First Regular Session Sixty-eighth General Assembly STATE OF COLORADO INTRODUCED LLS NO. 11-0533.01 Thomas Morris HOUSE BILL 11-1266 HOUSE SPONSORSHIP Lee, SENATE SPONSORSHIP (None), House Committees Senate Committees Economic and Business Development A BILL FOR AN ACT Concerning the creation of a small business capital authority, and, in connection therewith, improving Colorado small businesses' access to capital, increasing the amount of available capital within Colorado by authorizing the formation of private capital exchanges, enabling the division of securities to license private capital agents, authorizing the creation of a revolving fund to provide continued seed and early-stage investment capital to small businesses, requiring fund operators to provide matching capital for investment in small Colorado businesses, advancing knowledge about small business investing, developing standards for investment criteria, disseminating educational material about small business investing, and promoting investment in Colorado's small businesses. Bill Summary (Note: This summary applies to this bill as introduced and does not reflect any amendments that may be subsequently adopted. If this bill passes third reading in the house of introduction, a bill summary that applies to the reengrossed version of this bill will be available at http://www.leg.state.co.us/billsummaries.) In order to improve access to capital and to provide small businesses in Colorado with an additional source of capital, section 1 of the bill creates the small business capital authority as an enterprise under section 20 of article X of the state constitution (a/k/a the "TABOR" amendment) and as a special purpose authority. The authority can engage in research and development, education, promotion, and advocacy activities relative to small business capital. The authority is directed to exert best efforts to annually raise and deposit at least $50 million into a state fund at a Colorado bank and to use the state fund for its expenses and as a revolving fund to provide continued seed and early-stage investment capital to small businesses. The authority will contract with fund operators, selected by competitive bid, for the management of small business investment funds. The fund operators must: Provide matching funds equal to or greater than revenues received from the state fund; Make investment decisions using a weighted scoring approach that favors small businesses that create a greater number of new jobs within Colorado, create new jobs that pay higher wages within Colorado, produce and export products and services out of Colorado, and produce and export products and services out of the United States; Invest 20% of the small business investment fund in amounts no greater than $25,000; Invest 80% of the small business investment fund in amounts no greater than $250,000; and Exert best efforts to invest all revenues in the small business investment fund within 12 months. A fund operator's fee is limited to no more than 2% of the revenues under management and 10% of the revenues earned by the small business investment fund. The small businesses must pay back the investment from the small business investment fund in the form of a royalty beginning 12 months after receipt of the investment. The royalty is at least 3% of the small business's revenues with a cap of at least 200% of the investment in the small business. The authority will administer the operation of private capital exchanges to facilitate the purchase and sale of Colorado private securities within Colorado. The exchanges will support the sale of securities by the fund operators and all other private securities of any Colorado business by creating a secondary market for investors in the small business investment funds. The exchanges must pay fees to the authority equal to 1% of the value of each private Colorado securities sale. Sections 2 through 5 direct the securities commissioner to license private capital agents, who would be authorized to negotiate the purchase and sale of Colorado private securities. Be it enacted by the General Assembly of the State of Colorado: SECTION 1. Article 46 of title 24, Colorado Revised Statutes, is amended BY THE ADDITION OF A NEW PART to read: PART 4 SMALL BUSINESS CAPITAL AUTHORITY 24-46-401. Short title. This part 4 shall be known and may be cited as the "Economic Development - Small Business Seed Capital Market Act". 