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By PBN Staff
By PBN Staff
PROVIDENCE – Startup accelerator Betaspring’s use of $1.4 million in federal State Small Business Credit Initiative funds may have violated U.S. Treasury Department requirements, according to an audit conducted by Lyon Park Associates.
First reported by WPRI on Feb. 17, the Lyon Park audit criticized Betaspring’s practice of allocating a portion of SSBCI money to cover the program’s expenses rather than make direct cash investments in companies.
In evaluating Betaspring’s disbursement of the funds, Lyon Park cited the organization’s application, which stated that “all SSBCI funds invested by Betaspring will be used for equity investment. All funds will represent a cash investment in the portfolio companies and will be shown as paid-in capital to the companies’ balance sheets.”
Lyon Park found through its audit that $394,396 – or 29 percent of the $1.4 million in SSBCI funds doled out to Betaspring in the initial round – were disbursed to portfolio companies in cash, based on a review of Betaspring’s cash transactions log. The remaining 71 percent, Lyon Park said, were used to pay “operating expenses” of the Betaspring program.
R.I. Director of Administration Richard Licht, who was responsible for overseeing Rhode Island’s SSBCI programs, argued in a letter to the Treasury Department refuting Lyon Park’s claims that the 71 percent Lyon Park attributes to “operating expenses” was actually disbursed to Betaspring startup companies in the form of services provided through the accelerator program.
“Lyon Park is wrong,” Licht wrote. “[The] entire analysis on this issue elevates the form over the substance when it notes that there was no indication ‘that the funds to pay for these services would never actually pass through the investee.’ ”
In other words, rather than investing $42,500 directly in each company that attends the accelerator and then charging an entry fee to fund the services they receive through the program, Betaspring delivers a portion of the $42,500 as direct cash investment in the companies and withholds a portion in exchange for services that they consider to represent an equity investment of a different sort.
“The accelerator investment consists of both cash and services and this is clearly defined in documentation that all investors in Betaspring receive,” said Betaspring co-founder Owen Johnson in a statement. “The services we provide as part of our investment, including office space, legal support, mentorship, programming and consultation, are erroneously construed as fund operating expenses in the Lyon Park report.”
In addition to the charge that Betaspring misappropriated SSBCI funds, the Lyon Park audit also contends that Betaspring’s investments may not have been in compliance with the Treasury Department’s requirements that SSBCI funds have at least 20 percent private capital at risk and 1:1 private leverage, and that some of Betaspring’s SSBCI investments were made in companies not located in Rhode Island., specifically citing one company, Gbooking, which is located in Israel.
The R.I. Commerce Corporation, which oversees the state Small Business Loan Fund Corporation that approved the $1.4 million initial SSBCI allotment for Betaspring as part of a larger $2 million package, is working with the Treasury Department “to address any questions raised” by the Lyon Park audit, according to Executive Director Marcel A. Valois.
The total federal SSBCI package for Rhode Island was $13.2 million, with $9 million allotted for Slater Technology Fund, $2.2 million allotted for the Small Business Loan Fund and $2 million allotted for Betaspring. So far only the first of three planned tranches has been disbursed.