PURPOSE: This rule describes the methods for claiming tax credits, for continuing certification as a CAPCO, for qualifying as a qualified Missouri small business, for the making of payments to the Missouri Development Finance Board, for decertification of CAPCOs by the Department of Economic Development, for conducting audits, for determining conflicts of interest, for determining whether records are open or closed, and for maintaining communications between the Department of Economic Development and CAPCOs.

1. (1) Tax credits shall not be approved or denied before the official tax credit allocation date as announced by the department. The announcement of the allocation date shall not be less than thirty (30) days in advance of such date. Tax credits shall be approved or denied in the following manner:

   1. (A) Tax credits will be allocated to CAP- COs in the order that the required information is filed with the department on Form 135-5, Part A. The information required is—

      1. 1. The name of each investor;
      2. 2. The amount of the investment of cer-

tified capital or the amount of a binding letter of intent for the investment of certified capital;

1. 3. The amount of tax credits requested;

and

1. 4. The date the certified capital was

received or the date a binding letter of intent was made. A binding letter of intent from the investor is needed to allocate the tax credits. A binding letter of intent is an agreement of an investor to commit an investment of certified capital. The amount of the commitment is subject to reduction only if the investor’s ability to make an investment of certified capital is limited by the application of section 135.503(4) or reduced by the rebalancing allowed under 4 CSR 80-7.040(1)(M). A binding letter of intent from an investor must be converted into an investment of certified capital in a CAPCO within thirty (30) days from the date that such CAPCO receives written notification of the allocation of tax credits pursuant to section 135.503(4). A CAPCO may not submit a binding letter of intent from an investor exceeding the ten (10) million dollar investor limit, except as allowed in 4 CSR 80-7.040(1)(N). A CAP- CO may not submit binding letters of intent from investors exceeding the twenty-five (25) million dollar per CAPCO limit, except as allowed in 4 CSR 80-7.040(1)(K).

1. (B) In the event that more than one (1) CAPCO submits the specified documentation to the department requesting tax credits on the same day, and the amount of such proposed investments exceed the limit of available tax credits, the amount of tax credits approved shall be approved pro rata to the amount requested. For example, in a given calendar year, if CAPCO A’s investors request twenty (20) million dollars (over ten years) in tax credits; CAPCO B requests twenty-five (25) million dollars; and CAPCO C requests twenty-five (25) million, then the total requests seventy (70) million dollars exceed the 1997 limit of fifty (50) million dollars in tax credits. Therefore, CAPCO A’s investors would be provided $14,286,000 in tax credits (over ten years), CAPCO B’s investors would be provided $17,857,000 in tax credits, and CAPCO C’s investors would be provided $17,857,000 in tax credits. For the purpose of calculating allocations, the amount of tax credits requested by an investor (and its affiliates) shall not exceed the limitations described in subsection (1)(N) of this rule;
2. (C) The department shall notify each CAP- CO of the aggregate amount of credits allocated to its investors within five (5) days after the official tax credit allocation date. Once the CAPCO is allocated tax credits the CAP- CO must submit the name of each investor, the amount of the investment of certified capital and amount of tax credits to the department for issuance of tax credits. Such information must be submitted on Form 135-5, Part B to the department, along with evidence that the investment was made within thirty

1. (30) days of the allocation. Such evidence is a copy of the check from the investor to the CAPCO, or in the case of a wire transfer, a certification from the financial institution that administered the transfer certifying that such transfer was completed.

