HOUSE BILL No. 2505*
An Act relating to income taxation; concerning venture capital; enacting the
Kansas certified capital formation company act.
Section 1. This act shall be known and may be cited as the Kansas
certified capital formation company act. The purpose of this act is to
enhance the development of seed and venture capital in Kansas and to
support the modernization and expansion of the state's economy. As used
in this act, unless the context clearly requires otherwise, the following
(a) ``Affiliate of a certified capital formation company'' means:
(1) Any person that directly or indirectly, owns, controls or possesses
the power or ability to vote ten percent or more of the outstanding voting
securities or other beneficial ownership interests of the Kansas certified
capital formation company;
(2) any person ten percent or more of whose outstanding voting se-
curities or other beneficial ownership interests are directly or indirectly
owned, controlled or possessed with the power to be voted by the Kansas
certified capital formation company;
(3) any person directly or indirectly controlling, controlled by, or un-
der common control with the Kansas certified capital formation company;
(4) any partnership in which the Kansas certified capital formation
company is a general partner;
(5) any person who is an officer, director, general partner, managing
member, managing director or agent of the Kansas certified capital for-
mation company or an immediate family member of such person.
(b) ``Affiliate of an investor'' means:
securities or other beneficial ownership interests of the investor;
owned, controlled or possessed with the power to be voted by the inves-
(3) any person directly or indirectly controlling, controlled by or un-
der common control with the investor;
(4) a partnership in which the investor is a general partner;
(5) any person who is an officer, director or agent of the investor or
an immediate family member of such officer, director or agent.
(c) ``Applicable percentage'' means 50%.
(d) ``Authorized capital formation company and authorized CFC''
means a capital formation company that has been designated by the sec-
retary as having met the requirements of this act necessary to raise capital
investments but that has not yet received the designation as a certified
capital formation company.
(e) ``CFC'' means any capital formation company.
(f) ``Capital in a qualified Kansas business'' means any at risk invest-
ment in any note, stock, partnership or membership interest or other form
of equity investment or hybrid security, of any nature and description
whatsoever, including a debt instrument or security which has the char-
acteristics of indebtedness but which provides for conversion into equity
or equity participation instruments such as options or warrants which are
acquired by a CFC as a result of a transfer of cash to a business, except
for debt instruments, the proceeds of which were used to acquire or
which will be used to develop intellectual property, in which case such
debt instrument may be secured by a lien on the intellectual property.
Capital in a qualified Kansas business shall not include secured debt in-
(g) ``Certified capital'' means cash, marketable securities, legally en-
forceable commitments of capital subject to call by a capital formation
company and other assets held by a certified capital formation company
equal to the amount of certified capital investment made by investors in
the certified capital formation company.
(h) ``Certified capital formation company'' means any partnership,
corporation, trust or limited liability company, whether organized on a
profit or not for profit basis, that is domiciled in and qualified to conduct
business in Kansas and that has as its primary business activity, the in-
vestment of cash in qualified Kansas businesses, and which is certified by
the secretary as satisfying the criteria of this act.
(i) ``Certified capital investment'' means an investment of cash by an
investor which is certified by the secretary made in such manner as to
acquire a beneficial ownership interest in a Kansas certified capital for-
(j) ``Commissioner'' means the securities commissioner of Kansas or
persons acting under the supervision of the commissioner.
(k) ``In existence'' means the date of the first sale of goods or services
by a qualified Kansas business or a business seeking to be so qualified.
(l) ``Investor'' means any person that invests cash. If the investor is a
natural person, the investor shall have a net worth of at least $1,000,000
and such net worth shall be not less than 10 times the amount of the
investor's certified investment in a CFC. The investor's net worth shall
not include the value of any equity in the investor's primary residence.
(m) ``Liquidating distribution'' means any distribution other than a
(n) ``Maximum cumulative investment'' means certified capital in-
vestment of $10,000,000 or such lesser amount as the secretary of com-
merce and housing may prescribe in accordance with subsection (d) of
section 4, and amendments thereto.
