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RULE §3.833Certified Capital Companies and Certified Investor Premium Tax Credits

    (B) has a repayment schedule that is not faster than a level principal amortization over five years, including payments of cash and tax credits. A repayment schedule is not faster than a level principal amortization over five years if the repayment schedule for the debt instrument issued by the CAPCO has a scheduled outstanding principal balance greater than a hypothetical note with the same price and yield as the CAPCO's debt instrument that provides for principal to be amortized over equal, consecutive daily payments, where payments are first allocated to accrued interest and then to principal, however, a certified investor may receive payments at any time for future earned interest, provided the amount received does not exceed the present value of that future interest payment, discounted by a factor that is not less than the stated interest rate of the debt instrument.

    (C) Has no interest, distribution, or payment features that are related to the profitability of the CAPCO or the performance of the CAPCO's investment portfolio.

  (21) Qualified distribution means any distribution or payment from certified capital, the return of capital from qualified investments, or the profits earned thereon by a CAPCO in connection with:

    (A) the reasonable costs and expenses of forming, syndicating, managing, and operating the CAPCO, provided that the distribution or payment is not made directly or indirectly to a certified investor or an affiliate of a certified investor, including:

      (i) the reasonable costs and expenses of forming, syndicating, or organizing the CAPCO, so long as these costs;

        (I) shall be limited to the greater of;

          (-a-) $250,000; or

          (-b-) 5.0% of the amount of certified capital the CAPCO initially received as investment from its certified investors; or

          (-c-) $1,500,000; and

        (II) provided that at the time the CAPCO closes its investment from its certified investors and after deducting the aggregate of the costs of organizing, forming, syndicating, insuring and defeasing the obligations, the CAPCO must have available for qualified investments, cash and/or permissible investments in an amount equal to at least 50% of the amount of certified capital initially received from its certified investors.

      (ii) reasonable and necessary fees paid for professional services, including legal and accounting services, related to the operation of the company are limited to 1.0% in any calendar year of the amount of certified capital the CAPCO initially received as investment from its certified investors; and

      (iii) an annual management fee in an amount that does not exceed 2.5% of the certified capital of the company;

    (B) any projected increase in federal income or state taxes based on income or imputed income of the CAPCO, including penalties and interest related to those taxes, of the equity owners of the CAPCO resulting from the earnings or other tax liability of the CAPCO to the extent that the increase is related to the ownership, management, or operation of the CAPCO in Texas.

  (22) Qualified investment means the investment of cash by a CAPCO in a qualified business for the purchase of any debt, debt participation, equity, or hybrid security of any nature or description, including a debt instrument or security that has the characteristics of debt, but that provides for conversion into equity or equity participation instruments such as options or warrants; provided that the investment must not have a final stated maturity or be subject to mandatory redemption or repurchase prior to two years from the date of initial investment and, provided further, that not more than 50% is used to refinance existing non-CAPCO debt. Notwithstanding the foregoing, a qualified investment shall not include an investment that results, or could result, in a CAPCO owning 50% or more of the voting or non-voting stock of a qualified business as evidenced by a proforma capitalization table presented to the administrator, unless:

    (A) such ownership is the result of:

      (i) the CAPCO's exercise of its rights and remedies following a default in the obligations of the qualified business;

      (ii) the CAPCO's exercise of preemptive rights granted to it in connection with its initial investment in a qualified business, provided such rights are exercised in connection with an investment in such qualified business by a party other than the CAPCO or an affiliate of the CAPCO;

      (iii) the operation of any anti-dilution rights granted to a CAPCO in connection with its initial investment in a qualified business; or

    (B) such investment is approved by the comptroller prior to its being made.

  (23) State premium tax liability means:

    (A) any gross insurance premium tax or health maintenance organization gross receipts tax liability incurred by any person under Insurance Code, Chapter 4; or

    (B) if the gross premium tax liability imposed under Insurance Code, Chapter 4, on January 1, 2003, is eliminated or reduced, any substitute tax liability imposed on an insurance company or other person that had premium tax liability or health maintenance organization gross receipts tax liability under the Insurance Code on that date.

  (24) Strategic investment area means an area of Texas that qualifies at the time of investment as a strategic investment area under Tax Code, Chapter 171, Subchapter O, or after the expiration of that subchapter, an area that qualified as a strategic investment area under that subchapter immediately before its expiration.

  (25) Strategic investment business means a qualified business that has its principal business operations located in one or more strategic investment areas and that intends to maintain business operations in the strategic investment areas after receipt of an investment by the CAPCO as documented in the business plan or other business records that were generated at or before the time of the investment.

(b) Application Process. Any entity that seeks to operate in Texas as a CAPCO under the provisions of the Insurance Code shall comply with the application procedures set forth in this section.

  (1) An applicant must file with the comptroller the following:

    (A) a completed Application for Certification on a form provided by the comptroller,

    (B) a nonrefundable application fee of $7,500;

    (C) an audited balance sheet with an unqualified opinion from an independent certified public accountant and any Statement of Auditing Standard No. 61 communications provided by the auditor, as of a date not more than 35 days before the date of application;

    (D) documentation that the prospective CAPCO is duly organized and qualified to do business in Texas;

    (E) evidence of an equity capitalization of at least $500,000 in the form of unencumbered cash or cash equivalents;

    (F) evidence that at least two principals or persons employed or engaged to manage the funds of the applicant have at least four years of experience in the venture capital industry;

    (G) a commitment that if certified, the CAPCO will establish in Texas its headquarters within 60 days of certification; and

    (H) biographical, personal, financial, investment, and historical data for each manager, principal, and the entity itself that provides the following, as applicable:

      (i) prior venture capital firms with which the manager or principal was employed that specifically includes details on:

        (I) the valuation of portfolio investments, including the manager or principal's ability to structure and execute timely and effective exits from portfolio investments;

        (II) historical investment performance of prior firms managed by the same managers or principals;

        (III) historical performance of the CAPCO and each of the managers or principals identified in subparagraph (F) of this paragraph, relating to investments in early stage businesses;

        (IV) the investment philosophy of the firm;

        (V) the history and strategy of the CAPCO and its managers or principals for obtaining investors and making investments, particularly in the targeted areas of early stage businesses and strategic investment businesses, low-income community businesses or comparable targeted early stage investments or investments in the underserved areas in Texas or other states;

        (VI) disclosure of any fines, penalties, or other sanctions or actions by any state, federal, or other regulatory entity, including the Securities and Exchange Commission against the CAPCO or its managers or principals, relating to violations of any type; and

        (VII) a five-year business plan, which shall include the applicant's investment strategy and investment criteria and which must comply with the requirements of subsection (a)(18) of this section with respect to qualified investments in qualified businesses. If the comptroller determines that an applicant's investment strategy or investment criteria would not effectively further economic development in Texas the applicant's certification may be denied.


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