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SB-0525, As Passed Senate, June 30, 2005

HOUSE SUBSTITUTE FOR

SENATE BILL NO. 525

A bill to amend 2003 PA 296, entitled

"Michigan early stage venture investment act of 2003,"

by amending sections 3, 5, 15, 17, 19, and 23 (MCL 125.2233,

125.2235, 125.2245, 125.2247, 125.2249, and 125.2253).

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

Sec. 3. As used in this act:

(a) "Alternative energy technology" means that term as defined

in section 2(d) of the Michigan next energy authority act, 2002 PA

593, MCL 207.822.

(b) "Board" means the Michigan early stage venture investment

corporation board of directors.

private interest of a director, employee, or agent of the board may

influence the judgment of the director, employee, or agent in the

performance of his or her duties or responsibilities under this

act. A conflict of interest includes, but is not limited to, the

following:

(i) Any conduct that would lead a reasonable person, knowing

all of the circumstances, to conclude that the director, employee,

or agent of the board has an interest related to an action that the

board is taking under this act.

(ii) Acceptance of compensation other than from the board for

services rendered as part of the official duties as a director,

employee, or agent of the board.

(iii) Participation in any business being transacted with or

before the board in which the director, employee, or agent of the

board or his or her spouse, child, parent, stepparent, grandparent,

grandchild, brother, sister, parent-in-law, brother-in-law, sister-

in-law, aunt, uncle, nephew, niece, first cousin, or second cousin

or the spouse of any of the persons described in this subparagraph

has a financial interest.

(d) "Equity capital" means capital invested in common or

preferred stock, royalty rights, limited partnership interests,

limited liability company interests, or any other security or

rights that evidence ownership in a private business.

(e) "Fund" or "Michigan early stage venture investment fund"

means the fund created in section 19.

(f) "High-technology activity" means that term as defined in

section 3(g) of the Michigan economic growth authority act, 1995 PA

24, MCL 207.803.

(g) "Holder" means a person that has a tax voucher certificate

or the right to be issued a tax voucher certificate from the

Michigan early stage venture investment corporation.

(h) ~~(g)~~ "Investor" means an individual, firm, bank,

financial institution, limited partnership, co-partnership,

partnership, joint venture, association, corporation, receiver,

estate, trust, or any other entity that invests in the fund.

(i) ~~(h)~~ "Michigan economic development corporation" means

the public body corporate created under section 28 of article VII

of the state constitution of 1963 and the urban cooperation act of

1967, 1967 (Ex Sess) PA 7, MCL 124.501 to 124.512, by a contractual

interlocal agreement effective April 5, 1999 between local

participating economic development corporations formed under the

economic development corporations act, 1974 PA 338, MCL 125.1601 to

125.1636, and the Michigan strategic fund. If it is determined that

the Michigan economic development corporation is unable to perform

its duties under this act, those duties shall be exercised by the

Michigan strategic fund.

(j) ~~(i)~~ "Michigan strategic fund" means the Michigan

strategic fund as described in the Michigan strategic fund act,

1984 PA 270, MCL 125.2001 to 125.2093.

(k) ~~(j)~~ "Near-equity capital" means capital invested in

unsecured, undersecured, or debt securities or subordinated or

convertible loans.

(l) ~~(k)~~ "Negotiated return on qualified investment" means the

rate of return agreed upon for investments made by investors in the

fund.

(m) (l) "Qualified business" means a seed or early stage

business that is domiciled in this state, that has its corporate

headquarters in this state, or the majority of whose employees work

a majority of their time at a site located in this state.

(n) ~~(m)~~ "Qualified investment" means the amount of capital

invested by an investor in the fund.

(o) ~~(n)~~ "Seed or early stage business" means a business that

is either of the following:

(i) A business that has not fully established commercial

operations and may also be engaged in continued research and

product development.

(ii) A business engaged in product, service, or technology

development and initial manufacturing, marketing, or sales

activities.

(p) ~~(o)~~ "Venture capital company" means a corporation,

partnership, limited liability company, or other legal entity the

primary business activity of which is the investment of equity

capital in businesses that focus on areas, including, but not

limited to, alternative energy technology, high-technology

activity, or health care.

Sec. 5. (1) A Michigan early stage venture investment

corporation is a nonprofit corporation incorporated under the

nonprofit corporation act, 1982 PA 162, MCL 450.2101 to 450.3192,

that meets the registration requirements of this act.

(2) A Michigan early stage venture investment corporation

shall be incorporated as a nonprofit corporation that has received,

on or before ~~September 1, 2004~~ August 1, 2005, a favorable

determination from the internal revenue service that the

corporation is exempt from taxation under section 501(c)(3) or

501(c)(4) of the internal revenue code. The department of treasury

may allow up to 3, 30-day extensions of the date under this section

for purposes of reviewing and approving an application for

registration under section 11.

