Act 860 Creates New Era For Venture Capital In State

Venture capital advocates in Arkansas are hailing Act 860 of 2003 as the start of a new day for venture capital in Arkansas.

“I think that ultimately this could be one of the most positive economic steps we’ve taken as a state,” said Sam Walls, chief operating officer of the Arkansas Capital Corporation Group in Little Rock.

The assessment might appear to be less than humble given Walls’ leading role in helping formulate and lobby for the legislation. But he is nonetheless convinced that the 31-page bill signed into law on March 28 is a very good thing for Arkansas.

The legislation amended the Arkansas Capital Development Corporation Act, doing away with exploitable loopholes created in 1991 and returning the original spirit of its enactment in 1985.

The recent reinvigoration of capital development corporations, historically referred to as industrial development corporations, establishes better accountability to do away with past abuses and lays the ground work for attracting more venture capital.

A big draw is that tax credits generated from the program now can be sold or transferred to other investors. This flexibility provides an incentive for nonprofits — including Arkansas Capital Corporation Group — to invest in IDCs even though they would derive no benefit from the tax credits.

A nonprofit can sell the tax credit for cash. In the case of venture capital-related nonprofits, the proceeds from selling tax credits generate more money that can be reinvested in other venture capital opportunities.

“It opens up a whole new world in terms of raising capital,” Walls said.

The legislation also creates new scenarios to help recruit companies to Arkansas.

An IDC could be used as a vehicle to encourage a company to invest in Arkansas operations. Tax credits equal to one-third of the investment would be available to offset other taxable income. For instance, a company could invest $1 million in an Arkansas facility that through an IDC would generate $333,000 in tax credits.

Those tax credits could be retained by the company to offset profits or sold off to boost working capital. Such an IDC setup could be orchestrated by the Arkansas Department of Economic Development.

“I think we’ve created a tool that can be a long-term asset for the state,” Walls said.

Another key component of the law is establishing a two-year waiting period before investors in the program can use any of the tax credits generated.

This allows time for the investments to demonstrate an economic benefit to the state.

Act 860 also requires investment funds raised by an IDC to flow unhindered to a company before the investments can qualify for the tax credit. This is a key change: The old law allowed an IDC to raise money without even having a benefactor company in mind and to hold funds for up to 18 months. The old law also allowed investors to take the tax credits immediately and carried no practical accountability for producing results.

The result was a law that was exploited by some IDCs and was a source of frustration for regulators at the Arkansas State Bank Department, who were powerless to stop the abuses.

Act 860 sets a tax credit limit of 50 percent of an investor’s tax liability in a given year. Remaining tax credits from the investment can be carried forward for up to eight years.

The new law also does away with the county or regional vision for the IDCs and replaces it with the original statewide authority of conducting business. The IDCs will now be quasi-public entities administering a tax credit program, with direct oversight provided by members of government agencies.

The inclusion of folks from the Arkansas Development Finance Authority et al is a must for every IDC board.

State Bank Commissioner Frank White grew frustrated with the lack of accountability under the old law that allowed do-nothing IDCs to reap tax credits without delivering any economic benefits to the state in return.

“That was the big problem we had, the accountability of it,” White said. “Several of the IDCs claimed to have fulfilled the mandate of creating jobs. But we never found anything in our examination to prove that. The bottom line was: Is the state of Arkansas getting its money’s worth?”

He was not happy that his agency was unable to effectively police the program and the handful of active IDCs because of watered-down legislation.

“Either we’re going to do away with it or tighten it up,” he said. “[Arkansas Capital Corp.] said they thought it had value, but they wanted to work with us to tighten up the flaws in the legislation.”

Now IDCs will have to submit projects for review before the tax credits are granted. The field is wide open in terms of business categories for investment, but the proposals are scrutinized with an eye toward job creation, grounded in viability and reality.

“The decision-making process is a non-political process,” said Walls.

Shepherding a piece of legislation through the General Assembly was a new experience for Walls.

The legislation was sponsored by Sen. Percy Malone, D-Arkadelphia, and Rep. Jimmy Milligan, D-Yellville. Walls said Malone, who helped bring about the original IDC law in 1985, especially was pleased to work on the revamped legislation.

IDCs are required to file quarterly reports to state authorities including the State Bank Department and the Department of Finance and Administration.

Beginning in the fourth year, annual reports will be presented to the bank department, DF&A, Legislature and governor.

The financial reports are envisioned as measuring sticks on the economic benefits the state is receiving in exchange for the tax credits granted.

“We’ll be the first to say that we need to do something else if this doesn’t play out as a benefit to the state,” Walls said. “We’re taxpayers, too.”