   1. (D) Any investments from an insurance company (equity, debt, or other cash investment) received by a CAPCO or CAPCO affiliate prior to the department’s approval of a CAPCO’s certification will not be deemed to be certified capital, therefore, no tax credits will be issued. Prospective investments by an insurance company in a CAPCO may be placed in an escrow account with the intent of being invested in a CAPCO upon the approval of certification, however, such prospective investments placed in the escrow account must be returned if the CAPCO does not receive certification;
   2. (E) Investments made by an insurance company in a CAPCO prior to January 1 in the calendar year in which additional tax credits become effective, as provided for in section 135.503.3, RSMo, are not eligible for tax credits;
   3. (F) Within thirty (30) days after the transfer or sale of tax credits, the original holder of the tax credits (“transferor”) shall notify the department in writing of the name of the new holder of the tax credits (“transferee”), the amount of tax credits transferred, the sale price of such credits, the date the transfer occurred, the tax identification number of the transferee, and the remaining balance of tax credits held by the transferor. In the event such notice is not received by the department within the thirty (30)-day limit, the transfer shall be void;
   4. (G) There is no limitation on the value of tax credits that may be sold, except that tax credits may be sold only to insurance companies;
   5. (H) If the transferor has an A.M. Best rating less than “A,” the department may require such transferor to post or provide acceptable security to the department for the full amount of the tax credits received prior to any transfer. In the event the department requires security to be posted or provided, such security may be in the form of bonds, a bank letter of credit, or low risk marketable securities acceptable to the department. Such securities will be held by the department until the CAPCO has invested one hundred percent (100%) of its certified capital in qualified Missouri businesses and the annual review of the CAPCO is completed. If the CAPCO is decertified, the department may immediately draw on that security for the amount, which is required to be repaid as a result of the decertification. There is no requirement for the transferee to provide security for the amount of tax credits received;
   6. (I) A CAPCO or its investors may not receive state tax credits from the Capital (Small Business Investment) Tax Credit Program, the Community Bank Tax Credit Program, the Development Tax Credit Program, or the Seed Capital Tax Credit Program for qualified investments made by the CAPCO;
   7. (J) Investments made by an insurance company in a prospective CAPCO (an entity that submits an application to the department requesting to be certified as a CAPCO), prior to the time such certification is granted, are not eligible for tax credits;
   8. (K) The maximum amount of new earned and vested tax credits (those above the amounts available from previous years) that will be provided in any calendar year to investors in any one CAPCO (or CAPCO affiliate, if such CAPCO affiliate has an interest in more than one CAPCO) will be limited to twenty-five (25) million dollars. If the entire amount of tax credits is not allocated within sixty (60) days after the official tax credit allocation date, such per CAPCO limitation shall not apply.
   9. (L) In the event certified capital is invested by an investor in a certified CAPCO, and such certified capital is not eligible for tax 4 CSR 80-7

credits due to the limitations of section 135.503.3, RSMo, or the limitations imposed by subsection (1)(J), the investor may withdraw such certified capital at any time without restriction;

1. (M) In the event the department receives a notification of receipt of certified capital (on Form 135-5, Part A) from a CAPCO and limitation with respect to tax credits apply, the department shall notify the CAPCO of the total amount of credits which are available within fifteen (15) days. Upon receiving such notice, the investors and/or the CAPCO may rebalance the amounts actually invested by each investor in a manner which will fully utilize the tax credits allocated to the CAP- CO. The CAPCO shall have forty-five (45) days in which to use all of the allocated credits. If the CAPCO does not receive investments in certified capital equaling the aggregate amount of tax credits allocated within the forty-five (45)-day time period, that portion of the tax credits will be forfeited and the department will reallocate the unfunded portion of the tax credits to the investors in other CAPCO’s pro rata based on the amount of credits requested by each.
2. (N) The maximum amount of new earned and vested tax credits (those above the amounts available from previous years) that will be provided prior to any calendar year to any one investor (or its affiliates) in one or more CAPCOs will be limited to ten (10) million dollars. If the entire amount of tax credits is not allocated within sixty (60) days after the official tax credit allocation date, such per investor limitation shall not apply. For the purpose of calculating this limitation, tax credits which have been acquired by or transferred to the investor (or its affiliates) which were earned by another investor in that calendar year will be included.
3. (O) Once the department has made an allocation of tax credits under section 135.503(3) and 135.503(4), RSMo, which equals in the aggregate the maximum amount of credits that may be allowed and allocated to investors in any calendar year, the department will not accept and will not consider additional requests for allocation of tax credits for that year.