(3) Except as otherwise provided in this act to the contrary,

a Michigan early stage venture investment corporation is subject to

the laws of this state that are applicable to nonprofit

corporations.

(4) A Michigan early stage venture investment corporation is a

charitable and benevolent institution, and its funds, income, and

property are exempt from taxation by this state or any political

subdivision of this state.

(5) A corporation shall not act as a Michigan early stage

venture investment corporation except as authorized under this act.

Sec. 15. (1) Except as otherwise provided in this act, in the

nonprofit corporation act, 1982 PA 162, MCL 450.2101 to 450.3192,

by law, or in its articles of incorporation, a Michigan early stage

venture investment corporation may do or delegate any act

consistent with this act and the purposes of the nonprofit

corporation, including, but not limited to, the following:

(a) Enter into contracts and all necessary activities in the

regular course of business of the Michigan early stage venture

investment corporation.

(b) Charge reasonable fees for the implementation of this act

and the ongoing operation of the Michigan early stage venture

investment corporation.

necessary to carry out its powers and duties under this act.

(d) Invest in venture capital funds through equity securities.

(e) Employ ~~a fund manager~~ fund managers and other persons it

considers necessary to implement this act. ~~The Michigan early~~

~~stage venture investment corporation shall employ only 1 fund~~

~~manager at any 1 time.~~

(2) The fund manager shall exercise the duties of a fiduciary

toward the corporation and shall discharge his or her duties with

the degree of diligence, care, and skill that an ordinarily prudent

person would exercise under the same or similar circumstances in a

like position.

(3) The fund manager shall solicit investors pursuant to

section 17.

(4) The Michigan early stage venture investment corporation

shall require the fund manager to develop procedures to evaluate

types of business and industry for investment purposes and to set

priorities as to which businesses are most likely to meet the

desired outcomes of the investment plan established under section

19 and which businesses conduct activities that are consistent with

the purposes of this act and of the fund. This evaluation shall

include, but not be limited to, the location of the firm and the

direct and indirect impact of the business on the economic

development of this state.

Sec. 17. (1) To secure investment in the fund, the Michigan

early stage venture investment corporation shall enter into

agreements with investors.

(2) Each agreement shall contain all of the following:

(a) An established and agreed-upon investment amount and

repayment schedule.

(b) A ~~guaranteed~~ negotiated amount or negotiated return on

qualified investment by the ~~certified~~ investor over the term of

the agreement.

investor may ~~claim~~ use to pay a liability under ~~section 37e of~~

the single business tax act, 1975 PA 228, MCL ~~208.37e~~ 208.1 to

208.145, a successor tax to the single business tax act, 1975 PA

228, MCL 208.1 to 208.145, or under ~~section 270 of~~ the income tax

act of 1967, 1967 PA 281, MCL ~~206.270~~ 206.1 to 206.532, and the

first year in which that ~~credit can be claimed~~ tax voucher may be

used to pay a liability under the single business tax act, 1975 PA

228, MCL 208.1 to 208.145, or the income tax act of 1967, 1967 PA

281, MCL 206.1 to 206.532, including any withholding tax imposed on

the investor under the income tax act of 1967, 1967 PA 281, MCL

206.1 to 206.532.

(3) The Michigan early stage venture investment corporation

shall notify the department of treasury when agreements are entered

into under this section and send a copy of each agreement to the

department of treasury. ~~The~~ After making the determination

required under section 23(2), the department of treasury shall

issue an approval letter to the investor that states that the

investor is entitled to a tax ~~credit under section 37e of the~~

~~single business tax act, 1975 PA 228, MCL 208.37e,~~ voucher that is

Senate Bill No. 525 (H-1) as amended June 29, 2005

equal to the difference between the amount actually repaid and the

amount set as the repayment due in the agreement entered into by

the investor and the ~~fund manager~~ Michigan early stage venture

investment corporation.

(4) The fund shall repay any amounts due from proceeds from

the funds raised based on the agreements made under this section [AND

FROM THE PROCEEDS OF INVESTMENTS MADE BY THE FUND].

