VCA Summary of Questions and Responses
Venture Capital Authority
SUMMARY OF PROSPECTIVE FUND MANAGERS - QUESTIONS AND RESPONSES PROVIDED BY THE VENTURE CAPITAL AUTHORITY
This document is intended to provide clarification to the Request For Proposal (RFP) issued by the Venture Capital Authority (VCA) in response to questions submitted by PFMs. If a PFM is unable to comply with the requirements in the RFP, the PFM must so indicate in its submittal and provide a complete explanation. Additionally in the event that a PFM is not able to comply with the requirements in the RFP, PFMs are encouraged to provide alternative recommendations or remedies where applicable for the VCA's consideration. The final contract terms with the VCA are generally subject to negotiation. The VCA will consider a number of factors during the selection process.
Following are the questions asked by PFMs and the responses provided by the VCA.
MATCHING FUNDS - CLARIFICATION
Q. Is the VCA looking for matching funds that have been raised by investors and is under management by the same Fund Manager (FM)? Or, would the VCA allow co-investments by other Fund Managers to count as matching funds?
A. The VCA is looking for matching funds that have been raised by investors and is under management by the same Fund Manager; however, it is only one item that the VCA is considering. The VCA does not intend to allow co-investments by other Fund Managers to count as matching funds.
SEED AND EARLY STAGE DEFINITION
Q. Please provide further definition to "seed and early stage". Under what conditions may a PFM make subsequent investments in its portfolio companies, using either debt or equity or both, that are no longer seed and early stage, should the PFM deem it necessary and prudent within the boundaries of common industry practices within the venture capital industry - say as a bridge loan to carry a portfolio company until it receives a new round of investment?
A. The definition of "seed and early stage" may be found in the statute. Once a FM has invested VCA funds in a Qualified Business, the FM may continue to make investments in the Qualified Business as long as: 1) the business is complying with the requirement for it to maintain its headquarters and principal business operations in Colorado for at least five years after first receiving an investment of Certified Capital; 2) the investment meets the statutory requirements of a Qualified Investment pertaining to the structure of the investment (such as debt, equity, hybrid, etc.); 3) the investment meets the statutory requirements of a Qualified Investment pertaining to the expenditure requirement of the Qualified Investment within Colorado; 4) the required loan rejection letters for each new investment (if a loan is provided) are obtained; and 5) the investment in the business does not exceed 15% of the FM's aggregate total of certified capital.
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LICENSES/CERTIFICATIONS
Q. On page 17, Section V.E (8) - Does the term "licenses" refer to professional licenses (such as securities sales licenses) and professional certifications (such as CPA)?
A. Yes, any professional license which a PFM deems applicable to this RFP.
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QUARTERLY REPORTING
Q. Exactly what information will the VCA require be provided to them quarterly?
A. The RFP asks that PFMs provide a sample report or a concise description of that report that would be provided to the VCA on a quarterly basis. At a minimum, the VCA anticipates receiving the same type of information that would typically be provided to a limited partner in a private equity fund in addition to the specific information required in the statute for this program. It should be noted that this information is only one factor in the RFP competitive process.
FUND MANAGER COMPENSATION
Q. Will there be any limitations considered in the contract with the FM on the use of the FM managers time to "provide testimony and information to state auditors, legislative committees,..." or will appropriate compensation be paid to FM for utilizing the Fund Managers time for these purposes?
A. The VCA generally considers this type of activity to be one of the responsibilities of a Fund Manager(s). However, the RFP allows for PFMs to submit competitive proposals on all facets of the RFP and such items may be subject to negotiation. No additional compensation, beyond a competitive management fee, will be paid to a Fund Manager(s) for this purpose.
OTHER INCOME SOURCES FOR THE FUND MANAGER
Q. Are there any statutory or VCA limitations on the PFM receiving consulting income for services rendered by the PFM in a portfolio company?
A. No. However, the VCA would expect to receive its share of such income (similar to a management fee offset customarily included in a venture capital fund) to ensure that the Fund Managers' (General Partners) interests are fully aligned with the VCA's (Limited Partners) interests. In sum, the General Partner should be incentivized and be rewarded through the carried interest for generating significant capital gain for the limited partners. However, the General Partner should not be rewarded for generating income that benefits itself for monitoring the investments in the fund. However, the RFP allows for PFMs to submit competitive proposals on all facets of the RFP and the PFMs' proposals should address this item.