(o) ``Person'' means any natural person or any business association,
including but not limited to, a corporation, limited liability company, gen-
eral or limited partnership or trust.
(p) ``Qualified distribution'' means any distribution or payment made
by a certified capital formation company for costs and expenses of form-
ing, syndicating, managing or operating the certified capital formation
company, including an annual management fee and reasonable and nec-
essary fees in accordance with industry custom for professional fees in-
cluding, but not limited to, legal and accounting fees, relating to operating
(q) ``Qualified Kansas business'' means:
(1) A business that satisfies the requirements of subparagraphs (A)
through (F) of this subsection.
(A) Such business is independently owned and operated and has its
principal business office located in Kansas or, in the case of a company
domiciled outside the state of Kansas, which certifies that the company's
principal business office will be located in Kansas within six months fol-
lowing the date of the initial investment.
(B) At least fifty percent of the employees of the business shall be
resident in Kansas or, in the case of a company domiciled outside the
state of Kansas, certifies that at least fifty percent of its employees will
be resident in Kansas within six months following the date of the initial
qualified venture capital investment.
(C) Such business is in need of venture capital and cannot obtain
conventional financing to fund its further development and future oper-
(D) Such business shall be engaged in commerce for the purpose of
manufacturing, processing or assembling or distributing products, con-
ducting research and development or providing services in interstate com-
(E) For businesses involved in commerce for the purpose of provid-
ing services in interstate commerce, that business must demonstrate that
more than fifty percent of its gross revenues are derived from sales out-
side the state of Kansas or provide reasonable documentation that the
company will derive at least fifty percent of its gross sales outside the
state within a three-year period.
(F) Such business, at the time of the initial qualified venture capital
investment, shall have been in existence less than five years and shall not
have had gross sales in excess of $1,000,000 in any single fiscal year.
(2) Any business which, subject to paragraph (a)(5) of section 5, and
amendments thereto, is approved as a qualified Kansas business at the
time of the first qualified venture capital investment in such business by
a Kansas certified capital formation company, for a period of five years
following the date of such first investment, shall continue to be classified
as a qualified Kansas business and may receive follow-on investments
from any Kansas certified capital formation company, and such follow-on
investments shall constitute qualified venture capital investments even
though such business may not meet other qualifications set forth in par-
agraph (p)(1)(F) at the time of such follow-on investments.
(3) A qualified Kansas business shall not include:
(A) Any commercial enterprise primarily engaged in the sale at retail
of goods or services taxable under the Kansas retailer's sales tax act; any
service provider set forth in K.S.A. 17-2707, and amendments thereto;
any bank, savings and loan or lending institution; any real estate, real
estate development or insurance company; or any commercial enterprise
deriving its revenues directly from noncommercial customers in exchange
for personal services;
(B) an entity engaged primarily as a passive business, in irregular or
noncontinuous operations, any financial instrument that derives substan-
tially all of its income from passive investments that generate interest,
dividends, royalties or capital gains or any business arrangement the effect
of which is to immunize an investor from risk of loss;
(C) a business engaged in oil and gas exploration and development;
(D) a subsidiary of a certified capital formation company;
(E) another certified capital formation company;
(F) an affiliate of the certified capital formation company;
(G) an investor of the certified capital formation company or an af-
filiate or subsidiary of an investor of the certified capital formation com-
pany unless approved in writing by the secretary.
(r) ``Qualified venture capital investment'' means the investment of
cash by a Kansas certified capital formation company in such a manner
as to acquire capital in a qualified Kansas business.
(s) ``Secretary'' means the secretary of commerce and housing or per-
sons under the secretary's direction.
(t) ``Tax credit'' means a credit against the tax imposed by the Kansas
income tax act, the premium tax or privilege fee imposed pursuant to
K.S.A. 40-252, and amendments thereto, or the privilege tax as measured
by net income of financial institutions imposed pursuant to chapter 79,
article 11 of the Kansas Statutes Annotated.
