Part 1.
COMPTROLLER OF PUBLIC ACCOUNTS
Chapter 3.
TAX ADMINISTRATION
Subchapter GG. INSURANCE TAX
34 TAC §3.833
The Comptroller of Public Accounts adopts new §3.833
concerning certified capital companies and certified investor premium tax
credits, with changes to the proposed text as published in the October 22,
2004, issue of the
Texas Register
(29 TexReg
9813).
It addresses the creation of certified capital companies (CAPCOs) and premium
tax credits by insurers and other persons that invest in them. This section
pertains to investments of certified capital in CAPCOs by certified investors.
It describes the procedures for application to the Comptroller of Public Accounts
for certification as a CAPCO, the requirements for maintaining CAPCO status,
and the process for de-certification for noncompliance with these requirements.
It provides for premium tax credits for insurance companies to promote investment
in CAPCOs that fund qualified businesses, early stage businesses, or strategic
investment businesses, and describes the methods for claiming tax credits.
This section also details the annual review conducted by the comptroller and
the required reports CAPCOs must file with the comptroller. The section implements
Senate Bill 601 passed by the 77th Legislature, 2001, as amended by House
Bill 2425 passed by the 78th Legislature, 2003, codified at Insurance Code,
Chapter 4, Subchapter B, Articles 4.51-4.73. The changes are made in response
to comments received or to correct language to conform with the statutes.
Written comments were received regarding adoption of this new section.
The following persons provided comment: Michael Korengold, President of Enhanced
Capital Partners, LLC and Michael T. Johnson, Principal of Advantage Capital
Partners, who operate CAPCOs in other states. They generally support the proposed
rules as "extremely thorough, well-crafted rules that effectively resolve
issues that have arisen in other state programs," but recommend clarification
or expansion of certain provisions.
Comments: Both commentators expressed a concern with the definition of
CAPCO headquarters included at §3.833(a)(8), which requires that 80%
of a CAPCO's administrative costs be spent in Texas. The concern is that the
requirement might be interpreted to prohibit the use of centralized "back-office"
payroll, accounting and administrative functions that will be routinely conducted
outside of Texas by their organizations. One commenter suggests the words
"and administrative" be deleted from §3.833(a)(8)(A) or, alternatively,
proposes adding language clarifying that such administrative functions may
be performed outside of Texas.
Response: The comptroller disagrees with this comment. Nothing contained
in the proposed rule prohibits a CAPCO from obtaining routine administrative
services from an out-of-state provider or prohibits an affiliate of the CAPCO
from providing administrative services so long as such services, in combination
with other administrative costs, do not exceed 20% of a CAPCO's annual operating
expenses.
Comments: Both commentators recommend clarification of the language relating
to expenses incurred in the formation and funding of the CAPCO. Specifically,
the commentators state that §3.833(a)(17)(A) is unclear as to whether
the cost of insuring and defeasing the debt obligations of the CAPCO may be
counted in the limitations on formation costs.
Response: The comptroller agrees that the specific language could be confusing
and based on these comments revises §3.833(a)(17)(A).
Comment: One commenter recommends changes to §3.833(i)(2), which disqualifies
investments in any previously qualified business that relocates its principal
business operations outside Texas during the term of the CAPCO investment.
The commenter suggests that if the qualified business maintains its headquarters
in Texas, it should not have to meet the principal operation requirement that
80% of the CAPCO's employees reside in Texas. The commenter relies on language
that focuses on the location of business headquarters in §3.833(d)(7).
Response: While the comptroller disagrees with this comment, it does highlight
an inconsistency between the statute and the proposed rule. The enabling legislation
addresses treatment of follow-on investments and clearly states under Article
4.56(e) that "a follow-on investment does not qualify as a qualified investment
if, at the time of the follow-on investment, the qualified business no longer
has its principal business operations in this state." Consistent with the
purpose of the CAPCO legislation to promote job creation and economic development
in Texas, the language at §3.833(i)(2) will not be revised, but §3.833(d)(7)
will be revised to conform to the statute.
Comment: One commenter recommends changing the singular "affiliate" to
the plural "affiliates" at §3.833(f)(9) to ensure that no more than one
certified investor or the affiliates of that certified investor provide indemnity
agreements or insurance for the benefit of a certified investor. This recommendation
appears to address insurance regulatory issues. Also, the commenter is concerned
that an affiliate of a certified investor would be prohibited from providing
these instruments.
Response: While there may be a legitimate insurance regulatory issue, the
comptroller disagrees with the recommendation to change "affiliate", which
is the statutory term. The comptroller, however, agrees that only one certified
investor or affiliate may provide these instruments to a CAPCO and, therefore,
deletes the last sentence of §3.833(f)(9) to make this clear.
This new section is adopted under Tax Code, §111.002, which
provides the comptroller with the authority to prescribe, adopt, implement,
and enforce rules relating to the administration and enforcement of the provisions
of Tax Code, Title 2, and under Insurance Code, Article 4.52, which requires
the comptroller to adopt rules to administer and implement Insurance Code,
Chapter 4, Subchapter B.
The new section implements Insurance Code, Chapter 4, Subchapter B.
§3.833.Certified Capital Companies and Certified Investor Premium Tax Credits.
(a)
Definitions. The following words and terms, when used in
this section, shall have the following meanings, unless the context clearly
indicates otherwise.
