PROVIDENCE – A federal audit released this week claims business-accelerator and consultant Betaspring LLC intentionally misused $803,644 to fund operations in 2012.
A manager of the accelerator, however, refutes the findings, saying the program was transparent about its funding approach, which was reviewed and approved by the state.
“We were a bit hung out to dry here,” said Allan Tear, co-founder of Betaspring. “But we did what we always said we’d do, which was run an accelerator to fund early-stage startups.”
The Sept. 20 audit by the U.S. Office of Inspector General examined nearly $2 million awarded by the state to Betaspring through the U.S. Treasury Department State Small Business Credit Initiative, or SSBCI.
The state was originally awarded about $13.2 million through the program, and nearly $2 million was passed through to Betaspring in 2011. The audit claims Betaspring then knowingly misused $803,644 to improperly invest in startups and to pay itself.
“At the time the investments were made, there was no private capital at risk,” according to the audit. “The fund also used some SSBCI funds to pay [Betaspring] for accelerator-program services, rather than make direct cash investments in beneficiary companies.”
The period in question was between February and March 2012. At the time, Betaspring made investments in 17 startups prior to receiving private capital, meaning the investments were made almost entirely with public money, according to the audit.
Betaspring did subsequently receive private funding, amounting to about $2.1 million, which totaled more than 50 percent of the total fund. But OIG claims the requirement of having 20 percent private capital on hand was necessary on a per-deal basis, meaning the 17 investments made prior to the influx of private capital constituted misuse.
And the managers knew it, according to the report.
“We found that the misuse of funds was intentional because Betaspring managers acknowledged the 20 percent capital-at-risk requirement during the SSBCI application process,” according to the audit.
The audit specifically cites a Betaspring application letter from July 22, 2011.
“Betaspring understands the private-capital matching requirements for tranching [sic] of the SSBCI capital, and projects that we will be able to meet these on a per-deal and overall fund basis,” according to the letter.
Tear, however, says their plan to establish a blended fund – comprising both public and private money – was made clear from the get-go. And while they did spend public money prior to receiving private investments, the approach received support and approval from the R.I. Economic Development Corp., now known as R.I. Commerce Corp.
“We had told the EDC this was how we were going to run the program, and they told us, ‘OK,’ ” Tear said.
In a letter dated Aug. 2 of this year, Darin Early, president and chief operating officer of Commerce Corp., wrote to the Treasury, largely coming to Betaspring’s defense.
“Betaspring was not fully cognizant of the relevant timing issues and that the staged funding mechanism utilized would be interpreted as being contrary to program requirements,” Early wrote.
Federal investigators further claim a portion of the public money went toward paying for professional services, which violated the terms of the program.
Both Tear and the state, however, said it was always clear the fund was set up to pay for these types of services, and Early pointed out application language as corroboration.
“Part of this funding will help pay for services including mentorship, legal counsel, incorporation filing and other legal work necessary to complete the business model,” according to the application.
Early went on to write in his letter, “It is obvious that the application intended to provide some examples but not a complete list of some of the services that would be funded with the investment from the fund.”
The audit also found the state in further violation of the program, accusing officials of setting up an interim investment vehicle, called Startup Investments LLC, to move the SSBCI funds to Betaspring.
The federal agency said the state did not seek and receive Treasury’s approval to invest the $2 million into Startup Investments.
In his letter, Early said the investment vehicle served “a legitimate purpose,” but acknowledged, “the lack of discussion with Treasury in relation to the ownership structure of startup was an oversight on the part of the individuals involved in the negotiation process.”
As a result of the audit, the federal agency is recommending the Treasury recoup the $803,644. Alternatively, the OIG said Treasury could withhold about $2 million it has yet to release from the $13.2 million it originally awarded to the state through the program.
The OIG says not disbursing that $2 million would meet the intent of its recommendation.
How that might impact the Rhode Island small-businesses community isn’t immediately clear. But the other two entities to receive money through the federal program are the Small Business Loan Fund Corp., a small-business loan program administered by Commerce, and the Slater Technology Fund, a publicly funded venture-capital firm in Providence.
Thorne Sparkman, managing principal at Slater, isn’t sure what this might mean for future funding to the venture-capital firm.
“I think in the end Slater will get most of what was intended for Slater, through the efforts of Commerce,” he said.
Commerce released a statement saying it continues to work with the federal government on the findings of the audit.
“This is a report on a program that was applied for and managed by a previous administration,” according to Commerce spokesman Matt Sheaff. “We will examine these findings and discuss them with Treasury in order to bring this matter to a conclusion.”
For the company, which now focuses on revenue-generating businesses through RevUp by Betaspring, Tear hopes the issue is resolved soon.
“This has taken me by surprise,” he said. “A lot of my feelings and comments about this has been about how it’s impacting our public brand, which is obviously negative. … I look forward to Commerce’s successful resolution of this with the Department of Treasury.”