24-46-402. Legislative declaration. (1) The general assembly hereby: (a) Finds that: (I) The present and prospective right to gainful employment and general welfare of the people of this state require as a public purpose the promotion and development of new and expanded business enterprises and the promotion and development of job training; (II) The existence, development, and expansion of business, commerce, industry, higher education, and job training are essential to the economic growth of the state and to the full employment, welfare, and prosperity of its citizens; (III) Improved access to capital and the formation and funding of capital markets for small businesses will encourage and foster the development and diversification of Colorado's economy and the reduction of unemployment and underemployment in the state; (IV) The state of Colorado is currently in a recession, as demonstrated by the high levels of unemployment and underemployment; and (V) Small businesses are historically the single largest source of net new jobs; (b) Determines that: (I) The means and measures authorized by this part 4 and the assistance provided in this part 4 are in the public interest and serve a public purpose of the state in promoting the welfare of the citizens of the state economically by supporting the formation and growth of new businesses and the resulting maintenance of a higher level of employment, economic activity, and stability; (II) Small businesses in this state would benefit from a capital market where they may obtain capital; and (III) Small businesses in this state would benefit from an increase in available capital; and (c) Declares that: (I) The establishment of a capital market and the increased access to capital for small business enterprises to provide and encourage employment and the public welfare is in the public interest and is a public purpose; and (II) Courts shall construe this part 4 in conformity with the intention of the general assembly expressed in this section. 24-46-403. Definitions. As used in this part 4, unless the context otherwise requires: (1) "Authority" means the small business capital authority created in section 24-46-404. (2) "Board" means the board of directors of the authority. (3) "Colorado private security" has the meaning established in section 11-51-201, C.R.S. (4) "Commission" means the Colorado economic development commission created in section 24-46-102. (5) "Equity" means an investment in the form of a right to participate in the profits and losses of a small business. (6) "Fund operator" means a contractor selected by the authority to operate a small business investment fund and make investments. A contractor may be a private business, economic development agency, local government agency, nonprofit organization, educational institution, or other legal entity. (7) "Investment" means any loan, equity, or royalty transaction in which money from a small business investment fund is distributed to a small business. (8) "Loan" means an investment in the form of a debt of a small business. (9) "Office" means the governor's office of economic development and international trade or its successor office. (10) "Private capital exchange" means a legal entity engaged in the business of facilitating the purchase or sale of a Colorado private security. (11) "Proceeds" means any revenue arising from an investment. (12) "Royalty" means an investment in the form of a right to participate in the revenues of a small business. (13) "Security" has the meaning established in section 11-51-201, C.R.S. (14) "Small business" means a for-profit enterprise that is licensed to conduct business in Colorado and has five hundred or fewer employees and less than fifty million dollars in assets. (15) "Small business investment fund" means a pool of money created by a fund operator for investments in small businesses. (16) "State fund" means a pool of money created by the authority pursuant to section 24-46-405. 24-46-404. Small business capital authority - repeal. (1) (a) The small business capital authority is hereby created as a special purpose authority as defined in section 24-77-102. (b) The authority is a body corporate, a political subdivision of the state, and a public instrumentality, and its exercise of the powers conferred by this part 4 is the performance of an essential public function. The authority is not an agency of state government and is not subject to administrative direction by any department, commission, board, or agency of the state. (c) The authority constitutes an enterprise for the purposes of section 20 of article X of the state constitution so long as it is authorized to issue revenue bonds and receives less than ten percent of its total annual revenues in grants, as defined in section 24-77-102, from all Colorado state and local governments combined. The authority is not a district for purposes of section 20 of article X of the state constitution. (d) The authority has all of the powers necessary or convenient to carry out and effect the purposes of this part 4, including the following powers: (I) Perpetual existence and succession; (II) To adopt, have, and use a corporate seal; (III) To sue and be sued and to be a party to suits, actions, and proceedings; (IV) To license and administer private capital exchanges as specified in section 24-46-405; (V) To establish and raise capital for the state fund as specified in section 24-46-408; (VI) To contract with fund operators as specified in section 24-46-409; and (VII) To enter into contracts and agreements as necessary to carry out this part 4. (2) (a) The governing body of the authority is a board of directors consisting of the following seven members: (I) The governor shall appoint three members of the board, the president of the senate shall appoint one member