Sec. 2. (a) Any investor that makes a certified capital investment shall
earn a tax credit against state tax liability equal to 50% of the amount of
such investor's certified capital investment. The investor, or a person to
whom the credits were duly transferred, shall be entitled to claim not
more than 10% of the credit per taxable year for taxable years com-
mencing on and after January 1, 2005. If the amount of the tax credit
allowed under subsection (a) exceeds the tax liability of the taxpayer for
any taxable year, such excess amount shall be refunded to the taxpayer.
(b) No certified capital investment in a single CFC by any one person
shall be less than $25,000 or more than $2,000,000; nor shall any one
person's combined investment be deemed in excess of $5,000,000 for the
purpose of earning tax credits.
(c) The total amount of tax credits which may be allowed shall not
exceed $20,000,000. The total amount of tax credits which may be allowed
under this act shall not exceed $2,000,000 per fiscal year.
Sec. 3. (a) The secretary may authorize and subsequently certify
profit or not-for-profit entities which meet the requirements of this act.
The secretary shall compile a list of every certified CFC, including the
address and telephone number of the certified CFC's principal place of
business. The secretary shall publicize the list in order to inform Kansas
companies of the availability of potential investment capital.
(b) The secretary shall review the organizational documents for each
applicant for authorization as a CFC and the business history of the ap-
plicant to determine:
(1) That at the time of application, the applicant owns cash, market-
able securities and other liquid assets valued at no less than $500,000; or
that prior to January 1, 2000, the applicant was designated as an inno-
vation and commercialization corporation or an affiliate innovation and
commercialization corporation created under the Kansas technology en-
terprise corporation innovation and commercialization corporation pro-
(2) that the officers and the board of directors, general partners, trus-
tees, managing members or managers, as the case may be, are thoroughly
acquainted with the requirements of this act and acknowledge such by a
(c) To continue to be certified, the CFC must own and shall peri-
odically demonstrate to the secretary, as the secretary may require, that
the liquid asset base for the certified capital formation company is at least
$500,000 at all times during the CFC's participation in the program au-
thorized by this act.
(d) With respect to any person who submits or has submitted an
application for authorization as a CFC, the commissioner shall investigate
to determine and report to the secretary whether any of the directors,
trustees, managers, officers, general partners, beneficial owners of 10%
or more of any class of equity securities or any promoters employed or
otherwise associated with that person at the time of such application:
(1) Has been affiliated with any company that has filed a registration
statement which is subject to a currently effective stop order entered
pursuant to any state law;
(2) has been convicted of any felony or misdemeanor in connection
with the purchase or sale of any security or any felony involving fraud or
deceit including, but not limited to, forgery, embezzlement of money
under false pretenses, larceny or conspiracy to defraud;
(3) is currently subject to any state administrative order or judgment
entered by a state securities administrator or is subject to any state ad-
ministrative order or judgment in which fraud or deceit was found and
an order or judgment was entered;
(4) is currently subject to any state administrative order or judgment
which prohibits the use of any exemption from registration in connection
with the purchase or sale of securities;
(5) is subject to any order, judgment or decree of any court of com-
petent jurisdiction temporarily or preliminarily restraining or enjoining,
or is subject to any order, judgment or decree of any court of competent
jurisdiction permanently restraining or enjoining that person from engag-
ing in or continuing any conduct or practice in connection with the pur-
chase or sale of any security, rendering investment advice or involving the
making or any false filing with any state; and
(6) has been convicted of or pleaded nolo contendere to any criminal
offense other than a misdemeanor involving motor vehicle violations.
(e) The secretary shall not authorize any CFC if the commissioner's
report includes any affirmative findings pursuant to subsection (d).
(f) The secretary shall review documentation regarding the qualifi-
cations of the persons who will actively manage the CFC and make a
determination as to whether such persons possessed sufficient knowledge
and professional experience in the areas of investment, venture capital,
business management and evaluation, portfolio management, and such
other area of expertise to the degree that a reasonable person would be
confident in such manager's ability to manage the CFC. No authorization
shall be issued when it is the opinion of the secretary that such persons
do not possess this requisite degree of knowledge and expertise.