1. (2) The following describes how CAPCOs may retain their certification and procedures to be followed if decertification occurs:

   1. (A) To continue to be certified, a CAPCO shall make investments according to the following schedule:

      1. 1. Within two (2) years after the date on

which a CAPCO is certified, at least twentyfive percent (25%) of its certified capital shall be, or have been, placed in qualified investments;

1. 2. Within three (3) years after the date

on which a CAPCO is certified, at least forty percent (40%) of its certified capital shall be, or have been, placed in qualified investments; and

1. 3. Within four (4) years after the date on

which a CAPCO is certified, at least fifty percent (50%) of its certified capital shall be, or have been, placed in qualified investments;

1. (B) For the purposes of this rule, the dates of required qualified investments shall be referred to as milestone dates. The term “placed,” in this context, means the date funds are received by the qualified Missouri business from the CAPCO, as evidenced by the date of a check or other means of funds transfer. The CAPCO must submit the following information to the department within thirty (30) days of the milestone dates:

   1. 1. The amount of certified capital placed

in qualified investments as of the milestone date; and

1. 2. The amount of total certified capital

provided by investors to the CAPCO as of the milestone date;

1. (C) In the event that the CAPCO fails to meet the milestone dates, or in the event the CAPCO fails to submit the information required in paragraphs (2)(B)1. and 2. of this rule within the time period specified, the CAPCO shall be notified and allowed to resolve the deficiency within one hundred twenty (120) days. In the event the deficiency is not resolved within the time limit, the CAPCO may be decertified by the department;
2. (D) In the event that all the milestones are achieved, but the CAPCO is subsequently decertified, the department may not recapture tax credits claimed in the years prior to the tax year which the decertification occurred. In the event that the CAPCO willfully provides materially false or incorrect information with respect to the milestones that would have resulted in the decertification of the CAPCO, full recapture of all tax credits may be required by the department; and
3. (E) In the event that decertification occurs, the investor(s) into the CAPCO shall, within thirty (30) days of receipt of notice sent by the department, submit funds in the amount of all premium tax credits previously claimed by the investor and subject to recapture, if any, with respect to its investment in the CAPCO. In the event an investor fails to provide the department with such funds within the thirty (30)-day time period, a penalty based on .0003 per day of the amount owed shall be added until paid. In addition, the investor shall pay any legal or other costs relating to the collection of such payment. Payment shall be in the form of cashier’s check made payable to the department, or a wire transfer to the department.

1. (3) The following describes the information which a CAPCO must submit to the department certifying that a company in which it proposes to invest is a qualified Missouri small business, and outlines the procedures for required communications between a CAP- CO and the department:

   1. (A) The information the CAPCO must submit to the department prior to the initial investment in a qualified Missouri business must include the following:

      1. 1. Name and address of the business

(including headquarters and primary business operations), and type of primary business operations;

1. 2. Amount and type (debt, equity, other)

of capital the CAPCO intends to invest in the business;

1. 3. If the business is a service business,

documentation from the business that at least one-third (1/3) of sales after three (3) years will be derived from out of the state of Missouri. Such documentation shall include the typical in-state/out-state sales of other similar service companies and the marketing plan of the business;

1. 4. Certification from the CAPCO attest-

ing to the accuracy and completeness of the information supplied by it;

1. 5. Certification from the business

(signed and notarized by the president or chief officer) that—

1. A. Annual revenues in the business

last fiscal year were less than the limits established for a qualified Missouri business (four (4) million dollars if the business has been in existence less than three (3) years, or three (3) million dollars if the business has been in existence longer than three (3) years);

1. B. The business was unable to obtain

a loan for the entire project from a bank or other conventional financing sources and is in need of funds for expansion and/or modernization, or to retain current operations;

1. C. The primary operation of the

business is as an eligible qualified Missouri business and not retail sales, real estate sales or development, or insurance or professional services provided by accountants, lawyers or physicians;