BANK REJECTION REQUIREMENTS
Q. Please elaborate on any guidelines or restrictions the VCA may have on the requirement of "receiving rejection letters from two different banks" should the FM wish to make a convertible bridge loan to a company in which the FM wishes to invest or already has an investment. The requirements for fulfilling this process can have a material impact on the way the FM performs his duties, in step with industry standards commonly practiced in the venture capital community, and attempts to meet the statutory requirements. For instance, may the FM have established banking relations that may result in a rapid turnaround time for receiving a rejection letter or must all rejection letters be acquired through some other formal response? How will the VCA determine the arms-length nature of a rejection letter?
A. The statute generally contains the requirements for loan rejection letters that are required when a Fund Manager(s) plans to make a loan to a Qualified Business. In order to ensure that the loan rejection letters are bona fide, the VCA will likely have similar requirements as stated in the Certified Capital Companies' regulations-such as the letter being on the letterhead of the bank, the letter stating that sufficient information was provided to the bank to make a determination, the letter being signed by an authorized officer or person of the bank, etc. Please note that the loan rejection letters need to be issued to the Qualified Business (not the Fund Manager). However, the VCA would also be supportive of the Fund Manager(s) having established banking relationships that expedite the process for businesses and could help them obtain loans. If the loan rejection letters are bona fide and from established banks, the VCA will generally consider the letters to be satisfactory and meet the intent of the statute absent evidence to the contrary.
STATE BUSINESS LOAN FUNDS
Q. What authority or control does the OEDIT currently have over "the applicable state business loan fund", and how is a state business loan fund defined?
A. The state has a contract with the counties served by each business loan fund. The counties typically contract with a local non-profit entity to administer the business loan funds. The state, through the Governor's Financial Review Committee (FRC) and OEDIT staff, has oversight responsibilities for the state's business loan funds. The FRC makes funding decisions on the amount allocated to each business loan fund. OEDIT staff ensures that the business loan funds comply with the terms of the state's contract and are also required to provide approval for loans made with new funds provided by the state. For certain loans, FRC approval is also needed.
Click here for a list of state business loan funds and their service territories.
SELECTION CRITERIA FOR THE FUND MANAGER
Q. One of the selection criteria listed is the total amount of Venture Capital managed by the PFM in Colorado and elsewhere. Is this the total amount currently under management by the entity applying or the total amount that may have been managed in the past by partners in the firm that is applying?
A. The VCA will consider both the total amount of venture capital managed by the entity applying and/or managed in the past by the partners in the firm that is applying.
Q. Another criteria listed is the PFM's historical return on investment, with an emphasis on returns from seed and early stage investments (as defined in the statute for this program). Is this historical return on funds managed by the entity applying, or can it be historical returns on funds and businesses managed by the partners?
A. The VCA will consider both the historical return on funds managed by the entity applying and/or managed in the past by the partners in the firm that is applying.
Q. Related to the above criteria, they seem to imply that the VCA is seeking an existing venture fund that has an existing seed/startup fund, versus an entity that has experienced partners but where it is a first fund, is that the case? If so, how does the VCA reconcile this desire with the fact that an existing seed/startup fund won't likely be able to apply for the VCA funds because it would create "fund conflict" between their existing fund and the funds granted by VCA?
A. No, the VCA is willing to consider both existing funds and new funds with partners with appropriate experience. Existing funds will need to submit information on how any potential "fund conflicts" will be addressed.
MANAGING MORE THAN ONE FUND
Q. What "expectations if the Fund Manager forms another fund while managing the VCA's funds" will the VCA have? These are important issues to address for a prospective Fund Manager prior to submitting a bid proposal as it may have an impact on the cost structure of the fund and the business plan of the Fund Manager.
A. The PFM will need to address this item in its proposal if it intends to form (or has formed) another fund while managing the VCA's funds. The VCA will be interested in ensuring that a Fund Manager allocates the necessary amount of resources to the VCA's Funds so that it will be successful. Additionally, the PFM would need to address other items of concern-such as "cherry picking deals" to benefit the other fund.