of the board, and the speaker of the house of representatives shall appoint one member of the board. (II) The governor or the governor's designee and the executive director of the office shall serve as nonvoting, ex officio members of the board. (b) Board members must be residents of this state and have experience in small business operations and all forms of small business capital. A board member must not have had a business relationship with a fund operator in the current or immediately preceding three years. (c) Each board member may serve until a successor has been appointed and qualified. Each member is eligible for reappointment. The person making the original appointment shall fill a vacancy by appointment for the remainder of the unexpired term. (d) (I) The terms of appointed members of the board are four years, expiring on May 5 of each year. (II) (A) Notwithstanding subparagraph (I) of this paragraph (d), the initial term of the member appointed by the speaker of the house of representatives is two years and the initial term of the member appointed by the president of the senate is three years. Of the members appointed by the governor, one has an initial term of two years, one has an initial term of three years, and one has an initial term of four years. (B) This subparagraph (II) is repealed, effective July 1, 2016. (e) The governor may remove any member of the board for misfeasance, malfeasance, willful neglect of duty, or other cause, after notice and a public hearing, unless the member expressly waives in writing the requirement for a hearing. (f) The board shall: (I) Adopt its own rules of procedure; (II) Elect a chair and a vice-chair from its membership; (III) Keep a record of its proceedings; and (IV) Meet at least once each quarter. (g) Members of the board are entitled to receive: (I) Annual compensation as set by the commission in an amount that is no less than ten thousand dollars per year per appointed member; and (II) Reimbursement for actual and necessary expenses incurred in the performance of their duties. (3) The authority may hire staff and contractors and incur reasonable costs for its operations and for conducting its programs and activities as it deems necessary or convenient to administer this part 4. The office and the commission shall cooperate with the authority in such administration. (4) A member of the board, officer, or employee acting on behalf of the authority is not personally liable for damage, loss, or injury resulting from the performance of the person's duties under this part 4 or on any contract, commitment, or agreement executed on behalf of the authority under this part 4. (5) Rules adopted by the authority are not subject to the "State Administrative Procedure Act", article 4 of this title. 24-46-405. Private capital exchanges. (1) A legal entity with a place of business in this state shall not transact business in this state as a private capital exchange unless the entity is licensed by the authority. (2) An applicant for a license as a private capital exchange shall pay an initial and annual license fee, which shall be determined and collected by the authority; except that no annual license fee may be more than ten thousand dollars. (3) The authority may by rule require private capital exchanges to: (a) Satisfy specified minimum financial responsibility requirements; (b) File with the authority specified financial and other information; (c) Make and maintain specified records and to preserve such records for five years or such other period as the authority may specify; (d) Establish written supervisory procedures and a system for applying such procedures that is reasonably expected to prevent and detect violations of this part 4; (e) Acquire and keep in force a fidelity bond in such minimum amount and covering such risks as the authority may specify; and (f) Adopt such practices and procedures as the authority determines are reasonable and appropriate. (4) (a) The authority shall, by rule, require each private capital exchange to collect a fee on each sale of a Colorado private security that it facilitates in the amount of one percent of the sales price. The fee is charged to the seller of the security and shall be paid to the authority, which shall credit it to the state fund created in section 24-46-408. (b) A private capital exchange shall make fee payments by the end of each month following the month in which the sale price was collected. (5) A private capital exchange shall operate pursuant to the following limitations and conditions: (a) A private capital exchange may charge a fee or commission on each sale of a Colorado private security; (b) A private capital exchange shall not facilitate the purchase or sale of a public security, as that term is defined in section 11-51-201, C.R.S.; (c) A private capital exchange shall not facilitate the purchase or sale of any security other than a Colorado private security; (d) A private capital exchange shall not facilitate the purchase or sale of any security by anyone other than a resident of Colorado or a business registered to do business in Colorado; (e) A private capital exchange may engage in limited publication of offers to sell or buy a Colorado private security, which publication may be made to original issuers, broker-dealers, sales representatives, and private capital agents; and (f) A private capital exchange shall not publicize offers to sell or buy a Colorado private security to the general public. 