(g) No investor shall individually, or collectively with or through one
or more affiliates, by means of ownership, agreement or otherwise, own,
control or possess the power or ability to cause or direct the making of
any qualified venture capital investments by a CFC.
(h) Within a period of time established by the secretary after receiv-
ing an application for authorization as a CFC, the secretary shall either
issue or deny the authorization and communicate in detail to the applicant
the grounds for the denial, including any suggestions for the removal of
Sec. 4. (a) A capital formation company having been authorized by
the secretary pursuant to section 3, and amendments thereto, shall have
a period of not more than 365 days from the date of receiving authori-
zation in which to procure certified capital investment.
(b) In order to receive certification by the secretary, an authorized
capital formation company shall raise a minimum aggregate certified cap-
ital investment of no less than $5,000,000. In the case of an authorized
capital formation company formed by an innovation and commercializa-
tion corporation or an affiliate innovation and commercialization corpo-
ration created under the KTEC innovation and commercialization cor-
poration program, such minimum certified capital investment shall be no
less than $1,000,000.
(c) Total certified capital investment deemed certified for the pur-
pose of earning tax credits shall not exceed $10,000,000 in a single capital
(d) A CFC is hereby authorized to be formed for the purpose of
investing exclusively in nonmetropolitan counties as defined in K.S.A. 74-
5093 and amendments thereto. In the case of a CFC formed for such
purposes, the secretary may enter into an agreement with the CFC at the
time of application to establish a lower minimum or maximum invest-
ment. Upon meeting the established cumulative maximum, certification
may take place pursuant to subsection (e) of this section.
(e) If during the fund raising period, an authorized capital formation
company demonstrates to the secretary that the maximum cumulative
certified capital investment has been met pursuant to this act, the sec-
retary shall either designate the capital formation company as a certified
capital formation company and notify the secretary of revenue of such
certification; or shall deny the certification and notify the capital forma-
tion company of the basis for denial.
(f) All capital investment deemed certified for the purpose of earning
tax credits must be certified by the investor to be new moneys in that
such moneys were not being used for seed or venture capital prior to
making the investment in a CFC. Any attempt to transfer funds from an
existing venture capital fund to a CFC for the purposes of earning a tax
credit shall constitute a violation of this act and may lead to decertifica-
(g) No capital investments shall be certified by the secretary until
such time when the minimum cumulative certified capital investments
(h) Upon the end of the fund raising period as established by the
secretary, capital formation companies that have reached the minimum
cumulative certified capital investment requirement but have failed to
reach the maximum cumulative certified capital investment requirements
shall be certified by the secretary in rank order based on the amount of
certified capital investment raised by the capital formation company and
the amount of tax credits available for allocation upon the secretary's
satisfaction that all such investment was made pursuant to this act.
(i) The secretary will notify the department of revenue upon certifi-
cation of a capital formation company.