DEAL SOURCE AND COMPETITION IN THE BIDDING PROCESS
Q. Vying PFM's in Colorado will most likely target many of the same sources of preferential deal flow. If the VCA places any evaluation premium on "support" for a particular source of deal flow then is it the VCA's objective to make those submitting proposals to VCA to essentially "lobby for support or endorsement" of a PFM from those deal flow sources (e.g. university licensing agents, incubators, etc)? Furthermore, without checks and balances of this potential event, is not the VCA creating a competitive environment that is, by it's nature, political as particular deal flow sources that may be advantageous to the business plan of a PFM might "throw their vote" to a PFM that says they'll be more supportive or responsive to a deal flow source constituent (e.g. a PFM promoting fund dedication to biotech and the agenda of the university or an incubator)? What is the VCA's decision process when it comes to the support a deal flow source may play in a PFM's business plan?
A. It is not the intent of the VCA to have the PFM "lobby for support or endorsement" from any particular deal flow source. However, deal flow is important to the VCA and to the extent that a PFM has strong deal flow resources/contacts, it should submit a list of such references/contacts for the VCA's consideration. The PFM's business plan should also address this item. It is certainly conceivable that many sources of deal flow (such as university licensing agents) likely will work with more than one PFM; therefore, the VCA does not want PFMs to submit letters of recommendation/support for this item. The VCA has expressed an interest in being open to all proposals. The bottom line is that the VCA will be reviewing many factors in a PFM's proposal-not just one-to determine which Fund Manager(s) should be selected.
FLOW OF FUNDS TO FUND MANAGER
Q. Will the VCA contribute capital to the PFM on a schedule specified in the PFM's RFP response (which implies that un-invested funds are held by the PFM until they are invested)? Or, will the VCA sell the PTCs but hold the un-invested funds until they are "called" by the PFM for a specific investment?
A. The VCA intends to contribute capital to the FM(s) on a capital call basis as needed for investment in businesses. However, the VCA may also be willing to make the earned income [such as interest on the certified capital/principal committed to a FM(s)] available to the Fund Manager(s) on the same type of capital call basis. The VCA's contract will contain a reasonable timeframe by which the VCA will fund the capital calls (such as 10 days). A PFM should submit information in its proposal as to whether it would like to have access to such earned income and if the suggested timeframe for funding the capital calls is reasonable.
Q. Regarding the "VCA's discretion to limit the cashflow/capital contributions" (Page7, IV, A) General Conditions - Please provide further explanation and definition to the "VCA's discretion to limit the cashflow/capital contributions on an annual basis to the lesser of the maximum funds available in a given year or to the amount of cash needed for the negotiated operating expenses and investments in Qualified Businesses", as it is not clear what this means. Should a prospective Fund Manager interpret this further to mean that there are no assurances as to what each year's Certified Capital will be made available for investment? How then does the VCA expect the Fund Manager to behave within the months before the beginning of a fiscal year, while the Fund Manager is potentially entering into or proceeding through negotiations with a prospective company for investment, when the Fund Manager cannot know what funds are available for investment? Does the VCA have any guidelines for how the Fund Manager will compete with other funding sources during this hypothetical period of time that the Fund Manager does not know what funds are available for subsequent investment?
A. The VCA is interested in determining which cash flow options are attractive to PFMs prior to selling the tax credits. The VCA anticipates contracting with an insurance company(ies) for specific payments to be made on an annual basis for the term needed to meet the VCA's cash commitments to the Fund Manager(s). Once the premium tax credit sale has been completed, the VCA and Fund Manager(s) will know the amount of available cash on an annual basis. The VCA's sole funding source is the cash received from the insurance companies for the tax credits. The VCA may encounter some "short-term" issues in funding its capital contributions if an insurance company breaches its contract. However, the VCA intends to resell the premium tax credits to other insurance companies to obtain the cash in that event. The VCA welcomes your suggestions on remedying this potential "short-term" issue.
FLOW OF FUNDS (TABLES FROM RFP)
- The stated "Investment Requirements" on the tables in the RFP show that all Capital to VCA and Available Fund Manager must be distributed through the Investment Requirements. Does this mean that the 2.5% management fee is included in the "Estimated Discount" show on the table? If the calculation for the management fee is .025 x 22,500,000 = $562,500 then the estimated discount on these tables would appear to not include the management fee. What does Estimated Discount mean? Where is the management fee in these tables and how are the VCA and/or the Statute calculating the use of 2.5% annually of the total capital allocated to a Fund?
