A messy debate has been unfolding in the halls of political power in Rhode Island over how the state should help small businesses with financing.
On one side, there are members of the General Assembly who approved a Small Business Development Fund last summer as an alternative to Gov. Gina M. Raimondo’s job-creation programs. On the other side, the governor and her economic-development team have labeled the new program too risky and in need of more controls.
Instead of offering incentives directly to businesses like most conventional economic-development programs do, the new fund offers incentives to investors. The state would offer $42 million in tax credits to licensed investment companies in exchange for them pumping up to $65 million into qualified Rhode Island businesses.
R.I. Commerce Corp., the state’s economic-development agency headed largely by Raimondo appointees, declined to adopt the new fund as outlined by the General Assembly. Though the program began accepting applications for tax credits beginning Sept. 29, Commerce RI has begun developing “emergency” regulations to refine the parameters of the program during its first 120 days.
“This exorbitant tax credit, as we understand it, creates an opportunity for non-Rhode Island-based niche investors – of which there are only a few – to make money at the expense of the Rhode Island taxpayer,” Commerce RI’s three-member Investment Committee wrote in a Sept. 6 letter to Raimondo obtained by Providence Business News.
“While the legislation was written in such a way that binds [Commerce RI] to implement the Small Business Development Fund, it is a program that we would reject if given the opportunity to do so,” the committee wrote.
Larry Berman, a spokesman for House Speaker Nicholas A. Mattiello, D-Cranston, a key supporter of the program, took issue with such remarks.
“The General Assembly included [the new program] in the budget because the [Raimondo] administration’s economic-development policies of the last four years have not done enough to help homegrown small businesses,” Berman said.
Commerce RI’s Investment Committee worries investors will lend money to businesses without enough oversight.
“We can easily imagine a scenario where 1) the private investors in these funds realize highly subsidized returns via the tax credits, 2) the small-business creditors are exploited by these same [investors] via high fees and excessive interest rates, and 3) there is no tangible economic benefit to the state,” the committee wrote.
“In a worse, but very possible scenario,” the committee added, “the local company who borrows money from these funds is far worse off because they are overburdened by debt and the state is worse off by both the amount of the tax credits and by inheriting a financially distressed company.”
Berman dismisses such concerns.
“This program is designed to fill in the gaps where the Commerce programs have not been adequate or accessible for these types of businesses,” he said.
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MEDICAL ACCESSORIES: Maria Del Mar is a co-owner of Mighty Well in Cranston. The company makes catheter line protectors and other medical accessories designed not to look conspicuous in public. PBN PHOTO/MIKE SKORSKI[/caption]
A “FIASCO”?
Commerce RI researched similar programs in other states and found that investment firms that participate in such programs often charge “very high” interest rates and fees to the businesses they finance. It cited interest rates of 20% in Missouri’s program and a $1 million fee on an $8 million loan in Maine’s program. In Maine, it added, investors received $16 million in tax credits for an $8 million loan to a company that ended up closing.
In New York, Commerce RI found, the state invested $325 million in its program, but it only created 188 jobs, equating to a cost of more than $1.7 million per job.
In 2014, it added, Connecticut’s Department of Economic and Community Development reported that the “net new economic activity induced by firms claiming the credit was insufficient to offset the decline in state revenue” due to the program.
Karl Wadensten, a member of Commerce RI’s board of directors, called the new Rhode Island fund a “fiasco” that’s “potentially dangerous.” Wadensten, CEO and president of Richmond-based
VIBCO Inc., recently wrote a letter to Mattiello, asking him to meet with Commerce RI to discuss the program.
“I just asked him if he may be missing something [about the program], to please come and talk to us,” said Wadensten, who did not immediately hear back from Mattiello.
Senate Finance Committee Chairman Sen. William J. Conley Jr., D-East Providence, the Senate’s lead sponsor of the legislation, took issue with those who describe the program as a lobbyist-driven giveaway to investment companies.
“When I hear that, it makes no sense,” Conley said. “This bill went through six hearings over two years. And lobbyists had no greater access to those hearings than anyone else. … We must be responsive to what we were hearing” about the concerns of small local businesses.
Conley also said the fund has been inaccurately labeled as a “CAPCO” [certified capital company] program that’s similar to those that have faltered in other states.
“Commerce Corp. has misunderstood the legislation. They probably need to take another look at it,” Conley told PBN. “It’s not a CAPCO program.”
A representative for one of the four major CAPCOs – Enhanced Capital Partners LLC – did testify last year before the House Committee on Small Business that the Small Business Development Fund would be a cost-effective way for the state to direct private-capital investment into businesses.
“It is a good policy and a meaningful step to supporting the Rhode Island economy,” said Enhanced Capital’s Carling Dinkler IV, according to a transcript provided by Mattiello’s office.
Michael McNally, a member of Commerce RI’s Investment Committee and a retired business executive, said Conley can call the program “whatever he wants,” but it brings a middleman (investment companies) into the process, potentially at the expense of small businesses and taxpayers.
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DIVIDED EFFORTS: House Speaker Nicholas A. Mattiello, left, has been a key backer of the General Assembly-approved Small Business Development Fund, which is seen as an alternative to Gov. Gina M. Raimondo’s Small Business Assistance Program.
PBN FILE PHOTOS/MICHAEL SALERNO AND DAVE HANSEN[/caption]
VENTURE CAPITAL
CAPCO programs were established to provide venture-capital funds to new or expanding small businesses that are unable to access traditional financing. States are given access to large pools of capital otherwise unavailable to them through CAPCO programs, which offer state premium tax credits to insurance companies. These insurance companies then provide a source of funding for venture-capital investing through certified investment companies. The investment companies in turn invest those funds into small local businesses that show growth potential.