(1)
Affiliate means:
(A)
a person who is an affiliate for purposes of Insurance
Code, Article 823.003, §2;
(B)
a person who directly or indirectly:
(i)
beneficially owns 10% or more of the outstanding voting
securities or other voting or management interests of another person, whether
through rights, options, convertible interests, or otherwise; or
(ii)
controls or holds power to vote 10% or more of the outstanding
voting securities or other voting or management interests of the other person;
(C)
a person 10% or more of which the outstanding voting securities
or other voting or management interests are directly or indirectly:
(i)
beneficially owned by the other person, whether through
rights, options, convertible interests, or otherwise; or
(ii)
controlled or held with power to vote by the other person;
(D)
a partnership in which the other person is a general partner;
or
(E)
an officer, director, employee, or agent of the other person,
or an immediate family member of the officer, director, employee, or agent
of the other person.
(2)
Allocation date means the date on which the comptroller
allocates premium tax credits to certified investors of a CAPCO under this
section, except that in the case of a pro rata reallocation pursuant to subsection
(g)(7)(B)(ii) of this section, the allocation date shall be the date of the
reallocation.
(3)
CAPCO means a certified capital company as defined herein.
(4)
Certified capital means an investment of cash by a certified
investor in a CAPCO that fully funds the purchase price of an equity interest
in the company or a qualified debt instrument issued by the CAPCO.
(5)
Certified capital company means a partnership, corporation,
trust, or limited liability company, whether organized on a profit or not-for-profit
basis, that is in good standing with the State of Texas, is headquartered
in Texas and has as its primary business activity the investment of cash in
qualified businesses and that is certified as meeting the criteria of this
section.
(6)
Certified investor means an insurance company or health
maintenance organization licensed by the Texas Department of Insurance or
other person that has state premium tax liability under Insurance Code, Chapter
4, or a successor statute, other than a title insurance company as defined
in Insurance Code, Chapter 9, that invests certified capital pursuant to an
allocation of premium tax credits under this section.
(7)
Early stage business means a qualified business that satisfies
at least one of the following criteria:
(A)
is involved, at the time of a CAPCO's first investment,
in activities related to the development of initial product or service offerings,
such as prototype development or establishment of initial production or service
processes;
(B)
was initially organized less than two years before the
date of the CAPCO's first investment; or
(C)
during the fiscal year immediately preceding the year of
the CAPCO's first investment had, on a consolidated basis with its affiliates,
gross revenues of not more than $2 million as determined in accordance with
generally accepted accounting principles.
(8)
Headquartered in Texas means the following requirements,
at a minimum, are met with respect to Texas CAPCOs:
(A)
the CAPCO has its principal office in Texas for operations
covered under this section, in which the main investment and administrative
functions of the CAPCO are conducted;
(B)
the original principal books and records of the CAPCO are
maintained in the Texas principal office; and
(C)
a minimum of 80% of the CAPCO's expenses are spent in Texas
including management fees, and administrative costs including but not limited
to organizational fees, but for the purposes of this subparagraph, expenses
do not include underwriting fees; closing costs (including rating agency fees,
and other fees related to the closing of the CAPCO's funding); fees related
to any insurance issued for a qualified debt instrument or associated premium
tax credits; interest payments on indebtedness; and other expenses for services
that the CAPCO demonstrates cannot be reasonably obtained in Texas.
(9)
Initially organized means the date that an entity's organizational
documents were first accepted as filed by the appropriate official in the
state of its incorporation or organization, as applicable, or, in the case
of an entity that is not required to file its organizational documents with
any state official, the date on which its members, partners, or owners, as
applicable, originally executed the entity's organizational documents.
(10)
Person means a natural person or entity, including a corporation,
general or limited partnership, trust, or limited liability company.
(11)
Premium tax credit allocation claim means a claim for
allocation of Texas premium tax credits on a form provided by the comptroller.
(12)
Primary or primarily under this section means at least
80%.
(13)
Principal business operations means at least 80% of the
business organization's employees reside in Texas or 80% of the business payroll
is paid to individuals living in Texas.
(14)
Principal office means the location in Texas that is the
primary place for investment functions of the CAPCO and the principal location
for books and records of the CAPCO.
(15)
Qualified business means a business that, at the time
of a CAPCO's first investment in the business:
(A)
is headquartered in Texas or relocates its headquarters
and principal business operations to Texas within 90 days, and based on a
copy of its business plan, intends to remain in Texas after receipt of an
investment by the CAPCO;
(B)
has its principal business operations in Texas or relocates
its principal business operations to Texas within 90 days, and based on a
copy of its business plan, intends to maintain business operations in Texas
after receipt of an investment by the CAPCO;
(C)
has agreed to use the qualified investment primarily:
(i)
to support its principal business operations in Texas,
other than for advertising, promotion, and sales operations, which may be
conducted outside of Texas; or
(ii)
in the case of a start-up company, to establish and support
business operations in Texas, other than for advertising, promotion, and sales
operations, which may be conducted outside of Texas;
(D)
does not have more than 100 employees and:
(i)
at least 80% of its employees reside in Texas; or
(ii)
pays 80% of its payroll to Texas residents;
(E)
is primarily engaged in:
(i)
manufacturing, processing, or assembling products;
(ii)
conducting research and development; or
(iii)
providing services;
(F)
does not incur more than 20% of its expenses and does not
receive more than 20% of its income from:
(i)
retail sales;
(ii)
real estate development;
(iii)
the business of financial services including insurance,
banking, or lending; or
(iv)
the provision of professional services provided by accountants,
attorneys, or physicians;
(G)
is not or does not:
(i)
formed or organized, directly or indirectly, by a CAPCO
or an affiliate of the CAPCO;
(ii)
a franchisee of a CAPCO; or
(iii)
an affiliate of the CAPCO; or
(iv)
have any financial relationship with a CAPCO before the
date on which the CAPCO makes its first investment in such business.
