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TITLE 34PUBLIC FINANCE
PART 1COMPTROLLER OF PUBLIC ACCOUNTS
CHAPTER 3TAX ADMINISTRATION
SUBCHAPTER GGINSURANCE TAX
RULE §3.833Certified Capital Companies and Certified Investor Premium Tax Credits

      (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.

  (23) 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.

  (24) 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.

  (25) 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.

  (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, low-income community 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)(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, with respect to Program One and Program Two, 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 the certified capital allocated on such date; 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 the certified capital allocated on such date, 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 and/or low income community 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 or low-income community 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 or low-income community 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, low income community business as applicable, at the time of the follow-on investment, unless the qualified business no longer has its principle business operations in Texas. Investment in the qualified business by another CAPCO retains the qualified business' original classification.

  (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

Cont'd...

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