Increases the total amount of issued and transferable tax credits. Adds insurance premium taxes to the list of applicable taxes. Ensures that tax credits will be invested in Hawaii companies. Authorizes the corporation to use refundable credits to support technology industry development efforts.

A BILL FOR AN ACT

SECTION 1. The legislature finds that a shortage of venture capital resources is impairing the growth of commerce in the State. According to A Turning Point in Capital Formation, Assessing Hawaii's Strategic Options published by Enterprise Honolulu, nearly sixty per cent of Hawaii's small growth businesses in 2003 anticipated an increase in sales and required capital investments to meet its full potential. In 2003, Hawaii ranked only forty-first in the nation for venture capital activity. The capital investment shortage is undermining financial growth, decreasing the rate of return that local venture capitalists receive, and forcing local entrepreneurs to leave the State and find capital investments elsewhere.

In 2004, the legislature made significant advances in the capital formation for Hawaii's emerging technology firms and expansion-oriented companies through Act 215, Session Laws of Hawaii 2004. The Hawaii strategic development corporation was authorized to use tax credits issued from the State and transfer them to taxpayers to reduce their tax liability. Additionally, the corporation was authorized to solicit investment plans from investment groups that will generate and deploy investment capital and resources in the State.

The purpose of this Act is to:

SECTION 2. Section 211G-1, Hawaii Revised Statutes, is amended by amending the definition of "tax credits" to read as follows:

""Tax credits" means tax credits issued or transferred pursuant to this chapter and available against liabilities imposed [by] under chapter 235 [or], 241[.], or 431."

SECTION 3. Section 211G-1, Hawaii Revised Statutes, is amended by amending the definition of "taxpayer" to read as follows:

""Taxpayer" means a person subject to a tax imposed [by] under chapter 235 [or], 241[.], or 431."

SECTION 4. Section 211G-12, Hawaii Revised Statutes, is amended to read as follows:

"[[]§211G-12[]] Tax credits. (a) The State shall issue tax credits to the corporation that may be transferred or otherwise used to reduce the tax liability of any taxpayer pursuant to chapter 235 [or], 241[.], or 431. The total amount of tax credits that may be issued, and which may be transferred pursuant to this chapter by the corporation is [$36,000,000] $120,000,000. Upon compliance with subsection (b), the credits shall be freely transferable by the corporation to transferees and by transferees to subsequent transferees; however, the tax credits so transferred by the corporation shall not be exercisable before July 1, 2005, nor after July 1, 2030. The corporation shall not transfer tax credits except in conjunction with a legitimate call on a corporation guarantee. The corporation shall immediately notify the president of the senate, the speaker of the house of representatives, and the governor in writing if any tax credit is transferred by the corporation in conjunction with a legitimate call on a corporation guarantee; provided that the corporation shall not be required to make that notification for transfers to subsequent transferees.

(b) Subject to the [annual] authorization by the legislature, the corporation may transfer tax credits under this section up to the annual amount allowed under subsection (c). Legislative authorization for the tax credits shall be by a separate legislative act.

(c) The corporation shall determine the amount of individual tax credits to be transferred pursuant to this chapter and may negotiate for the sale of those credits subject only to the limits imposed by this chapter. The corporation shall limit the transfer of tax credits that may be claimed and used to reduce the tax otherwise imposed [by] under chapter 235 [or], 241, or 431 for one fiscal year (including any tax credits that are carried over by a taxpayer from a prior fiscal year and used to reduce taxes otherwise imposed in the current fiscal year, as permitted in subsection (g)) to not more than an aggregate total of [$12,000,000] $20,000,000 per fiscal year. The board shall clearly indicate on the face of the certificate or other document transferring the tax credit the principal amount of the tax credit and the taxable year or years for which the credit may be claimed.

(d) The corporation, in conjunction with the department of taxation, shall develop a system for registration of any tax credits issued or transferred pursuant to this chapter and a system of certificates that permits verification that any tax credit claimed upon a tax return is validly issued, properly taken in the year of claim, and that any transfers of the tax credit are made in accordance with this chapter.

(e) The corporation may pay a fee and provide other consideration in connection with the purchase by the corporation of a put option or other agreement pursuant to which a transfer of tax credits authorized by this chapter may be made.

(f) The tax credits issued or transferred pursuant to this chapter, upon election by the taxpayer at time of use, shall be treated as a payment or prepayment in lieu of taxes imposed under chapter 235 [or], 241[.], or 431. Tax credits used pursuant to this chapter shall be claimed as a payment of tax or estimated tax for the purposes of chapter 235 [or], 241[.], or 431.