(16)
Qualified debt instrument means a debt instrument issued
by a CAPCO, at par value or a premium that:
(A)
has an original maturity date of at least five years after
the date of issuance;
(B)
has a repayment schedule that is not faster than a level
principal amortization over five years, including payments of cash and tax
credits. A repayment schedule is not faster than a level principal amortization
over five years if the repayment schedule for the debt instrument issued by
the CAPCO has a scheduled outstanding principal balance greater than a hypothetical
note with the same price and yield as the CAPCO's debt instrument that provides
for principal to be amortized over equal, consecutive daily payments, where
payments are first allocated to accrued interest and then to principal, however,
a certified investor may receive payments at any time for future earned interest,
provided the amount received does not exceed the present value of that future
interest payment, discounted by a factor that is not less than the stated
interest rate of the debt instrument.
(C)
Has no interest, distribution, or payment features that
are related to the profitability of the CAPCO or the performance of the CAPCO's
investment portfolio.
(17)
Qualified distribution means any distribution or payment
from certified capital, the return of capital from qualified investments,
or the profits earned thereon by a CAPCO in connection with:
(A)
the reasonable costs and expenses of forming, syndicating,
managing, and operating the CAPCO, provided that the distribution or payment
is not made directly or indirectly to a certified investor or an affiliate
of a certified investor, including:
(i)
the reasonable costs and expenses of forming, syndicating,
or organizing the CAPCO, so long as these costs;
(I)
shall be limited to the greater of;
(-a-)
$250,000; or
(-b-)
5% of the amount of certified capital the CAPCO initially
received as investment from its certified investors; or
(-c-)
$1,500,000; and
(II)
provided that at the time the CAPCO closes its investment
from its certified investors and after deducting the aggregate of the costs
of organizing, forming, syndicating, insuring and defeasing the obligations,
the CAPCO must have available for qualified investments, cash and/or permissible
investments in an amount equal to at least 50% of the amount of certified
capital initially received from its certified investors.
(ii)
reasonable and necessary fees paid for professional services,
including legal and accounting services, related to the operation of the company
are limited to 1.0% in any calendar year of the amount of certified capital
the CAPCO initially received as investment from its certified investors; and
(iii)
an annual management fee in an amount that does not exceed
2.5% of the certified capital of the company;
(B)
any projected increase in federal income or state taxes
based on income or imputed income of the CAPCO, including penalties and interest
related to those taxes, of the equity owners of the CAPCO resulting from the
earnings or other tax liability of the CAPCO to the extent that the increase
is related to the ownership, management, or operation of the CAPCO in Texas.
(18)
Qualified investment means the investment of cash by a
CAPCO in a qualified business for the purchase of any debt, debt participation,
equity, or hybrid security of any nature or description, including a debt
instrument or security that has the characteristics of debt, but that provides
for conversion into equity or equity participation instruments such as options
or warrants; provided that the investment must not have a final stated maturity
or be subject to mandatory redemption or repurchase prior to two years from
the date of initial investment and, provided further, that not more than 50%
is used to refinance existing debt. Notwithstanding the foregoing, a qualified
investment shall not include an investment that results, or could result,
in a CAPCO owning 50% or more of the voting or non-voting stock of a qualified
business, unless:
(A)
such ownership is the result of:
(i)
the CAPCO's exercise of its rights and remedies following
a default in the obligations of the qualified business;
(ii)
the CAPCO's exercise of preemptive rights granted to it
in connection with its initial investment in a qualified business, provided
such rights are exercised in connection with an investment in such qualified
business by a party other than the CAPCO or an affiliate of the CAPCO;
(iii)
the operation of any anti-dilution rights granted to
a CAPCO in connection with its initial investment in a qualified business;
or
(B)
such investment is approved by the comptroller prior to
its being made.
(19)
State premium tax liability means:
(A)
any gross insurance premium tax or health maintenance organization
gross receipts tax liability incurred by any person under Insurance Code,
Chapter 4; or
(B)
if the gross premium tax liability imposed under Insurance
Code, Chapter 4, on January 1, 2003, is eliminated or reduced, any substitute
tax liability imposed on an insurance company or other person that had premium
tax liability or health maintenance organization gross receipts tax liability
under the Insurance Code on that date.
(20)
Strategic investment area means an area of Texas that
qualifies at the time of investment as a strategic investment area under Tax
Code, Chapter 171, Subchapter O, or after the expiration of that subchapter,
an area that qualified as a strategic investment area under that subchapter
immediately before its expiration.
(21)
Strategic investment business means a qualified business
that has its principal business operations located in one or more strategic
investment areas and that intends to maintain business operations in the strategic
investment areas after receipt of an investment by the CAPCO as documented
in the business plan or other business records that were generated at or before
the time of the investment.
