, and employees of the fund are subject to all provisions of Chapter 17, Title 2 and Chapter 13, Title 8, and the provisions of this item are supplemental to and not in lieu of the provisions of Chapter 17, Title 2 and Chapter 13, Title 8.
(C) The fund must be located within the Department of Commerce and is separate and distinct from the state general fund. The monies deposited in the accounts of the fund must be managed and invested by the directors with the assistance, if necessary, of professionals in the area of financial management and selected by a process as determined by the board of directors.
Fund to seek capital commitments; issuance of tax credit certificates in event of insufficient funds; use of loan proceeds; limitations.
(A) The fund must seek capital commitments to the fund in accordance with procedures approved by the State Budget and Control Board. The fund may retain an amount annually not to exceed one percent of the capital commitments received for expenses incurred by the fund. Capital contributions received by the fund must be in cash or in immediately available funds and are to be used only as provided by this chapter.
(B) The fund shall retain any fees earned after repayment to lenders to use as a contingency fund for future obligations to lenders and to fulfill additional capital commitments. If at any time a principal or interest payment is due and the fund has insufficient monies to repay same, the fund shall issue tax credit certificates in an amount to meet the obligation as provided for below, and tax credits as stipulated in subsection (C) are hereby established in these required amounts.
(C) These tax credits may be used to offset the lenders' state bank tax or premium tax liability in the event the fund does not meet its obligation to repay the lenders' cash investment together with required interest at the date and time the payment is due. These tax credits may be carried forward without limitation but are not refundable.
(D) The tax credits may also be transferred among bank or insurance company lenders for consideration, and then used by the subsequent holder. These tax credits shall take the form of a certificate issued by the board of the fund stating the amounts, year, and conditions of the tax credits reflected on the certificate.
(E) The board in accepting loans to the fund giving rise to these tax credits shall ensure that no more than fifty million dollars in total tax credit certificates are issued and outstanding at any one time with no more than twenty million dollars in tax credit certificates being redeemable for any one year. Any tax credit certificates issued in one year but carried forward and redeemed in a subsequent year do not count against the twenty million dollar limitation on the total amount of tax credit certificates which may be redeemed in that subsequent year.
(F) The fund is authorized to use the proceeds of loans received from lenders, together with other available monies, for making investments with venture capital investors and for paying and funding services as necessary.
(G) No part of the fund may inure to the benefit of or be distributed to its employees, officers, or board of directors, or to members of their immediate families as this term is defined in Section 2-17-10(7), except that the fund is authorized to pay reasonable compensation for services provided by employees of the fund and out-of-pocket expenses incurred by its employees, officers, or board members, as long as such compensation does not create a conflict of interest pursuant to Section 11-45-40. The provisions of this subsection are supplemental to and not in lieu of the provisions of Chapter 17, Title 2 and Chapter 13, Title 8.
Selection of investment plans.
The fund shall solicit from investors plans for the investing of capital in the fund in accordance with the requirements of this chapter. The fund shall consider and select the investment plans and shall select investors qualified to:
(1) make the most effective and efficient utilization of the investment; and
(2) invest in venture capital investments, requiring equity, near-equity, or seed capital which promote the economic development goals of this State as described in the strategic plan of the Department of Commerce adopted and published as of that date.
Venture capital investment requirements.
In order for the board of directors of the fund to place monies of the fund with an investor for the purpose of making a venture capital investment, the following requirements must be met:
(1) No investment by an investor in any one investment may exceed five million dollars or fifteen percent of the committed capital of the investor, whichever is less. In addition, an investor must agree to invest at least an amount equal to the fund's capital commitment to such investor in South Carolina based companies.
(2)(a) While the board of directors of the fund shall give preference to investors, otherwise qualified, that maintain either a headquarters or an office staffed by an investment professional in South Carolina, investments may be made with investors not principally located in South Carolina; provided, that the investors are otherwise qualified under this chapter and have other venture capital investments in South Carolina or in South Carolina based companies at least equal to the total amount of monies placed with that investor by the fund.
(b) "South Carolina based companies" for purposes of this section means any corporation, limited liability company, community development corporation or unincorporated business organization, including a general or limited partnership, that has its principal place of business located in this State and has at least fifty percent of its gross assets and fifty percent of its employees located in this State at the time of the initial investment. If a corporation, limited liability company, or unincorporated business organization is a member of an affiliated group, the gross assets and the number of employees of all of the members of the affiliated group, wherever those assets and employees are located, shall be included for the purpose of determining the percentage of the corporation's, company's, or organization's gross assets and employees located in this State.
(3) When selecting investors with which to place the fund's venture capital investments, the board of directors shall give preference to investors that have on or before the date of the fund's capital commitment, aggregate capital commitments of at least three times the amount of the fund's capital commitment. An investor's capital commitments for purposes of this requirement include private, federal, or other nonstate funds secured by the investor.
(4) Investors must develop a repayment plan based on expected liquidity events of its portfolio investments. All repayments must occur within ten years, subject to extension as described in Section 11-45-30(12).
(5) No investment may violate the provisions of Section 11, Article X of the Constitution of this State.
South Carolina Technology Innovation Fund established; purposes.
In addition to and apart from the other duties and functions of the fund, there is created under the administration of the board of directors of the fund, another fund entitled the South Carolina Technology Innovation Fund which shall receive that funding as may be provided by law. The board shall contract with a tax exempt organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, for administration of the innovation fund.
The innovation fund must be used by the board to:
(1) award small grants for the best and most creative ideas from South Carolina research universities' technology incubators with the awards to be available for eligible students and innovative knowledge-based enterprises that are located in a research university incubator. These grants are to be awarded to inspire and encourage knowledge-based technology and intellectual property transfers from research university faculty and students to the marketplace;
(2) design a major education, marketing, and public relations program to ensure that residents of South Carolina, members of the General Assembly, and potential venture capital investors understand and support the requirements for participation in the fund, the strategic need for venture capital funding, and for grant support for deserving entrepreneurs.
(A) The board shall provide loan, investment, tax credit, and expense reports at least quarterly during the fiscal year to the Governor, the General Assembly, and other appropriate officials and entities.
(B) In addition to the quarterly reports provided in subsection (A), the board shall provide an annual report to the Governor, the General Assembly, and other appropriate officials and entities containing at a minimum the following information:
(1) monies from the fund placed in venture capital investments with approved investors cumulatively and during that fiscal year;
(2) the extent of current loan obligations including principal and interest requirements;
(3) the amount and time lines of tax credit certificates issued both cumulatively and during that fiscal year;
(4) a description of a material interest held by a director, officer, or employee of the fund with respect to the investments or assets of the fund;
(5) a schedule of the rates of return, net of total investment expense, on assets of the fund overall and on assets aggregated by category over the most recent one-year, three-year, five-year, and ten-year periods, to the extent available; and
(6) a schedule of the sum of total investment expense and total general administrative expense for the fiscal year expressed as a percentage of the fair value of assets of the fund on the last day of the fiscal year, and an equivalent percentage for the preceding five fiscal years, if applicable.
(C) These disclosure requirements are cumulative to and do not replace other reporting requirements provided by law.
Powers of fund.
The fund has the power to promulgate regulations and make a contract, execute a document, perform an act, or enter into a financial or other transaction necessary to implement this chapter.