- The estimated discount column refers to what the VCA anticipates the insurance company(ies) will pay for each $1 of premium tax credit. The estimated discount will vary depending on whether insurance companies are asked to provide the cash one year in advance or two years in advance of the insurance companies being able to use the premium tax credits. Therefore, PFMs will see different discount factors used in the various cash flow funding tables provided in the RFP.
The maximum management fee is based on 2.5% annually of the "Total Estimated Capital To VCA And Available to PFM" listed on each table. Again the maximum annual management fee total will vary depending on the cash flow option selected. However, the VCA is asking the PFMs to submit competitive bids on their management fee-which is why a specific fee to be paid has not been listed.
TIMING OF INVESTMENTS
Q. Regarding the "anticipated timing of the cash distribution needed to make initial investments" (pg. 18 i.) - Unless PFMs have already identified AND completed diligence on the first several investments (which new funds certainly would not have), it really is not possible to know the timing and amount of investments, other than to say that a certain number of investments per year is anticipated, at a certain average investment size. We can certainly guess, but this guess may have no correlation to reality.
A. A question was not provided but we recognize that all business plans are subject to variation when implemented. The VCA is interested in obtaining information regarding a PFM's business plan and its ability to execute on the business plan for the VCA's consideration.
PERCENTAGE INVESTMENT REQUIREMENTS
Q. Considering the 25/25/50% investment requirement - do these proportions apply throughout the investment cycle, or only at the point when all the VCA's capital is invested? For example, could the PFM concentrate on Statewide investments for the first years of the fund, meeting the investment milestones as required but focused on one category of investments, then shift focus to rural and urban in later years?
A. In its contract (and per statute), a Fund Manager will have capital allocated to the three designated geographical markets that can only be used in the designated geographical markets. So, a Fund Manager will need to meet the 30% in 3 years, 50% in 5 years and 100% in 10 years requirements for investment for each designated geographical market. However there are no specific investment requirements in certain years (like year one and two), so Fund Managers will have some flexibility to focus more strongly on certain geographic markets in those years as long as the 30/50/100 percent investment requirements are met. Also, some of the cash flow funding options in the RFP would provide sufficient cash to meet the 30/50 percent investment requirements for each specific geographical market and would still allow for additional investments in any or all of the specific markets as preferred by the Fund Manager(s)-up to the amount of funds allocated to each specific geographic market.
Q. Does the percentage distribution of investment funds apply only to the initial capital sourced from the VCA's sale of PTCs? In other words, is there any requirement that matching funds or reinvestment of proceeds from the sale/liquidation of portfolio companies must be made in the same proportions?
A. There is no specific requirement that matching funds or reinvestment of proceeds be invested in the same proportions. However, the Fund Manager will have to meet the 30% in 3 years, 50% in 5 years and 100% in 10 years requirements for investment of an amount equal to the amount of certified capital initially allocated to it for each of the 3 designated geographical markets.
The VCA will review a PFM's proposal to determine how the PFM intends to meet the 30/50/100 investment requirements stated above (which may involve matching funds, using earned income from the VCA¿s account, reinvestment of proceeds and/or some other creative method). The VCA will also be interested in how the PFM plans to invest its matching funds due to concerns such as "cherry picking deals", etc. and the likelihood of reinvestment proceeds being available to meet these requirements (if these items are applicable to the method proposed by the PFM to meet the 30/50/100 investment requirements). The PFMs should address these items in their submittal.
INVESTMENT REQUIREMENTS
Q. Can a PFM propose to only accept funds that are not restricted to urban distressed or rural areas?
A. As stated in the RFP, "it is anticipated that the VCA will allocate capital to a FM(s) and such capital will automatically be split on a pro-rata basis into the three designated geographical markets". The PFM(s) will need to be willing to manage funds for all three designated geographical markets; however, the VCA has also reserved the right to allocate funds in an alternative manner in the RFP. Therefore, PFMs may also state their geographical market preferences (if different than all three) for the VCA's consideration.
Q. How does the VCA plan to enforce the statute's requirement that 25% of funds go to rural,25% go to urban distressed areas and other material contract terms?