(b)
Application Process. Any entity that seeks to operate in
Texas as a CAPCO under the provisions of the Insurance Code shall comply with
the application procedures set forth in this section. The comptroller will
begin accepting applications for certification as a CAPCO 30 days after the
adoption of this section.
(1)
An applicant must file with the comptroller the following:
(A)
a completed Application for Certification on a form provided
by the comptroller,
(B)
a nonrefundable application fee of $7,500;
(C)
an audited balance sheet with an unqualified opinion from
an independent certified public accountant and any Statement of Auditing Standard
No. 61 communications provided by the auditor, as of a date not more than
35 days before the date of application;
(D)
documentation that the prospective CAPCO is duly organized
and qualified to do business in Texas;
(E)
evidence of an equity capitalization of at least $500,000
in the form of unencumbered cash or cash equivalents;
(F)
evidence that at least two principals or persons employed
or engaged to manage the funds of the applicant have at least four years of
experience in the venture capital industry;
(G)
a commitment that if certified, the CAPCO will establish
in Texas its headquarters within 60 days of certification; and
(H)
biographical, personal, financial, investment, and historical
data for each manager, principal, and the entity itself that provides the
following, as applicable:
(i)
prior venture capital firms with which the manager or principal
was employed that specifically includes details on:
(I)
the valuation of portfolio investments, including the manager
or principal's ability to structure and execute timely and effective exits
from portfolio investments;
(II)
historical investment performance of prior firms managed
by the same managers or principals;
(III)
historical performance of the CAPCO and each of the managers
or principals identified in subparagraph (F) of this paragraph, relating to
investments in early stage businesses;
(IV)
the investment philosophy of the firm;
(V)
the history and strategy of the CAPCO and its managers
or principals for obtaining investors and making investments, particularly
in the targeted areas of early stage businesses and strategic investment businesses
or comparable targeted early stage investments or investments in the underserved
areas in Texas or other states;
(VI)
disclosure of any fines, penalties, or other sanctions
or actions by any state, federal, or other regulatory entity, including the
Securities and Exchange Commission against the CAPCO or its managers or principals,
relating to violations of any type; and
(VII)
a five-year business plan, which shall include the applicant's
investment strategy and investment criteria and which must comply with the
requirements of subsection (a) paragraph (18) of this section with respect
to qualified investments in qualified businesses. If the comptroller determines
that an applicant's investment strategy or investment criteria would not effectively
further economic development in Texas the applicant's certification may be
denied.
(ii)
any other information that the comptroller may later request
to determine the quality of the firm's management, reputation, code of ethics,
investment strategy, and practices.
(2)
Any false, inaccurate, or misleading information provided
in the application may be grounds for rejection of the application and denial
of further consideration, as well as decertification, if the information,
discovered at a subsequent date, would have resulted in the denial of the
certification. The applicant shall also notify the comptroller as soon as
possible or within 10 business days of the following:
(A)
when the applicant is unable to continue as a viable going
concern; and
(B)
when the applicant is subject to litigation that may affect
its viability as a going concern.
(3)
Management by certain entities prohibited. An insurance
company, group of insurance companies, or other persons who may have state
premium tax liability or the affiliates of the insurance companies or other
persons may not, directly or indirectly:
(A)
manage a CAPCO;
(B)
beneficially own, whether through rights, options, convertible
interest, or otherwise, more than 10% of the outstanding voting securities
of a CAPCO; or
(C)
control the direction of investments for a CAPCO.
(4)
Paragraph (3) of this subsection applies without regard
to whether the insurance company or other person or the affiliate of the insurance
company or other person is licensed by or transacts business in Texas.
(5)
Paragraphs (3) and (4) of this subsection do not preclude
a certified investor, insurance company, or any other party from exercising
its legal rights and remedies, including interim management of a CAPCO, if
authorized by law, with respect to a CAPCO that is in default of its statutory
or contractual obligations to the certified investor, insurance company, or
other party.
(6)
The date of receipt of an application is the postmark date
or the date of the independent delivery. Incomplete applications shall be
treated as not received. All submissions to the comptroller may be either
by hand delivery or via overnight common carrier to the attention of CAPCO
Administrator, Texas Treasury Safekeeping Trust Company, 208 E. 10th Street,
Austin, Texas 78701.
(7)
The comptroller shall review the application and all required
documents to ensure that the applicant satisfies the requirements for certification
as a CAPCO. Within 30 days of the date of receipt of an application the comptroller
shall:
(A)
issue the certification; or
(B)
refuse to issue the certification and provide to the applicant
the grounds for the refusal, including suggestions for the removal of those
grounds. The comptroller shall have 10 business days from the day that the
additional information was submitted to approve or reject the application
and certification request.
(c)
Offering material used by a CAPCO. Any offering material
involving the sale of securities of a CAPCO must include the following statement:
BY AUTHORIZING THE FORMATION OF A CERTIFIED CAPITAL COMPANY, THE STATE OF
TEXAS DOES NOT ENDORSE THE QUALITY OF MANAGEMENT OR THE POTENTIAL FOR EARNINGS
OF THE COMPANY AND IS NOT LIABLE FOR DAMAGES OR LOSSES TO A CERTIFIED INVESTOR
IN THE COMPANY. USE OF THE WORD "CERTIFIED" IN AN OFFERING DOES NOT CONSTITUTE
A RECOMMENDATION OR ENDORSEMENT OF THE INVESTMENT BY THE COMPTROLLER OF PUBLIC
ACCOUNTS. IF APPLICABLE PROVISIONS OF LAW ARE VIOLATED, THE STATE OF TEXAS
MAY REQUIRE FORFEITURE OF UNUSED PREMIUM TAX CREDITS AND REPAYMENTS OF USED
PREMIUM TAX CREDITS.
