Bill Summary – FastDemocracy

     Special Session of 2020
                               HOUSE BILL No. 2005
                                 By Representative Croft
                                          6-3

 AN ACT concerning economic development; relating to angel investor tax
   credits; qualified securities; credit limitations and amounts; investor
   requirements; qualified Kansas business designation requirements;
   bioscience businesses; program expiration date; amending K.S.A. 74-
   8132, 74-8133 and 74-8136 and repealing the existing sections.
 6
 Be it enacted by the Legislature of the State of Kansas:
     Section 1. K.S.A. 74-8132 is hereby amended to read as follows: 74-
 8132. As used in this act:
     (a) "Angel investor" and "investor" mean an accredited investor who
 is a natural person or an owner of a permitted entity investor, who is of
 high net worth, as defined in 17 C.F.R. § 230.501(a), as in effect on the
 effective date of this act, and who seeks high returns through private
 investments in start-up companies and may seek active involvement in
 business, such as consulting and mentoring the entrepreneur. For the
 purposes of this act, a person who serves as an executive, officer,
 employee, vendor or independent contractor of the business in which an
 otherwise qualified cash investment is made is not an "angel investor" and
 such person shall not qualify for the issuance of tax credits for such
 investment;
     (b) "bioscience business" means what is reflected a business engaged
 in "bioscience" as defined in K.S.A. 74-99b83, and amendments thereto;
     (c) "cash investment" means money or money equivalent in
 consideration for qualified securities;
     (d) "department" means the department of commerce;
     (e) "Kansas business" means any business owned by an individual,
 any partnership, association or corporation domiciled in Kansas, or any
 corporation, even if a wholly owned subsidiary of a foreign corporation,
 that does business primarily in Kansas or does substantially all of such
 businesses' production in Kansas;
     (f) "owner" means any natural person who is, directly or indirectly, a
 partner, stockholder or member in a permitted entity investor;
     (g) "permitted entity investor" means: (A) Any general partnership,
 limited partnership, corporation that has in effect a valid election to be
 taxed as an S corporation under the United States internal revenue code, or
 a limited liability company that has elected to be taxed as a partnership
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 under the United States internal revenue code; and (B) that was established
 and is operated for the sole purpose of making investments in other
 entities;
     (h) "qualified Kansas business" means the Kansas businesses that are
 approved and certified as qualified Kansas businesses as provided in
 K.S.A. 74-8134, and amendments thereto;
     (i) "qualified securities" means a cash investment through any one or
 more forms form or combination of forms of financial assistance as
 provided in this subsection that have been approved in form and substance
 by the secretary. Such forms of financial assistance are: (1) Any form of
 equity, such as: (A) A general or limited, partnership interest; (B) common
 stock; or (C) preferred stock, with or without regard to voting rights,
 without regard to or seniority position, and whether or not convertible into
 common stock; or (D) any form of subordinate or convertible debt, or
 both, with warrants or other means of equity conversion attached; or
     (2) a any debt instrument, such as a note or debenture that is secured
 or unsecured, subordinated subordinate to the general creditors of the
 qualified Kansas business debtor and that requires no payments of
 principal, other than principal payments required to be made out of any
 future profits of payment from the qualified Kansas business debtor, for at
 least a seven-year period after commencement of such debt instrument's
 term and that shall convert to some form of equity prior to the qualified
 Kansas business debtor raising its next series of funding; and
     (j) "secretary" means the secretary of commerce.
     Sec. 2. K.S.A. 74-8133 is hereby amended to read as follows: 74-
 8133. (a) A credit against the tax imposed by article 32 of chapter 79 of the
 Kansas Statutes Annotated, and amendments thereto, on the Kansas
 taxable income of an angel investor and against the tax imposed by K.S.A.
 40-252, and amendments thereto, shall be allowed for a cash investment in
 the qualified securities of a qualified Kansas business. For tax year 2020
 and all tax years thereafter, the credit shall be in a total amount equal of
 up to 50% of such investors' cash investment in any qualified Kansas
 business, subject to the limitations set forth in subsection (b). This tax
 credit may be used in its entirety in the taxable year in which the cash
 investment is made except that no tax credit shall be allowed in a year
 prior to January 1, 2005. If the amount by which that portion of the credit
 allowed by this section exceeds the investors' liability in any one taxable
 year, beginning in the year 2005, the remaining portion of the credit may
 be carried forward until the total amount of the credit is used. If the
 investor is a permitted entity investor, the credit provided by this section
 shall be claimed by the owners of the permitted entity investor in
 proportion to their ownership share of the permitted entity investor.