1. D. The business will not use the

CAPCO’s investment for operations or capital improvements outside the state of Missouri, except for marketing costs;

1. E. The business is headquartered and

its primary business operations are located in the state of Missouri, it has no more than two hundred (200) employees, and at least eighty percent (80%) of its employees are located in the state of Missouri;

1. F. The business will not use the CAP-

CO’s investment to relocate to another site within Missouri more than thirty (30) miles from its current location without the prior approval of the department; and

1. G. The business has no more than two

hundred (200) employees and certification of the total number of employees, and the number of employees located in Missouri;

1. (B) Any notices required to be sent by the department to a CAPCO or an investor shall be sent by certified mail to the contact person and address of the CAPCO listed in the CAP- CO’s application, or, in the case of an investor, to the contact person and address listed in the application for tax credits. Such contact persons may submit a revision of their addresses to the department by certified mail. Notwithstanding the above, a CAPCO or investor which receives any written notice in person at the department will be deemed to have been notified; and
2. (C) Any notices or other required communications with the department or director (except the submission of an application for certification by a CAPCO) shall be sent by facsimile, e-mail, regular mail, express mail, or overnight courier to the: Missouri Department of Economic Development, Office of Business Finance, P.O. Box 118, Jefferson City, MO 65102, street address of Truman Building, 301 W. High St., Room 720, facsimile at (573) 751-7384, or e-mail at msorth@mail.state.mo.us. In the case where receipt cannot be verified (e-mail and facsimile), the CAPCO may telephone the department at (573) 751-0717 to verify receipt with a verification code.

1. (4) The following provides the procedures for the determination of the amount and payment by CAPCOs to the Missouri Development Finance Board (MDFB) as mandated by section 135.512, RSMo:

   1. (A) Additional capital contributions are additional investments of certified capital in the CAPCO by investors subsequent to the investors’ original investments, or capital contributions from any party on which no tax credits are earned;

   2. (B) Internal rate of return (IRR) is the annualized monthly discount rate that equates the present value the sum of i) the actual periodic cash flows (other than qualified distributions but including payments of principal and interest on CAPCO debt) distributed from the CAPCO and ii) the economic benefit of the tax credits as realized (i.e., received as periodic offsets to tax payment liability) by investors to the present value of any capital contributions to the CAPCO. An example calculation would be as follows:

      1. 1. Initial capital contribution of

$500,000 from a CAPCO affiliate in the form of equity upon which no tax credits are earned, made on January 1, 1997, certification date of the CAPCO. (The January 1 date is for illustrative purposes only; no investments in a CAPCO can occur until after the initial application date of February 10, 1997);

1. 2. Initial certified capital investment

from an insurance company of nine (9) million dollars in proceeds from the issuance of a debenture and an additional one (1) million dollars in proceeds from the issuance of equity, (a total of ten (10) million dollars in certified capital), both placed on March 1, 1997, therefore, tax credits would be one (1) million dollars per year for ten (10) years;

1. 3. Repayment of the nine (9) million

dollars debenture on January 1, 2007;

1. 4. Repayment of the $1.5 million in total

equity on January 1, 2008 (which is only permitted if the CAPCO has placed an amount cumulatively equal to one hundred percent (100%) of its certified capital in qualified investments); and

1. 5. Distribution of $39.5 million from

investment returns on January 1, 2008 (which is only permitted if the CAPCO has placed an amount cumulatively equal to one hundred percent (100%) of its certified capital in qualified investments). The internal rate of return would therefore be 21.36%, which is greater than the statutory milestone of fifteen percent (15%) IRR. The distribution amount that equates to a fifteen percent (15%) IRR would be $14,075,000. The amount of distributions in excess of a fifteen percent (15%) IRR (hereafter termed as “participating distributions”) would be $26,925,000. Therefore, the CAPCO would provide the MDFB twenty-five percent (25%) of the $26,925,000 participating distribution, or $6,731,250. For simplicity of illustration, in this example, qualified distributions (which are permitted, but are not to be included in the IRR calculations) have been omitted. The debentures in this example do not include payments for interest or amortization of principal which are permitted but are to be included in the computation of the IRR; and