(5) For tax years that begin after December 31, 2008,

investors that have tax voucher certificates issued pursuant to

section 23 may ~~claim a credit~~ use the tax voucher to pay a

liability owed by the investor under ~~section 37e of~~ the single

business tax act, 1975 PA 228, ~~MCL 208.37e~~ MCL 208.1 to 208.145,

or ~~section 270 of~~ the income tax act of 1967, 1967 PA 281, ~~MCL~~

~~206.270~~ MCL 206.1 to 206.532, as ~~otherwise~~ provided in this act,

up to an amount equal to the difference between the amount actually

repaid and the amount set as the repayment due in the agreement

entered into by the taxpayer and the ~~fund manager~~ Michigan early

stage venture investment corporation. The Michigan early stage

venture investment corporation shall notify the department of

treasury when ~~credit~~ tax voucher certificates are issued under

section 23(5). ~~23, and upon notification and approval by the~~

~~department of treasury under section 23, the amount of credit~~

~~allowed pursuant to the credit certificate becomes a debt of the~~

~~fund to the state subject to repayment pursuant to the agreement~~

~~between the Michigan early stage venture investment corporation and~~

~~the department of treasury. A debt under this section shall accrue~~

~~interest at the same rate as the interest paid to the investor.~~

(6) Repayment of a debt under this section may be restricted

to specific funds or assets of the Michigan early stage venture

investment corporation.

(7) The Michigan early stage venture investment corporation

may purchase securities and may manage, transfer, or dispose of

those securities.

(8) The Michigan early stage venture investment corporation

and its directors are not broker-dealers, agents, investment

advisors, or investment advisor representatives when carrying out

their duties and responsibilities under this act.

Sec. 19. (1) A Michigan early stage venture investment

corporation shall create a Michigan early stage venture investment

fund, which shall be a restricted fund.

(2) The fund manager shall establish an investment plan

approved by the board for the investment of the money in the fund

using the following criteria:

(a) Not more than 15% of the total capital and outstanding

commitments of the fund shall be invested in any single venture

capital company.

(b) The fund manager with the approval of the board shall

undertake to invest the fund in such a way as to promote that at

least $2.00 will be invested in qualified businesses for every

$1.00 of principal for which ~~credits may be claimed under section~~

~~37e of~~ tax vouchers may be used to pay a liability under the

single business tax act, 1975 PA 228, ~~MCL 208.37e~~ MCL 208.1 to

208.145, a successor tax to the single business tax act, 1975 PA

228, MCL 208.1 to 208.145, or ~~section 270 of~~ the income tax act

of 1967, 1967 PA 281, ~~MCL 206.270~~ MCL 206.1 to 206.532.

from the state's various universities and research institutions.

(d) Any other professional portfolio management criteria that

the fund manager and board consider appropriate.

(e) Priorities for investment in venture capital may be based

on an evaluation, which shall consider the following criteria:

(i) The retention of those businesses which would be likely to

leave this state absent the investment.

(ii) The revitalization and diversification of the economic

base of this state.

(iii) Generating and retaining jobs and investment in this

state.

(3) Consistent with the plan established under subsection (2),

the fund manager shall select venture capital companies from among

those venture capital companies that apply for money from the fund

considering the following criteria:

(a) The venture capital company's probability of success in

generating above-average returns through investing in qualified

businesses.

(b) The venture capital company's probability of success in

soliciting investments. The level of investment from the fund

committed to each venture capital company shall not be more than

25% of the venture capital company's total capital under

management.

relates to the investment plan criteria under subsection (2)(b).

(d) The venture capital company has a significant presence in

this state as determined by the Michigan early stage venture

investment corporation.

(e) The venture capital company will undertake to invest in

qualified businesses, as determined at the point of initial

investment, a percentage of invested capital equal to or greater

than the percentage of invested capital that the venture capital

company received from the fund.

(f) The venture capital company's consideration of minority

owned businesses in its investment activities.

Sec. 23. (1) The Michigan early stage venture investment

corporation shall determine which investors are eligible for tax

~~credits~~ vouchers under ~~section 37e of~~ the single business tax

act, 1975 PA 228, ~~MCL 208.37e~~ MCL 208.1 to 208.145, and ~~section~~

~~270 of~~ the income tax act of 1967, 1967 PA 281, ~~MCL 206.270~~ MCL

206.1 to 206.532, and the amount of the tax ~~credit under those~~

~~sections~~ voucher or vouchers allowed to each investor.

(2) The Michigan early stage venture investment corporation

shall determine which investors are eligible for tax ~~credits~~

vouchers under this section and submit proposed tax voucher

certificates that meet the criteria under subsection (3) to the

department of treasury for approval. The department of treasury

shall approve or deny proposed tax voucher certificates within 30

days after receipt of the proposed tax voucher certificates. If the

department of treasury denies a proposed tax voucher certificate,

the department of treasury shall notify the Michigan early stage

venture investment corporation and the investor of the denial and

the reason for the denial. If a proposed tax voucher certificate is

denied under this subsection, the Michigan early stage venture

investment corporation is not prohibited from subsequently

submitting a proposed tax voucher certificate on behalf of that

same investor. If the department of treasury does not approve or

deny the proposed tax voucher certificates within 30 days, the

proposed tax voucher certificates are considered approved as

submitted. The approval by the department of treasury under this

section may be a condition to the effectiveness of the agreement

between the investor and the Michigan early stage investment

corporation required under section 17(1).