(d)
Requirements for renewal and continuance of certification.
A CAPCO must comply with the requirements for renewal and continuance of certification
set forth in this subsection.
(1)
Each CAPCO shall pay a nonrefundable renewal fee of $5,000
to the comptroller not later than January 31 of each year, except that a renewal
fee is not required within six months of the date on which the certification
is issued.
(2)
If a CAPCO fails to pay its renewal fee on or before January
31 of each year, the company must pay, in addition to the renewal fee, a late
fee of $5,000 to continue its certification.
(3)
If a CAPCO fails to pay the renewal fee and late fee as
stated in paragraph (2) of this subsection within 60 days after January 31,
the CAPCO shall be subject to decertification.
(4)
To continue to be certified, a CAPCO must make qualified
investments of certified capital received from certified investors according
to the following schedule:
(A)
before the third anniversary of its allocation date, a
CAPCO must have made qualified investments in an amount cumulatively equal
to at least 30% of its certified capital; and
(B)
before the fifth anniversary of its allocation date, a
CAPCO must have made qualified investments in an amount cumulatively equal
to at least 50% of its certified capital, subject to the following:
(i)
at least 50% of the dollar amount of qualified investments
required in subparagraph (B) of this paragraph must be placed in early stage
businesses; and
(ii)
at least 30% of the dollar amount of qualified investments
required in subparagraphs (A) and (B) of this paragraph must be placed in
strategic investment businesses.
(5)
The aggregate cumulative amount of all qualified investments
made by the CAPCO after its allocation date shall be considered in the computation
of the percentage requirements in paragraph (4) of this subsection, subsection
(i) of this section, and any other applicable provisions in this section.
Any investment returns or profits received by the CAPCO from a qualified investment
may be invested in another qualified investment and counted towards any requirement
in this section with respect to investments of certified capital.
(6)
Any amounts received by a certified capital company from
a qualified business as commitment fees, closing fees, license fees, royalties
or similar charges shall be considered as reductions in the CAPCO's qualified
investments in the computation of the percentage requirements in paragraph
(4) of this subsection, subsection (i) of this section, and any other applicable
provisions in this section.
(7)
A business that is classified as a qualified business,
early stage business, or strategic investment business at the time that the
CAPCO first invests in the business remains classified as a qualified business,
early stage business, or strategic investment business. The business may receive
follow-on investments from any CAPCO, even though the qualified business may
not meet the definition of a qualified business, early stage business, or
strategic investment business, as applicable, at the time of the follow-on
investment, unless the qualified business no longer has its principle business
operations in Texas.
(8)
A CAPCO may not make a qualified investment the cost of
which is greater than 15% of the total certified capital of the CAPCO at the
time of investment.
(9)
A CAPCO shall invest any certified capital not invested
in qualified investments only in the following, provided however, that any
such investments are not assigned, pledged, restricted, or otherwise encumbered
for the benefit of an affiliate of a CAPCO:
(A)
cash deposited with a federally insured financial institution
located in Texas that is not affiliated with the CAPCO;
(B)
certificates of deposit in a federally insured financial
institution located in Texas that is not affiliated with the CAPCO;
(C)
investment securities that are obligations of the United
States or its agencies or instrumentalities or obligations that are guaranteed
fully as to principal and interest by the United States;
(D)
debt instruments rated at least "A" or its equivalent at
the time of purchase by a nationally recognized credit rating organization,
or issued by, or guaranteed with respect to payment by an entity whose unsecured
indebtedness is rated at least "A" or its equivalent by a nationally recognized
credit rating organization and which indebtedness is not subordinated to other
unsecured indebtedness of the issuer or the guarantor provided that the debt
instruments are not procured through a financial institution affiliated with
the CAPCO;
(E)
obligations of Texas or any municipality or political subdivision
of Texas provided that the obligations are not procured through a financial
institution affiliated with the CAPCO; and
(F)
any other investments approved in advance and in writing
by the comptroller.
(10)
If a qualified business moves its principal business operations
outside Texas before the 90th day after a CAPCO makes an investment in it,
the investment is not considered a qualified investment for the purposes of
the percentage requirements in paragraph (4) of this subsection, subsection
(i) of this section, and any other applicable provisions in this section.
(e)
Annual review. Each CAPCO is subject to review as specified
in this section to determine compliance with rules and statutes.
(1)
The comptroller shall conduct an annual review of each
CAPCO to:
(A)
ensure that the CAPCO continues to satisfy the requirements
of this section and Insurance Code, Articles 4.51 - 4.73;
(B)
ensure that the CAPCO has not made any investment in violation
of this section and Insurance Code, Articles 4.51 - 4.73; and
(C)
determine the eligibility status of its qualified investments.
(2)
Each CAPCO shall pay the reasonable cost for the annual
review to be billed by the comptroller or, if the review is conducted by an
independent examiner under the authority of the comptroller, the CAPCO shall
reimburse the comptroller.