1. (C) Payments to the MDFB shall be

made by the CAPCO within thirty (30) days after the completion of the audit described in section 135.516.2, RSMo, but prior to or simultaneous to liquidating distributions made to investors or CAPCO affiliates. Liquidating distributions may not be made until the completion of an audit. Payments to the MDFB must be made in the form of a cashier’s check made to the order of the Missouri Development Finance Board and sent to the address of the department, or by wire transfer to the MDFB. In the event payment is not received by the thirty (30)-day deadline, or in the event the CAPCO distributes funds to investors or a CAPCO affiliate prior to the MDFB, there shall be a penalty added to such payment based on .0003 per day of the amount owed or the number of days elapsed from the time funds were distributed to investors or a CAPCO affiliate. In the event a CAPCO fails to provide funds owed to the MDFB (due to participating distributions) within sixty days from the completion of the audit, such funds must be paid by the CAP- CO affiliate and the CAPCO’s investors on a pro rated basis according to the amount of liquidating distributions received by the respective parties. The party that owes the funds shall also pay any legal or other costs associated with collection.

1. (5) The following describes records which are deemed to be open under Chapter 610, RSMo, potential conflicts of interest, and audit requirements relating to certified capital companies:

   1. (A) Firms, which are approved by the department to audit CAPCOs, and their principals and employees, may not be affiliated with the audited CAPCOs or their investors. A nationally recognized accounting firm means a firm that is generally recognized to be among the top six (6) certified accounting firms in the country;
   2. (B) At no time during the period when the department regulates a CAPCO shall an employee, board member, or agent (or an immediate family member of such persons) of the department or the MDFB, who has direct administrative or policy involvement with the CAPCO program, be an employee, owner, or agent of a CAPCO, a CAPCO affiliate, or an investor of a CAPCO. A CAPCO, a CAPCO affiliate, owners, employees, agents, or subsidiaries of a CAPCO, or investors of a CAPCO shall not provide any compensation, gifts, or contributions (which are in violation of sections 105.450, 105.452, or 105.454, RSMo) to any employee, board member or agent of the department or the MDFB (or immediate family member);
   3. (C) A person who is an affiliate of an insurance company investor in a CAPCO may not be in a position with the CAPCO to direct the investments of such CAPCO. This prohibition shall not preclude an insurance company from exercising its legal rights and remedies (which may include interim management of the CAPCO) in the event that a CAPCO is in default of its statutory obligations or its contractual obligations to its investors;
   4. (D) At no time during the period when the department regulates a CAPCO shall a person who is affiliated (employee or elected official) with the general assembly, the governor’s office, the Office of Administration or the Department of Economic Development, be an employee, owner, or agent with a CAP- CO, a CAPCO affiliate involved in managing the CAPCO, or an investor into a CAPCO; and 4 CSR 80-7

   5. (E) Open records under the Certified Capital Company Law shall include:

      1. 1. The names and addresses of princi-

pals of entities (and their affiliates) that have submitted applications to become CAPCOs, the dates such applications were submitted; the names and addresses of principals of certified CAPCOs (and their affiliates); the dates CAPCOs were certified, and the amount of tax credits provided to investors into each CAPCO;

1. 2. The names of investors who have

been provided tax credits, the amount of tax credits provided, and the dates the tax credits were provided;

1. 3. The names and addresses of qualified

Missouri businesses which have received investments from CAPCOs, the amount and date of such investments, and the types and locations of the businesses; and

1. 4. The names of all CAPCOs that have

been decertified and the reasons for such decertifications.

AUTHORITY: section 135.529, RSMo Supp. 1997.* Emergency rule filed Jan. 2, 1997, effective Feb. 3, 1997, expired July 1, 1997. Original rule filed Dec. 15, 1997, effective June 30, 1998. *Original authority 1996.