     (b) For tax year 2020 and all tax years thereafter, the secretary of
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 revenue shall not allow tax credits of more than $50,000 $100,000 for a
 single Kansas business or a total of $250,000 $350,000 in tax credits for a
 single year per investor who is a natural person or owner of a permitted
 entity investor. No tax credits authorized by this act shall be allowed for
 any cash investments in qualified securities for any year after the year
 2021 2026. The total amount of tax credits which that may be allowed
 under this section shall not exceed:
     (1) $4,000,000 during the tax year 2007 and;
     (2) $6,000,000 for tax year years 2008 and each tax year thereafter,
 except that through 2010 and 2012 through 2021;
     (3) for tax year 2011, the total amount of tax credits which that may
 be allowed under this section shall not exceed $5,000,000;
     (4) $6,500,000 for tax year 2022:
     (5) $7,000,000 for tax year 2023;
     (6) $7,500,000 for tax year 2024; and
     (7) $8,000,000 for tax year 2025.
     The balance of unissued tax credits may be carried over for issuance in
 future years until 2021 2026.
     (c) A cash investment in a qualified security shall be deemed to have
 been made on the date of acquisition of the qualified security, as such date
 is determined in accordance with the provisions of the internal revenue
 code.
     (d) No investor shall claim a credit under this section for cash
 investments in Kansas venture capital, inc. No Kansas venture capital
 company shall qualify for the tax credit for an investment in a fund created
 by articles 81, 82, 83 or 84 of chapter 74 of the Kansas Statutes Annotated,
 and amendments thereto.
     (e) Any investor who has not owed any Kansas income tax under the
 provisions of article 32, chapter 79 of the Kansas Statutes Annotated, and
 amendments thereto, for the immediate past three taxable years without a
 current tax liability, who does not reasonably believe that it will owe any
 such tax for the current taxable year and who makes a cash investment in a
 qualified security of a qualified Kansas business shall be deemed to
 acquire an interest in the nature of a transferable credit limited, for tax
 year 2020 and all tax years thereafter, to an amount equal up to 50% of
 this cash investment. This interest may be transferred to any natural person
 of net worth, as defined in 17 C.F.R. § 230.501(a), as in effect on the
 effective date of this act, whether or not such person is then an investor
 and be claimed by the transferee as a credit against the transferee's Kansas
 income tax liability beginning in the year provided in subsection (a). No
 person shall be entitled to a refund for the interest created under this
 section. Only the full credit for any one investment may be transferred and
 this interest may only be transferred one time. A credit acquired by transfer
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 shall be subject to the limitations prescribed in this section. Documentation
 of any credit acquired by transfer shall be provided by the investor in the
 manner required by the director of taxation.
     (f)(e) The reasonable costs of the administration of this act, the
 review of applications for certification as qualified Kansas businesses and
 the issuance of tax credits authorized by this act shall be reimbursed
 through fees paid by the qualified Kansas businesses and the investors or
 the transferees of investors, according to a reasonable fee schedule adopted
 by the secretary by rules and regulations in accordance with the rules and
 regulations filing act.
     Sec. 3. K.S.A. 74-8136 is hereby amended to read as follows: 74-
 8136. (a) Tax credits for qualified Kansas businesses are a limited resource
 of the state for which the secretary is designated as the administrator. The
 purpose of such tax credits is to facilitate the availability of equity
 investment in businesses in the early stages of commercial development
 and to assist in the creation and expansion of Kansas businesses which
 that are job and wealth creating enterprises. To achieve this purpose and to
 optimize the use of the limited resources of the state, the secretary is
 authorized to issue tax credits to qualified investors in qualified Kansas
 businesses. Such tax credits shall be awarded to those qualified Kansas
 businesses which that, as determined by the secretary, are most likely to
 provide the greatest economic benefit to the state. The secretary may issue
 whole or partial tax credits based on an assessment of the qualified
 businesses. The secretary may consider numerous factors in such
 assessment, including, but not limited to, the quality and experience of the
 management team, the size of the estimated market opportunity, the risk
 from current or future competition, the ability to defend intellectual
 property, the quality and utility of the business model and the quality and
 reasonableness of financial projections for the business.