The expansion of CAPCO programs since the late 1990s has been due in large part to the lobbying efforts of relatively concentrated fund-management groups, said Megan M. Carpenter in her book, “Entrepreneurship and Innovation in Evolving Economies: The Role of Law.” She found that four CAPCO fund-management groups control the bulk of the industry in the United States. The big four are Advantage Capital, Enhanced Capital, Stonehenge Capital, and Newtek. They accounted for about 80% of the $1.65 billion in tax credits granted from 1986 to 2001.
One criticism of CAPCO programs, according to Carpenter, is that they have enriched fund- management groups while doing little to support early-stage entrepreneurship. In fact, she pointed out, CAPCO programs have been accused of hurting state venture-capital industries.
That criticism comes from the fact that CAPCO management groups have existing relationships with insurance companies through programs in other states. As a result, these management groups can use their preexisting relationships to quickly obtain insurance company investment commitments, locking up all the tax credits for themselves and precluding local venture-capital funds from participating in the program, Carpenter found.
Evaluations of other CAPCO programs also reveal that they tend to make few seed or startup investments, according to Carpenter. This is because their primary focus is on maximizing profitability within the parameters outlined in the state-enabling legislation.
Thus, to the greatest extent possible, they try to make later-stage investments that carry lower risk and present the best potential for a quick return on investment.
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VEHICLE CAMERA: Mike Santolupo, left, chief engineer for Night Vision Technology Solutions in Jamestown, and company owner Joe Janson test the NVTS thermal camera driver-vision system for armored and track-wheel vehicles.
PBN PHOTO/KATE WHITNEY LUCEY[/caption]
BAD TRACK RECORD
CAPCO programs have been tried by numerous states over the past 20 years. The results have been checkered. In Rhode Island, previous efforts in the General Assembly to create a CAPCO program failed in 2002 and 2003.
In 2003, then-Florida Gov. Jeb Bush refused to allocate a second tranche of $75 million in tax credits after initial reports indicated the 30 companies receiving CAPCO investments had created only a net of 174 jobs.
In 2004, Colorado Gov. Bill Owens called for an end to that state’s program. “By any measure the CAPCO program has failed,” Owens said during his State of the State address.
Then-Missouri State Auditor Clair McCaskill issued an audit report in 2004 stating, “We concluded the Missouri Certified Capital Company Tax Credit program is an inefficient and ineffective tax credit program.”
Conley said the Small Business Development Fund legislation was drafted with safeguards to avoid the problems that other states have had with similar programs.
“These programs in other states have no relation to the Rhode Island program,” Conley said. “We’ve looked at the history and learned from it and improved upon it.”
He noted the legislation requires investors to estimate the number of jobs that will be created because of their investments. To be credited for creating a job, it must be a newly created position of at least 35 hours a week that did not exist prior to the investment.
He also noted it requires investors to submit a business plan that includes a strategy for reaching out to and investing in minority-owned businesses. Investors also must submit a projection of state and local tax revenue to be created due to an investment.
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MESSY DEBATE: Gov. Gina M. Raimondo and her economic-development team have labeled the Small Business Development Fund, approved last summer by the General Assembly as an alternative to Raimondo’s job-creation programs, as risky and in need of more controls.
PBN FILE PHOTO/ARTISTIC IMAGES[/caption]
‘RISK YOU TAKE’
Some Rhode Island business owners, such as Emily Levy, are celebrating the creation of the Small Business Development Fund because conventional forms of financing are hard to come by for fledgling businesses.
“If you’re a startup or you’re not an asset-heavy company, you’re not going to a bank,” Levy said. “They’re not going to give you a loan.”
About three years ago, Levy founded Cranston-based
Mighty Well, which makes catheter line protectors and other medical accessories designed not to look conspicuous in public.
Today, Mighty Well has about $200,000 in annual sales and several employees but, according to Levy, there aren’t enough private investors in Rhode Island to help a company such as hers grow.
Levy’s aware of concerns that investment firms can charge high interest rates and fees, but she’s been exposed to it before in dealing with out-of-state investors.
“When you decide to raise investor funding, that’s the risk you take,” she added.
But Joe Janson, owner of
Night Vision Technology Solutions LLC, a small company in Jamestown that makes night-vision equipment for the military and other uses, has some reservations about the new fund.
He was one of more than 100 small local businesses that received loans through Raimondo’s Small Business Assistance Program, which uses a combination of state money and community lenders.
Janson said the loan his company received through Commerce RI helped his company grow, using the money to buy lab equipment and hire an engineer, among other purposes. He asked that the amount he received not be published.
He wonders whether the new Small Business Development Fund could be carried out with adequate oversight of the investment companies, so they don’t gouge small businesses with high interest rates and fees.
“How do you police that?” Janson asked rhetorically.
Conley said the program has penalties for investments that don’t pan out.
Additionally, the legislation limits an investment company from investing more than $4 million in a single company. However, it allows several firms to collectively invest up to 20% of the program’s $65 million total capital investment authority in a single company.
Despite their differing views, Conley said he welcomes Commerce RI’s efforts to make the program work better.
“I share the same goals as the governor – to create jobs and help small businesses,” he said.
Scott Blake is a PBN staff writer. Contact him at Blake@PBN.com
This program is a complete waste of $42 million. It was clearly written by the CAPCO lobbyists and Then stuffed it in the budget. Our legislators could not have read it.