(g) If the tax credits under this section exceed the taxpayer's income tax liability under chapter 235 [or], 241, or 431 for any taxable year, or for any other reason is not claimed by a taxpayer in whole or in part in any taxable year, the excess of the tax credit over liability[, or the amount of the unclaimed tax credit, as the case may be, may be carried over and used as a credit against the taxpayer's income tax liability in any subsequent year until exhausted,] shall be refunded to the taxpayer subject to:

SECTION 5. Section 211G-13, Hawaii Revised Statutes, is amended to read as follows:

"[[]§211G-13[]] Investment of capital. (a) The corporation may solicit investment plans from investor groups for the investment of capital in accordance with this chapter. The corporation shall establish criteria for the selection of persons, firms, corporations, or other entities. The criteria shall include the applicant's level of experience, quality of management, investment philosophy and process, probability of success in fundraising, plan for achieving the purposes of this chapter, and such other investment criteria as may be used in professional portfolio management that the corporation deems appropriate. If the corporation decides to engage one or more investor groups to deploy or generate capital, it shall consider and select one or more investment plans and investor groups that the corporation deems qualified to:

An investor group engaged by the corporation shall have a manager who is experienced in design and implementation, as well as the management of seed and venture capital investment programs and in capital formation. The corporation may remove and replace any investor group that has been engaged and effect the assignment of assets, liabilities, guarantees, and other contracts of this program to a new investor group, subject to such terms and conditions as may be set forth in the terms of engagement.

(b) With legislative approval pursuant to section 211G-14, the corporation may extend one or more guarantees and secure the performance of such guarantees in the form of a put option, as well as other arrangements selected by the corporation. Without limiting the foregoing:

Guarantees, in whatever form negotiated by the corporation, may be made for any period of time, but no term shall expire prior to January 1, 2006. The corporation may charge a reasonable fee for costs and the fair compensation of risks associated with its guarantee. Proceeds from the sale of any tax credits may be used to satisfy the contractual guarantee obligation of the corporation. The corporation may contract freely to protect the interest of the State.

(c) If the corporation purchases any security pursuant to an agreement with an investor group, the corporation shall acquire the securities and may invest, manage, transfer, or dispose of the securities in accordance with policies for the management of assets adopted by the corporation.

(d) The corporation may make any contract, execute any document, charge reasonable fees for services rendered, perform any act or enter into any financial or other transaction necessary to carry out its mission. The corporation may employ necessary staff as may be required for the proper implementation of this chapter, the management of its assets, or the performance of any function authorized or required by this chapter necessary for the accomplishment of any such function. Staff shall be selected by the corporation based upon outstanding knowledge and leadership in the field for which the person performs services for the board.

(e) In carrying out the mission of the corporation, as authorized in this chapter, neither the corporation nor its officers, board members, or employees shall be considered to be broker-dealers, agents, investment advisors, or investment adviser representatives under chapter 485. The tax credits issued or transferred pursuant to this chapter shall not be considered securities under chapter 485.

(f) Funds raised or arranged by the corporation pursuant to this chapter shall be invested in seed capital and venture capital investments, as such terms are defined in chapter 211F, which, to the extent consistent with this chapter, shall be governed by applicable provisions of chapter 211F.

(g) The guarantees extended by the fund shall be payable solely from revenues of the fund and shall be secured solely by those revenues and by the pledges and assignments authorized by this chapter. No holders of guarantees issued under this chapter shall have a right to compel any exercise of the taxing power of the State to pay the guarantees and no moneys other than the revenues of the fund shall be applied to payment thereof. Each guarantee issued under this chapter shall recite in substance that the guarantee is not a general obligation of the State and is payable solely from revenues pledged to the payment thereof, and that such guarantee is not secured directly or indirectly by the full faith and credit or the general credit of the State or by any revenues or taxes of the State other than the revenues specifically pledged thereto.

(h) Financial commitments with private financial investment funds shall be made by the corporation on the condition that the private fund shall cause investments to be made in Hawaii companies in amounts at least equal to state participation.

(i) $250,000 of the amount raised by the corporation using the refundable credits under this program shall be used by the corporation to support technology industry trade groups in their technology development efforts in Hawaii."

SECTION 6. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 7. This Act shall take effect upon its approval.