     (b) Each qualified Kansas business for which tax credits have been
 issued pursuant to this act shall report to the department on an annual
 basis, the following: (1) The name, address and taxpayer identification
 number of each angel investor who has made cash investment in the
 qualified securities of a qualified Kansas business and has received tax
 credits for this investment during the preceding year and all other
 preceding years; (2) the amounts of these cash investments by each angel
 investor and a description of the qualified securities issued in
 consideration of such cash investments; (3) the name, address and taxpayer
 identification number of each investor to which tax credits issued pursuant
 to this act have been transferred by the original angel investor; and (4) any
 additional information as the secretary may require pursuant to this act.
     (c) The secretary shall transmit annually to the governor, the standing
 committee on commerce of the senate and the standing committee on
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 commerce, labor and economic development of the house of
 representatives a report, based upon information received from each
 qualified Kansas business for which tax credits have been issued during
 the preceding year, describing the following: (1) The manner in which the
 purpose, as described in this act, has been carried out; (2) the total cash
 investments made for the purchase of qualified securities of qualified
 Kansas businesses during the preceding year and cumulatively since the
 inception of this act; (3) an estimate of jobs created and jobs preserved by
 cash investments made in qualified securities of qualified Kansas
 businesses; and (4) an estimate of the multiplier effect on the Kansas
 economy of the cash investments made pursuant to this act.
     (d) The secretary shall provide the information specified in
 subsection (c) to the department of revenue on an annual basis. The
 secretary shall conduct an annual review of the activities undertaken
 pursuant to this act to ensure that tax credits issued pursuant to this act are
 issued in compliance with the provisions of this act or rules and
 regulations promulgated by the department with respect to this act.
     (e) Any violation of the reporting requirements set forth in this
 section shall be grounds for undesignation of a qualified Kansas business
 under this section.
     (f) If the secretary determines that a business is not in substantial
 compliance with the requirements of this act to maintain its designation,
 the secretary, by written notice, shall inform the officers of the qualified
 Kansas business and the business that such business will lose designation
 as a qualified Kansas business in 120 days from the date of mailing of the
 notice unless such business corrects the deficiencies and is once again in
 compliance with the requirements for designation.
     (g) At the end of the 120-day period, if the qualified Kansas business
 is still not in substantial compliance, the secretary shall send a notice of
 loss of designation to the business, the secretary of the department of
 revenue and to all known investors in the business. Loss of designation of
 a qualified Kansas business shall preclude the issuance of any additional
 tax credits with respect to this business and the secretary shall not approve
 the application of such business as a qualified Kansas business. Upon loss
 of the designation as a qualified Kansas business or if a bioscience
 business loses its designation as a qualified Kansas business under this act
 by moving its operations outside Kansas within 10 years after receiving
 financial assistance under this act or a qualified Kansas business that is
 not a bioscience business loses its designation as a qualified Kansas
 business under this act by moving its operations outside Kansas within 5
 years after receiving financial assistance under this act, such business
 shall repay such financial assistance to the department, in an amount
 determined by the secretary. Each qualified Kansas business that loses
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 such designation shall enter into a repayment agreement with the secretary
 specifying the terms of such repayment obligation.
    (h) Angel investors in a qualified Kansas business shall be entitled to
 keep all of the tax credits claimed under this act.
    (i) The secretary shall adopt rules and regulations in accordance with
 the rules and regulations filing act necessary to implement the provisions
 of K.S.A. 74-8131 through 74-8136, and amendments thereto.
    Sec. 4. K.S.A. 74-8132, 74-8133 and 74-8136 are hereby repealed.
    Sec. 5. This act shall take effect and be in force from and after its
 publication in the statute book.
Statutes affected: 
As introduced: 74-8133, 74-8136, 74-8132, 74-8131