(f)
Decertification. A CAPCO may be decertified for violations
of this section or the Insurance Code, and premium tax credits may be recaptured
and forfeited to the extent expressly set forth in this section or in the
Insurance Code.
(1)
A material violation of Insurance Code, Articles 4.56,
4.58, or 4.59 is grounds for decertification of a CAPCO. The comptroller shall
notify the officers of the CAPCO in writing of the violations and that the
company may be decertified after 120 days from the date on which the notice
is mailed, unless the violations are corrected as determined by the comptroller.
(A)
Violations of Insurance Code, Articles 4.56(a), 4.56(b),
4.56(f) or 4.56(h) shall constitute a material violation of the statutes.
(B)
Two consecutive violations of the requirements of Insurance
Code, Article 4.58 or 4.59 shall constitute a material violation of the statute.
(C)
Two or more consecutive instances of a CAPCO failing to
pay fees or penalties on a timely basis, two or more consecutive omissions
of required information, a misstatements of facts in applications or annual
reports, shall constitute material violations of the statutes.
(2)
A hearing is available to a CAPCO that is subject to decertification
as provided in Chapter 1, Subchapter A, Division 1, §§1.1-1.42 of
this title (relating to Central Administration).
(3)
Decertification is effective on the date on which the company
receives notice of decertification from the comptroller. Notices will be sent
via certified mail or via an overnight common carrier delivery service, and
become effective on receipt by the CAPCO.
(4)
In the event of decertification of a CAPCO, the comptroller
shall notify any appropriate state agency of the decertification including,
but not limited to the Secretary of State, the Office of Economic Development
and Tourism, and the Office of the Insurance Commissioner.
(5)
Premium tax credits previously claimed shall be recaptured
and future premium tax credits shall be forfeited following decertification
of a CAPCO in accordance with the provisions of Insurance Code, Article 4.63.
(6)
When a CAPCO has invested an amount equal to 100% of its
certified capital in qualified investments, any premium tax credit claimed
or to be claimed by a certified investor is not subject to recapture or forfeiture.
(7)
The comptroller will send a written notice to each certified
investor whose premium tax credit is subject to recapture or forfeiture for
failure of the CAPCO to maintain certification eligibility. Notification will
be sent in accordance with paragraph (3) of this subsection.
(8)
The comptroller may impose an administrative penalty on
any CAPCO that violates the provisions of this section. Each day a violation
continues or occurs is a separate violation. The maximum penalty may not exceed
$25,000 for each violation.
(A)
The penalty amounts are based on the following:
(i)
seriousness of the violations, including the nature, circumstances,
extent, and gravity of the violation;
(ii)
economic harm caused by the violation;
(iii)
history of previous violations;
(iv)
amount necessary to deter a future violation;
(v)
efforts to correct the violation; and
(vi)
any other matter that justice may require.
(B)
Each of the following is a separate violation that is subject
to a penalty of $5,000. Thereafter, an additional penalty of $5,000 will be
imposed for each 30 day period the violation remains uncorrected:
(i)
failure to file annual reports by January 31;
(ii)
failure to maintain in the principal office in Texas all
financial, administrative, management and investment records, including details
of both qualified investments and unqualified investments;
(iii)
failure to report names and addresses of certified investors,
including the date and amount of investments;
(iv)
failure to file an annual audited financial statement
with an unqualified opinion and any Statement of Auditing Standard No. 61
communication by April 1; and
(v)
failure to provide detailed financial and investment information
that supports each annual report.
(C)
Each of the following is a separate violation that is subject
to a penalty of $10,000. Thereafter, an additional penalty of $10,000 will
be imposed for each 30 day period the violation remains uncorrected:
(i)
failure to maintain the primary CAPCO office in Texas;
(ii)
investment in a business that is found to be unqualified,
without first requesting from the comptroller an evaluation of the business
as provided under subsection (g) of this section; and
(iii)
failure to provide information about the CAPCO's operation
within 30 days after the comptroller requests the information.
(D)
If a CAPCO is assessed penalties, a re-determination hearing
may be requested as provided in Tax Code, Chapter 111.
(9)
Indemnity Agreements and Insurance Authorization. A CAPCO
may agree to indemnify or purchase insurance for the benefit of a certified
investor for losses resulting from the recapture or forfeiture of premium
tax credits under Insurance Code, Article 4.63. Any guaranty, indemnity, bond,
insurance policy, or other payment undertaking made under this section may
not be provided by more than one certified investor of the CAPCO or affiliate
of the certified investor.
(g)
Premium Tax Credits. In the year a certified investor makes
an investment of certified capital, the certified investor shall earn a vested
premium tax credit that is equal to the amount of the investment, subject
to the other provisions in this section. Beginning with the tax report due
March 1, 2009, for the 2008 tax year, a certified investor may take up to
25% of these tax credits each year until all credits have been used. The credit
may not be applied to estimated payments due in 2008, but may be applied to
estimated payments beginning with those made in 2009.
(1)
The credit to be applied against state premium tax liability
in any one year may not exceed the state premium tax liability of the certified
investor for the taxable year. Any unused credit against state premium tax
liability may be carried forward indefinitely until the premium tax credits
are used.
(2)
A certified investor claiming a credit against state premium
tax liability earned through an investment in a Texas CAPCO is not required
to pay any additional retaliatory tax levied under Insurance Code, Article
21.46, as a result of claiming that credit.