24-46-406. Research and development of small business investment criteria. (1) The authority shall develop standards for objective investment criteria that use measurable data for the purpose of making investment selections. (2) The authority shall adopt a standard set of investment criteria, based solely upon objective investment criteria, to be used by each fund operator in the selection of requests for funding from each small business investment fund. The criteria must use a weighted scoring approach that favors small businesses that: (a) Create a greater number of new jobs within Colorado; (b) Create new jobs that pay higher wages within Colorado; (c) Produce and export products and services out of Colorado; and (d) Produce and export products and services out of the United States. (3) The authority may engage in studies and collection of market information from time to time with regard to then-current and changing capital needs of Colorado small businesses. 24-46-407. Education. The authority shall develop and present educational programs on small business investment. 24-46-408. Capitalization of state fund. (1) (a) The authority shall create the state fund. The state fund is a revolving fund administered by the authority as a government-owned business that provides oversight concerning the investment of revenues in the state fund pursuant to this part 4. (b) The authority shall establish one or more accounts with one or more Colorado banks to hold revenues that collectively constitute the state fund. All revenues of the state fund not expended or encumbered, and all interest earned on the investment or deposit of revenues in the fund, remain in the state fund, do not revert to the general fund, and do not constitute or contribute to state fiscal year spending as defined in section 24-77-102. (c) In addition to any other source of revenue specified in this part 4, the state fund is the depository for the fee established in section 24-46-405 (4). (2) The authority shall exert its best efforts to: (a) Secure sources of startup revenue. The authority may seek to: (I) Borrow money from any lawful source, including private businesses, foundations, nonprofit organizations, and state and federal agencies; (II) Accept federal grant-in-aid moneys; (III) Accept donations and gifts; (IV) Be certified as a small business investment company by the federal small business administration; (V) Initiate joint efforts with public and private entities; and (VI) Use any other legal means that the authority may arrange. (b) Annually secure the deposit of at least fifty million dollars of new capital into the state fund to carry out the purposes of this part 4. The authority may secure capital from any lawful source, which sources may include: (I) Authorization and issuance of revenue bonds; (II) Guarantee of private bonds; (III) Loans from any lawful source, including private businesses, foundations, nonprofit organizations, and state and federal agencies; (IV) Certification as a small business investment company by the federal small business administration; (V) Joint efforts with public and private entities; (VI) Appropriation by the general assembly; (VII) Gifts or grants; or (VIII) Any other source that the authority may lawfully arrange. (3) All bonds or other form of debt obligations issued by the authority must: (a) (I) Be issued only after approval by the board, acting by resolution. (II) The resolution adopted pursuant to this paragraph (a) must state: (A) The date of issuance of the bonds; (B) A maturity date or dates during a period not to exceed twenty years after the date of issuance of the bonds; (C) The interest rate or rates on, and the denomination or denominations of, the bonds; and (D) The medium of payment of the bonds and the place where the bonds will be paid. (III) The resolution adopted pursuant to this paragraph (a) may: (A) State that the bonds are to be issued in one or more series; (B) State a rank or priority of the bonds; and (C) Provide for redemption of the bonds prior to maturity, with or without premium. (IV) The resolution adopted pursuant to this paragraph (a) may require covenants as to: (A) The purpose to which the proceeds of sale of the bonds may be applied and the permissible use and disposition of the proceeds; (B) Such matters as are customary in the issuance of revenue bonds, including the issuance and lien position of other or additional bonds; and (C) Books of account and their inspection and audit. (V) Courts shall deem the resolution adopted pursuant to this paragraph (a) a contract with the holders of the bonds. The duties of the authority under the resolution are enforceable by any appropriate action in a court having jurisdiction. (b) Be deemed valid and binding obligations