(3) ~~The~~ At the time permitted under subsection (5), the

Michigan early stage venture investment corporation shall issue a

tax voucher certificate approved under subsection (2) to each

investor in the name of the investor that states all of the

following:

(a) The taxpayer is an investor.

(b) The taxpayer's federal employer identification number or

the number assigned to the taxpayer by the department of treasury

for filing purposes under the single business tax act, 1975 PA 228,

MCL 208.1 to 208.145.

taxpayer that uses the tax voucher may ~~claim against~~ use to pay

its tax liability under ~~section 37e of~~ the single business tax

act, 1975 PA 228, ~~MCL 208.37e~~ MCL 208.1 to 208.145, or ~~section~~

~~270 of~~ the income tax act of 1967, 1967 PA 281, ~~MCL 206.270~~ MCL

206.1 to 206.532.

(d) The tax years for which the ~~credit~~ tax voucher under

subdivision (c) may be ~~claimed~~ used and the maximum annual amount

that may be ~~claimed~~ used each tax year.

(e) The ~~tax credit is refundable~~ amount of the tax vouchers

that may be used shall not exceed the tax liability under the

single business tax act, 1975 PA 228, MCL 208.1 to 208.145, or the

income tax act of 1967, 1967 PA 281, MCL 206.1 to 206.532, of the

taxpayer that uses the tax voucher.

(f) The tax voucher may be transferred in whole or in part.

(g) If the amount of any tax voucher certificate exceeds the

investor's tax liability under the single business tax act, 1975 PA

228, MCL 208.1 to 208.145, or the income tax act of 1967, 1967 PA

281, MCL 206.1 to 206.532, the amount that exceeds the investor's

tax liability may be retained and used to pay a future liability of

the investor under the single business tax act, 1975 PA 228, MCL

208.1 to 208.145, or the income tax act of 1967, 1967 PA 281, MCL

206.1 to 206.532.

(4) The fund manager shall invest, budget, and plan scheduled

payments and repayments so that no ~~credits are claimed under~~

~~section 37e of the single business tax act, 1975 PA 228, MCL~~

~~208.37e,~~ tax voucher is used in any tax year before tax years that

begin after December 31, 2008.

(5) ~~Certificates~~ The Michigan early stage investment

corporation shall issue tax voucher certificates under this section

~~shall be issued~~ to an investor at the time that the Michigan early

stage venture investment corporation determines that, for that

investor, ~~capital is not sufficient to meet the guaranteed~~ it is

unable to pay the negotiated amount or the negotiated return on

qualified investment of that investor on or before the date on

which payment is due. The total of all tax voucher certificates

issued under this section shall not exceed the maximum amount

allowed under section 37e(2) of the single business tax act, 1975

PA 228, MCL 208.37e.

(6) ~~Certificates~~ Tax voucher certificates under this section

shall not be issued until December 31, 2008. ~~or 5 years after all~~

~~the requirements under section 29 have been met, whichever occurs~~

~~later.~~

(7) A tax voucher certificate issued under subsection (5), or

the right to be issued and receive a tax voucher certificate from

the Michigan early stage venture investment corporation, may be

transferred in whole or in part by a holder to another person if

the holder notifies the department of treasury and the Michigan

early stage venture investment corporation in writing of the

transfer, the amount of the tax voucher certificate to be

transferred, and the name and tax identification information

provided for under subsection (3) of the proposed transferee. The

tax voucher certificate transferred under this subsection shall be

made on a form prescribed by the department of treasury. The holder

shall send a copy of the completed transfer form to the department

of treasury within 60 days after the date of the transfer.

(8) A transfer under this section is irrevocable. If the

holder is transferring less than all of the tax voucher certificate

to a transferee, the department of treasury may issue new tax

voucher certificates to the holder and transferee representing the

allocated values of the tax voucher certificates held by the holder

and the transferee after the transfer.

(9) A holder of a tax voucher certificate shall attach a copy

of the tax voucher certificate and, if applicable, a completed

transfer form to its annual return for the tax toward which the tax

voucher certificate is used by the holder. If the amount of any tax

voucher certificate eligible to be used by a holder is in excess of

the holder's tax liability under either the single business tax

act, 1975 PA 228, MCL 208.1 to 208.145, or the income tax act of

1967, 1967 PA 281, MCL 206.1 to 206.532, the excess may be retained

and used to pay any future single business tax or income tax

liability of the holder.