(3)
A premium tax credit allocation claim form for certified
investors must be prepared and executed by each CAPCO receiving an investment
commitment, on a form provided by the comptroller. A CAPCO and its affiliates
may not file premium tax credit allocation claims in excess of the maximum
amount of certified capital for which premium tax credits may be allowed.
The form shall include an affidavit of the certified investor that legally
binds the investor to make an investment of certified capital in an amount
allocated by the comptroller. The forms are due from each CAPCO not later
than the 120th day after the date the CAPCO rule is adopted.
(4)
The comptroller shall notify each CAPCO of the amount of
tax credits allocated to each certified investor not later than the 15th business
day after the date on which the comptroller accepts premium tax credit allocation
claims.
(5)
A certified investor's tax credits are limited to the amount
of certified capital as allocated or as subsequently reallocated by the comptroller
and funded by the certified investor. The maximum request for premium tax
credits that any one individual certified investor, on an aggregate basis
with its affiliates, may request in one or more premium tax allocation claim
forms submitted pursuant to paragraph (1) of this subsection may not exceed
the greater of:
(A)
$10 million; or
(B)
15% of the maximum aggregate amount available under Insurance
Code, Article 4.67(a).
(6)
The total amount of credits allowed is $200 million for
all years. Total annual credits are limited to the lesser of $50 million per
year, or 25% of the total amount of investment. A CAPCO, together with its
affiliates, may not file premium tax credit allocation claims on behalf of
its investors in excess of $200 million.
(7)
Pro rata allocation of credits.
(A)
The comptroller shall perform a pro rata allocation of
the total amount of premium tax credits under this if:
(i)
the total amount of certified capital requested under paragraph
(3) of this subsection exceeds the total limit on credits under paragraph
(6) of this subsection; or
(ii)
if an allocation of credits under clause (i) of this subparagraph
has occurred and a CAPCO notifies the comptroller either by hand delivery
or overnight common carrier delivery service that it did not receive an investment
of certified capital equal to the amount of the investment commitment from
one or more investors, as provided on the premium tax credit allocation form
that is filed under paragraph (3) of this subsection, before the end of the
10th business day after the date of receipt of the notice of allocation.
(B)
the pro rata allocation for each certified investor shall
be computed as follows:
(i)
for an allocation under subparagraph (A)(i) of this paragraph,
a fraction, the numerator of which is the value determined in paragraph (5)
of this subsection for each certified investor and the denominator of which
is the total amount of all premium tax credit allocation claims that are filed
under paragraph (3) of this subsection, for all certified investors, multiplied
by the total limit on credits of $200 million as provided by paragraph (6)
of this subsection.
(ii)
for a reallocation under subparagraph (A)(ii) of this
paragraph, the comptroller shall reallocate the forfeited premium tax credit
allocation among the other certified investors in all CAPCOs that originally
received an allocation, in an amount that will ensure a result after reallocation
that is the same as if the original request for the forfeited allocation had
not been included in the allocation process.
(8)
Premium tax credits allocated under this subsection may
be transferred or assigned as provided in §3.830 of this title (relating
to Premium Tax Credit for Examination Expenses, Evaluation Fees, Assessments,
and Certified Capital Companies (CAPCOs), Limitations and Transfers). The
transfer or assignment of a premium tax credit does not affect the schedule
for taking premium tax credits under this section. The transfer, sale, or
assignment of premium tax credits, are subject to the follow conditions:
(A)
Failure to comply with §3.830 of this title, could
jeopardize the investor's ability to transfer premium tax credits.
(B)
Any liability with respect to premium tax credits transferred
pursuant to Insurance Code, Article 4.71, that are recaptured pursuant to
Insurance Code, Chapter 4, Subchapter B, shall be the responsibility of the
taxpayer that actually claimed the credit.
(9)
If a CAPCO is decertified, the comptroller will adjust
any tax report records that are impacted by the recapture or forfeiture of
premium tax credits and will enforce the collection of additional premium
taxes as a result of the recapture or forfeiture. For purposes of this section
in the recapture of tax credits taken, the provisions of Tax Code, §111.207,
shall apply as if the limitation period had been tolled before the end of
the limitation under Tax Code, §111.204. These provisions shall apply
to all insurers and persons, including those who received a transfer or assignment
of the credits to be adjusted or recaptured.
(h)
Evaluation of Proposed Qualified Business. Before a CAPCO
makes an investment, it may request that the comptroller determine whether
the business is a qualified business, an early stage business, or a strategic
investment business. The CAPCO shall provide all information it has gathered
on the business including its plan of operation and plans for future expansion.
The request may be denied if the comptroller determines that the proposed
investment is not consistent with the CAPCO's investment strategy or investment
criteria as approved by the comptroller at certification.
(1)
Not later than 15 business days following receipt of a
request, the comptroller shall issue a determination of whether the business
meets the definition of a qualified business, early stage business, or strategic
investment business.
(2)
The comptroller may notify the CAPCO that an additional
15 business days will be needed to review and make the determination.
(3)
If the comptroller fails to notify the CAPCO as provided
under either paragraph (1) or (2) of this subsection, the business is considered
to be a qualified business, early stage business, or a strategic investment
business, as appropriate.