regardless of whether, prior to delivery and payment, any or all of the persons whose signatures appear on the bonds have ceased to be members of the board; (c) Be sold at a price less than the par value thereof, discounted as necessary to obtain funding, together with all accrued interest up to the date of delivery; (d) Be negotiable, notwithstanding any provision of law to the contrary; (e) Be payable only from the state fund; and (f) Provide that: (I) No holder of bonds may compel the state or any subdivision of the state to exercise its appropriation or taxing power; and (II) The bonds do not constitute a debt or financial obligation of the state and are payable only from the state fund. (4) Any bonds issued by the authority may be sold at public or private sale. If bonds are to be sold at a public sale, the authority shall advertise the sale in any manner the authority deems appropriate. (5) The authority may provide for preferential security for any bonds, both principal and interest, to be issued under this section to the extent deemed feasible and desirable by the authority over any bonds that may be issued thereafter. (6) The state fund may be supplemented by contributions of money, property, or services from any Colorado agency, county, municipality, federal agency, or person. 24-46-409. Investment. (1) The authority shall use the state fund: (a) As a revolving, evergreen fund to provide continued seed and early-stage investment capital to small businesses, and for this purpose the authority shall transfer revenues from the state fund to one or more small business investment funds for the purpose of enabling a fund operator to make qualified investments; and (b) For its direct and indirect expenses in administering this part 4, including repayment of revenue bonds or other debt or contractual obligations of the authority, payment for costs of staffing and contractors, the conduct of programs by the authority, and operation of the authority. (2) The authority shall contract with one or more fund operators for the management of one or more small business investment funds. The authority shall select fund operators by competitive bid based upon: (a) The fund operator's knowledge of the management and operation of small businesses; (b) The fund operator's collaboration with other businesses, nonprofit organizations, government agencies, and educational institutions; (c) The design of the small business investment fund to support local economic development initiatives; (d) The design of the small business investment fund to support civic programs; and (e) The amount of fees charged by the fund operator for management of a small business investment fund. (3) The authority shall require the fund operator to: (a) Provide matching funds equal to or greater than revenues received from the authority; (b) Give priority to investment in those small businesses that obtain the highest score using the investment criteria adopted pursuant to section 24-46-406; (c) Establish contract terms for each small business receiving an investment, which contract terms shall include: (I) Customized milestones tied to success of the small business in attaining fixed, written objectives; (II) Making investments in small businesses in installments tied to the milestones in order to receive the entire investment; (III) Limiting use of investments by small businesses to attain the customized milestones; and (IV) Requiring principals of small businesses, as a condition of receiving the investments, to consent to personal liability if investments in small businesses are used for any unauthorized purpose; (d) Invest twenty percent of the small business investment fund under its management in amounts no greater than twenty-five thousand dollars; (e) Invest eighty percent of the small business investment fund under its management in amounts greater than twenty-five thousand dollars and no greater than two hundred fifty thousand dollars; (f) Exert best efforts to invest all revenues within the small business investment fund within a twelve-month period; (g) Return to the state fund all revenues distributed to the small business investment fund but not invested in a small business within the twelve-month period; (h) Use an investment structure that requires the small business to pay back the investment from the small business investment fund in the form of a royalty representing a percentage of the sales revenues of the small business, beginning twelve months after receipt of the investment. The royalty shall be: (I) No less than three percent of revenues; and (II) Capped at no less than two hundred percent of the investment in a small business. (i) Limit fees for management of a small business investment fund to no more than two percent of the revenues under management and ten percent of the revenues earned by the small business investment fund; and (j) After deduction of the fund operator's fees, pay into the state fund a pro rata share of revenues earned by the small business investment fund under its management. The share is equal to the percentage of the total money invested in the small business investment fund represented by the money from the state fund. (4) The authority shall permit a fund operator to: (a) Limit investments from the small business development fund under its management to a particular geographic region of Colorado or to a particular industry; (b) Obtain matching funds by: (I) Conduct of a direct-to-public offering; (II) Borrowing money; (III) Conduct of a private offering; or (IV) Any other legal means. 