A. Annual reviews of each Fund Manager will be performed by the VCA. If material violations are noted, the VCA may impose monetary fines and penalties [as stated in the statute 24-46-203 (9) C.R.S.] in addition to other remedies. Monetary fines may include payment of an amount up to the amount of Certified Capital received by the Fund Manager in addition to penalties determined by the VCA. PFMs should submit information on remedies they propose for the VCA's consideration. The contract between the VCA and the Fund Manager(s) will contain the negotiated remedies.
DISTRIBUTIONS TO THE VCA
Q. Does the PFM have the option of reinvesting the proceeds from the sale/liquidation of portfolio companies, or must all these funds be "distributed" to the VCA to replace the initial capital? Specifically, the legislation requires that management fees and expenses deducted from the VCA's capital contribution must be replaced by the PFM. Must the VCA receive 100% of its initial capital back before the PFM can re-invest these proceeds to replace the management fees and expenses?
A. PFMs' proposals should contain information on whether they plan on using reinvested proceeds, which would include as available the return of original certified capital and any additional funds, to meet the 30/50/100 investment requirements for the VCA's consideration. As investments are liquidated by the FM, the FM would transfer the proceeds to the VCA. If the VCA and the FM agreed in their negotiated contract that the FM would be able to "recall" such proceeds for reinvestment in additional businesses to meet the 30/50/100 investment requirements, the funds would be placed in the VCA's account designated for the FM(s) and made available on a capital call basis for such further investments in businesses.
Once a FM met the 100% investment requirement, the "recall provision" would no longer be available except for extraordinary circumstances as negotiated with the VCA and in compliance with the statute. Except for "Qualified Distributions" (as defined in the statute) and the FM's ability to "recall" such proceeds for reinvestment as described above, the FM would distribute 100% of all "sales" proceeds to the VCA until the VCA received total distributions equal to the aggregate amount of the VCA's capital contributions made to the Fund (or on a pro rata basis, based on the aggregate amounts of their respective capital contributions if the Fund has partners other than the VCA, until the VCA received total distributions equal to the aggregate amount of the VCA's capital contributions made to the Fund). After the VCA received an amount equal to its aggregate capital contributions, then distributions would be shared between the VCA and FM based upon an agreed upon split. The PFM's proposed term sheet in its RFP should clearly state its proposal regarding its need to use reinvested proceeds and its proposed share of the remaining proceeds (after 100% of capital has been returned to the VCA).
DIVESTITURES
Q. Please explain the term "divested with the VCA's approval". What kind of approval, what are appropriate or inappropriate divestitures, how will these determinations be made and by whom, on what time scale, etc.? Will not the VCA's participation in a divestiture decision potentially expose the VCA to liability should the divestiture actions result in harm to a business or any other investor of the company being divested?
A. It is anticipated that Fund Manager(s) will liquidate all investments without approval from the VCA provided that statutory requirements (including the "5 year maintenance of a business requirement", "Qualified Business", "Qualified Investment" and "Continuing Investment" requirements) have been met. The VCA anticipates that its approval would only be necessary in the event that a business has not complied with the above requirements or if a Fund Manager is not able to liquidate the portfolio company securities prior to the termination of the fund.
When liquidating compliant investments (without the VCA's approval), the VCA has indicated that it wants to ensure that the Fund Manager(s) understand their fiduciary responsibilities to the VCA, as general partner(s) of the Fund. For example, a "fire sale" of portfolio securities in order to meet the 30/50/100 investment requirements would not be considered to be appropriate. It will be expected that Fund Manager(s) will liquidate securities in the best interest of the VCA (meaning returning the highest level of proceeds based on standard industry practices) while complying with other statutory requirements. A statement to this effect will be included in the contract negotiated between the FM(s) and the VCA.
Q. Regarding the parenthetical statement in the second paragraph in section P: "or divested with the VCA's approval" - does the VCA reserve the right to approve any exits or liquidation events in/from a PFM's portfolio? This implies that the VCA has as much or more knowledge about an asset's value, and its prospects in the market for private (or public) equity than the PFM. This is not the case, and so the VCA should not reserve this right.
A. Same answer as previous answer.
TERMINATION/EXIT OF INVESTMENTS
Q. Regarding "the process used to terminate an investment in a business" (pg. 18, 16) - What is meant by "the process used to terminate an investment in a business"? Is the question asking how a PFM will exit investments to get cash for the shares they¿ve purchased or the loans made?
A. Yes, the VCA is interested in how the PFM may exit their investments based on a PFM's experience. Multiple responses may be provided.