(i)
Qualified distributions and repayment of debt. A CAPCO
may make a qualified distribution at any time. A CAPCO may make a distribution
or payment that is not a qualified distribution only if the CAPCO has made
original qualified investments in an amount cumulatively equal to 100% of
its certified capital.
(1)
A CAPCO may make repayments of principal and interest on
its indebtedness without regard to this subsection, and without restriction,
including repayments of indebtedness of the CAPCO on which certified investors
earned premium tax credits. Repayments do not relieve the CAPCO of the requirements
for renewal and continuance of certification under subsection (d) of this
section.
(2)
If a business in which a qualified investment has been
made relocates its principal business operations outside Texas during the
term of the CAPCO's investment in the business, the cumulative amount of qualified
investments made by the CAPCO, for purposes of satisfying the requirements
of this subsection, is reduced by the amount of the CAPCO's qualified investments
in this business. This provision shall not apply if the business demonstrates
that it has returned its principal business operations to Texas not later
than 90 days after the date of its relocation.
(3)
If a qualified business in which a qualified investment
has been made is subsequently acquired by or merged into another entity, whether
headquartered inside or outside of Texas during the term of the CAPCO investment
in the business, it will remain a qualified investment and not be subject
to paragraph (2) of this subsection, if after the acquisition or merger and
for the duration of the CAPCO's investment in the business, the business continues
to operate within the remaining provisions of this section for qualified business
as stated in subsection (a)(15) of this section.
(4)
If, after a CAPCO initially invests in a qualified business,
there is a subsequent follow on investment in that qualified business, the
investment will be considered an additional qualified investment for purposes
of satisfying the provision requiring investment milestones.
(j)
Required reports. Each CAPCO shall report to the comptroller:
(1)
as soon as practicable after receipt of certified capital,
but not to exceed 45 days;
(A)
the certified investors name, address, and taxpayer identification
number;
(B)
the date and amount of investment received by the CAPCO
from each certified investor; and
(C)
the type and amount of security issued by the CAPCO to
the certified investors in exchange for the investment resulting in premium
tax credits, including the names of the companies that issued the security
together with a copy of the security instrument.
(2)
An annual report due each January 31 that contains:
(A)
the amount of the CAPCO's certified capital, including
details of all investments, at the end of the preceding calendar year, including
but not limited to whether or not the company has invested more than 15% of
its total certified capital in any one business at cost;
(B)
a detailed listing of investment violations under this
section;
(C)
each qualified investment the CAPCO made during the preceding
year and, with respect to each qualified investment, the number of retained
jobs and the average wages paid per employee of the qualified business at
the time the qualified investment was made;
(D)
the number of jobs created by the investment and the average
wages paid for the jobs;
(E)
the classification of the qualified businesses according
to the industrial sector and the size of the business;
(F)
a copy of the business plan or plan of operation for each
of the qualified businesses in which the CAPCO invested in the preceding year;
and
(G)
any other information the comptroller requires by notification
or instructions to each CAPCO.
(3)
An annual audited financial statement for the prior calendar
year ending December 31, by April 1, that includes the opinion of an independent
certified public accountant. The auditor shall also address the methods of
operation and conduct of the business of the company by performing certain
agreed upon procedures to determine whether:
(A)
the company is complying with Insurance Code, Chapter 4,
Subchapter B, with respect to the CAPCO requirements and the rules adopted
in this section;
(B)
the funds received by the company have been invested as
required within the time provided by Insurance Code, Article 4.56(a); and
(C)
the company has invested the funds in qualified businesses.
(k)
Report to the legislature. The comptroller shall prepare
a biennial report to the legislature with respect to results of implementation
of this section. This report shall be filed with the governor, the lieutenant
governor, and the speaker of the house of representatives, not later than
December 15 of each even-numbered year. The report shall include:
(1)
the names and number of CAPCOs holding certified capital;
(2)
the amount of certified capital invested in each CAPCO;
(3)
the amount of certified capital the CAPCO has invested
in qualified business, including the names and locations of the businesses,
as of January 1, 2006, and each subsequent year;
(4)
the amount of tax credits granted based on certified investments
along with the tax credits taken by year;
(5)
the performance of each CAPCO with respect to renewal and
reporting requirements;
(6)
information concerning qualified businesses in which CAPCOs
have invested, and is to include:
(A)
the classification of the businesses, along with the industrial
sector and size of each business;
(B)
the total number of jobs created by the investment and
the average wages paid for the jobs; and
(C)
the total number of jobs retained as a result of the investment
and the average wages paid for the jobs;
(7)
a list of the CAPCOs that have been decertified or that
have failed to renew the certification and the reason for any decertification.
(l)
Confidentiality: any information containing confidential
business or trade secrets shall be kept confidential only to the extent provided
by the Texas Public Information Act, Texas Government Code, Chapter 552.
This agency hereby certifies that the adoption has been reviewed
by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of
the Secretary of State on January 3, 2005.
TRD-200500002
Martin Cherry
Chief Deputy General Counsel
Comptroller of Public Accounts
Effective date: January 23, 2005
Proposal publication date: October 22, 2004
For further information, please call: (512) 475-0387
Chapter 301.
RULES OF THE TEXAS STATEWIDE EMERGENCY SERVICES RETIREMENT FUND
Part 11.
OFFICE OF THE FIRE FIGHTERS' PENSION COMMISSIONER