24-46-410. Advocacy and promotion of investment in Colorado small businesses. (1) The authority shall plan, promote, and coordinate programs and activities advocating investment in Colorado small businesses by: (a) Cooperating with other public and private agencies and organizations to promote investment in Colorado small businesses; (b) Gathering and disseminating information on private capital exchanges and opportunities to invest in Colorado small businesses; (c) Engaging in activities for which private moneys can be secured and used for promotional activities, including internet promotions, publication of privately financed electronic and paper guides, and similar activities; and (d) Initiating joint efforts between public and private entities, joint marketing programs, and privately financed promotional ventures when such activities are consistent with the powers and duties of the authority. SECTION 2. 11-51-201, Colorado Revised Statutes, is amended BY THE ADDITION OF THE FOLLOWING NEW SUBSECTIONS to read: 11-51-201. Definitions. As used in this article, unless the context otherwise requires: (3.5) "Colorado private security" means a security that: (a) Is not a public security; (b) Relates to a business entity that is registered to do business in Colorado; and (c) Is sold and purchased, or offered to be sold and purchased, by and from sellers and buyers who are located in Colorado. (12.8) "Private capital agent" means a person engaged in the business of effecting purchases or sales of Colorado private securities for the accounts of others. SECTION 3. 11-51-401, Colorado Revised Statutes, is amended BY THE ADDITION OF A NEW SUBSECTION to read: 11-51-401. Licensing and notice filing requirements. (1.7) A person with a place of business in this state shall not transact business in this state as a private capital agent unless the person is licensed as such or exempt from licensing under section 11-51-402. SECTION 4. 11-51-404 (1), Colorado Revised Statutes, is amended BY THE ADDITION OF A NEW PARAGRAPH to read: 11-51-404. License and notice fees. (1) (c) An applicant for a license as a private placement agent shall pay an initial and annual license fee, which shall be determined and collected pursuant to section 11-51-707; except that no annual license fee may be more than one thousand dollars. SECTION 5. 11-51-407 (1), Colorado Revised Statutes, is amended BY THE ADDITION OF A NEW PARAGRAPH to read: 11-51-407. Operating requirements - rules. (1) (d) (I) The securities commissioner may by rule require private capital agents to: (A) Satisfy specified minimum financial responsibility requirements; (B) File with the securities commissioner specified financial and other information; (C) Make and maintain specified records and to preserve such records for five years or such other period as the securities commission may specify; (D) Establish written supervisory procedures and a system for applying such procedures that is reasonably expected to prevent and detect violations of this article; and (E) Acquire and keep in force a fidelity bond in such minimum amount and covering such risks as may be specified. (II) A private capital agent shall operate pursuant to the following limitations and conditions: (A) A private capital agent may earn a commission on the sale of Colorado private securities; (B) A private capital agent shall not purchase or sell, or offer to purchase or sell, a security that is not a Colorado private security; and (C) A private capital agent shall not handle or take possession of any funds or securities. SECTION 6. The introductory portion to 24-77-102 (15) (b), Colorado Revised Statutes, is amended, and the said 24-77-102 (15) (b) is further amended BY THE ADDITION OF A NEW SUBPARAGRAPH, to read: 24-77-102. Definitions. As used in this article, unless the context otherwise requires: (15) (b) "Special purpose authority" includes: but is not limited to: (XVIII) The small business capital authority created in section 24-46-404. SECTION 7. Act subject to petition - effective date. This act shall take effect at 12:01 a.m. on the day following the expiration of the ninety-day period after final adjournment of the general assembly (August 10, 2011, if adjournment sine die is on May 11, 2011); except that, if a referendum petition is filed pursuant to section 1 (3) of article V of the state constitution against this act or an item, section, or part of this act within such period, then the act, item, section, or part shall not take effect unless approved by the people at the general election to be held in November 2012 and shall take effect on the date of the official declaration of the vote thereon by the governor.