CONTRACT LENGTH
Q. The ramifications of providing a five-year life to the Fund Manager's contract might include that if the Fund Manager does not know if additional Certified Capital will be provided to him, then he would only be prudent to hold back monies that may need to be used for that Fund Manager's portfolio companies should follow-on investment be required. However, the investment requirements in years 3 and 5 require set amounts to be invested. Does the VCA have any additional guidelines for Fund Managers to reconcile this problem, that are in step with the VCA's interpretation of the statute?
A. PFMs' proposals should contain information on how the PFMs plan to maintain the value of their portfolio investments (and make additional investments as needed) while meeting the 30/50/100 investment requirements for the VCA's consideration. It should be noted that some of the cashflow funding options may provide enough cash to meet the 30/50 investment requirements in addition to allowing for additional capital to be available for follow-on investments or for additional investments in businesses in certain markets.
Q. How important is it to the committee that we commit to both 10-year funds?
From our standpoint, having never worked with the VCA, or anything like this, it would make more sense to do the first fund, and then at some point after we see how it is working we have a discussion with the VCA to talk about doing the second fund, making modifications in how it works, or giving the VCA a chance to find someone else more suitable. From the standpoint of the VCA, it would also make sense to not commit to the same Fund Manager doing both 10 year funds, in order to give the VCA time to see how the relationship and the investment process works out.
A. The VCA has stated its preferred option but also is allowing for PFMs to submit proposals on its preferred option and/or any of the other options provided. The VCA can always consider amending its contract with the selected Fund Manager(s) when needed. If the VCA and a Fund Manager(s) agree to the preferred option, the contract will still allow for the VCA to not move forward with the 2 nd 10-year fund at its discretion.
If a Fund Manager(s) decides during its 1 st 10-year fund that it is not interested in managing the 2 nd 10-year fund, it should provide notice to the VCA (allowing for a reasonable timeframe to discuss the issues with the VCA and allow the VCA to determine if it will issue a new RFP).
CONTRACT EXTENSION
Q. What alternative actions may take place between the Fund Manager ("FM") and the VCA regarding the term of a contract if either party, or both parties combined, deem the contract term needs to be extended to "meet the statutory investment requirements, monitor all investments until the investments have been completely liquidated (or divested with the VCA's approval) and complete all other requirements of the VCA's contract"? Can it be built into the contract that there is an optional extension of 3 additional years if the FM deems it necessary?
A. A Fund Manager will either meet the statutory investment requirements or not meet them.
For all other items, PFMs should submit preferences for contract extension terms in their response for the VCA's consideration. It is possible that an optional extension may be negotiated to meet the needs and objectives of the overall contract.
PROJECTED RATES OF RETURN
Q. Regarding a "projected annual cumulative rate of return" (pg. 19, 18) - To ask a PFM for a "projected annual cumulative rate of return" is quite unusual. Of course everyone believes they will have excellent returns, but no one can predict what these would be. See for example the disclaimers on any mutual fund prospectus which state that past
performance is not an indication of future success. So, the answer to this question is essentially meaningless, unless it will be used as a standard by which to judge the PFMs performance. Is that the point?
A. Given the constraints on this program, the VCA is interested in hearing PFM's thoughts on what the expected returns would be given the Fund Manager's prior track record and experience. The VCA will review historical vs. projected information to determine reasonableness as well-even though the VCA understands that historical performance is no guaranty of future performance. In addition, the VCA will review the PFM's performance periodically and may ask the Fund Manager(s) to explain differences between projected and actual results.
DISCLAIMER REQUIREMENT
Q. Regarding the statement of disclaimer on offering materials (pg. 28, J) - This disclaimer can only be agreed to after the PFM is selected by the VCA. Including this prior to the PFMs selection by the state only calls attention to the fact that they are an applicant, which may prove to be a distraction to the PFMs fundraising efforts with other potential limited partners.
A. If a PFM is soliciting investors (limited partners) to invest in the same fund as the VCA (limited partner), this statement of disclaimer would need to be provided to those potential investors. This requirement is contained in the statute and cannot be changed by the VCA.
However, if the PFM is soliciting investors (limited partners) to invest in a separate fund from the VCA (limited partner), even if the separate fund is used to provide matching funds, then this statement of disclaimer would not need to be provided to those potential investors.
MAXIMUM INVESTMENT IN A COMPANY
Regarding SB 04-106 Section (8)(a)(IV)
Q. Does this mean that a Fund Manager receiving $4.5m of Certified Capital per year for available investments may only place 4.5 x .15 = $675,000 in any one company, or is that the same company in any one year, or is it (for example) 22.5 x .15 per deal?
A. The statute limitation refers to the venture capital fund's aggregate total of certified capital. If a Fund Manager were allocated a total of $22,500,000, then the 15% limit would represent $3,375,000 as being the maximum that the fund could invest in one business-regardless of the year in which the investment was made. The maximum that the fund could invest in one business will be based on the final amount of certified capital allocated to the FM.
MAINTAINING ITS BUSINESS AND NON-COMPLIANCE
Regarding SB 04-106 Section (8)(a)(V)
Q. Please define "maintains its business". Who has the authority or by what process is a ruling suitable to the VCA provided to define and assess if a Qualified Business ("QB") has met this requirement?
A. In order to receive an initial investment, the statute requires that a business be a "Qualified Business". In order to be a Qualified Business, the business must have its headquarters and principal business operations in Colorado and maintain its headquarters and principal business operations in Colorado for at least five years after first receiving an investment of Certified Capital-or the VCA has to provide approval for the specific business to be considered as a Qualified Business if it does not meet all of the requirements.
PFMs at the September 20 th VCA meeting generally indicated that a business not continuing to have its headquarters and principal business operations in Colorado for at least five years is likely to be a rare occurrence unless the business ceases its operations. The VCA will review the FM's support documentation verifying that this requirement has been met. PFMs should submit their recommendations regarding this item for consideration by the VCA.
Q. Should a "return of any investment of certified capital" require that a non-complying Qualified Business must provide a return of capital and a rate of return or is this up to the Fund Manager?
A. The statute requires that the FM's contracts with businesses include the following type of provision: enforceable provisions requiring a return of any investment of certified capital and any other revenues required to be paid in the event of non-compliance with the specified statutory items or VCA required contract provisions.
In the event that a business does not comply with certain requirements, including the "5 year maintenance of a business requirement", "Qualified Business", "Qualified Investment" and "Continuing Investment" requirements, the FM will be required to obtain the returns specified in its Fund Agreement or have the VCA approve alternative returns.
Please note that the PFMs may submit their recommendations pertaining to "any other revenues required to be paid in the event of non-compliance with the specified statutory items or VCA required contract provisions."
Q. What if the Qualifying Business receiving the initial investment no longer ceases to be the same legal entity, in less than a five year time frame, that received the initial investment because it has been acquired or merged in whole with another company? Will this also be deemed "noncompliance"?
A. FM(s) would need to include language in their contracts with the business (in which the investment was made) stating that any new legal entity agrees to assume the responsibilities (and non-compliance terms) for meeting the requirements of the initial business' contract with the FM. As long as the initial business and the "new legal entity" satisfy certain requirements, including the "5 year maintenance of a business requirement", "Qualified Business", "Qualified Investment" and "Continuing Investment" requirements utilizing their combined terms of operation, then it will be deemed compliant.
However if their combined terms of operation do not meet the above requirements, then it will be deemed to be non-compliant and the enforceable provisions discussed previously will apply.
PFMs should submit additional recommendations in their response for the VCA's consideration.
QUALIFIED BUSINESS USE OF CAPITAL
Regarding SB 04-106 Section (10)(a)
Q. Can a Qualified Business use invested capital to purchase intellectual property from anywhere that company's management deems advisable, in management's fiduciary responsibility to its investors?
A. As long as the intellectual property is "used in Colorado", then it would be eligible per the statute.
MATERIAL CONTRACT VIOLATIONS
Q. Please clarify section 24-46-203 (9) of SB 04-106 regarding the PFM's liability for violating material contract terms or Part 2 of the bill.
A. Annual reviews of each Fund Manager will be performed by the VCA. If material violations are noted, the VCA may impose monetary fines and penalties [as stated in the statute 24-46-203 (9) C.R.S.] in addition to other remedies. Monetary fines may include payment of an amount up to the amount of Certified Capital received by the Fund Manager in addition to penalties determined by the VCA. PFMs should submit information on remedies they propose for the VCA's consideration. The contract between the VCA and the Fund Manager(s) will contain the negotiated remedies.