(j) Designation as an innovation and commercialization corporation
or an affiliate innovation and commercialization corporation created un-
der the Kansas technology enterprise corporation shall not relieve such
entity from compliance with any provisions of this act except where stated
Sec. 5. (a) To continue to be certified, a CFC shall make qualified
venture capital investments according to the following schedule:
(1) Within three years after the date on which a CFC is certified at
least 33% of its capital originally certified shall be, or have been, used for
making qualified venture capital investments;
(2) within four years after the date on which a CFC is certified at
least 66% of its capital originally certified shall be, or have been, used for
(3) within five years after the date on which a CFC is certified at least
100% of its total capital originally certified shall be, or have been, used
for making qualified venture capital investments;
(4) a CFC shall not make an investment in an affiliate of the CFC or
an affiliate of an investor. For the purposes of this subsection, if a com-
pany is not an affiliate before a CFC initially invests in the company, it
shall not be deemed to be an affiliate if such CFC provides additional
qualified venture capital investment to such company subsequent to its
initial investment. No corporate officer, employee or shareholder, no lim-
ited or general partner or other person personally affiliated with any CFC
shall personally invest in any portfolio company regardless of whether the
portfolio company is affiliated with the CFC; and
(5) all certified capital which is not then required to be invested in
qualified venture capital investments or which has been previously in-
vested in qualified venture capital investments and returned by the com-
pany, may be held or invested in such manner as the CFC, in its discre-
tion, deems appropriate. The proceeds of all certified capital which is
returned to a CFC after it was originally invested in qualified venture
capital investments, may be invested in other qualified venture capital
investments and shall be credited toward any requirement in this act with
respect to placing certified capital in qualified venture capital invest-
(b) A CFC may make qualified distributions at any time. In order to
lawfully make liquidating distributions, a CFC must have invested an
aggregate amount equal to 100% of its certified capital in qualified ven-
ture capital investments or the fair value of its assets plus any prior qual-
ified and liquidating distributions which equal or exceed 110% of its cer-
tified capital. In addition, to the extent that marketable securities have
been received in liquidation of a qualified venture capital investment,
such securities may be distributed as liquidating distributions. Notwith-
standing any other provisions of this act, cash liquidating distributions are
permitted solely for the purpose of providing funds to investors to pay
income taxes attributable to earnings of the CFC.
(c) Liquidating distributions in excess of the certified capital forma-
tion company's original certified capital and any additional capital contri-
butions to the certified capital formation company shall be subject to audit
by a certified public accounting firm acceptable to the secretary, at the
expense of the certified capital formation company.
(d) If at the time any liquidating distribution is made by a CFC, the
aggregate sum of all liquidating distributions of the CFC exceeds the
aggregate sum of the CFC's original certified capital and any subsequent
qualified venture capital contributions to the CFC, as determined by au-
dit, the CFC, prior to any additional distributions, shall pay to the state
treasurer's office 10% of the proportion of the distribution in excess of
(e) Documents and other materials submitted by CFC's or by busi-
nesses for purposes of authorization or original certification or the con-
tinuance of certification as a CFC shall not be public records if it is
determined by the secretary that disclosure of such information would
compromise trade secrets of qualified Kansas businesses unless otherwise
specified in this act.
(f) Each CFC shall report the following to the secretary:
(1) Within 90 days of the close of the CFC's fiscal year, annual au-
dited financial statements. The audit shall address the methods of oper-
ation and conduct of business of the CFC to determine if the CFC is
complying with the statutes and program rules and that the funds received
by the CFC have been invested in accordance with the time limits pro-
vided by this act.
(2) At the end of each quarter, that no more than 20% of the greater
of: (A) The original certified capital investment in the CFC; or (B) the
original certified capital investment plus the amount equal to the net
gains, losses, income and expenses realized by the CFC at such time shall
be invested by a CFC in a single qualified Kansas business at any one
time unless the CFC can demonstrate that a greater percentage in a single
qualified Kansas business at any one time is the result of losses suffered
by the CFC in other qualified venture capital investments.
(g) Any material related to the sale of ownership in a CFC or soliciting
investment in a CFC shall include the following statement: ``By author-
izing or certifying a certified capital formation company, the State of Kan-
sas does not endorse the quality of management or the potential for earn-
ings of a particular company. The use of the word ``certified'' or
``authorized'' in an offering does not constitute a recommendation or en-
dorsement of an investment by the Kansas Securities Commission or any
other State Official.''
(h) The secretary may establish reasonable initial filing fees for ap-
plications for authorization and certification pursuant to this act and may
also establish an annual nonrefundable fee for CFC's seeking continued
Sec. 6. (a) To ensure that no qualified venture capital investment or
investor's certified capital investment has been made in violation of this
act, the secretary shall conduct an annual review of each CFC to deter-
mine if the CFC is complying with the requirements of certification. The
costs of the annual review shall be paid by each CFC according to a
reasonable fee schedule adopted by the secretary.
(b) Any material violation of this act by a CFC shall be grounds for
decertification under this section. If the secretary determines that a CFC
is not in compliance with the requirements for continuing certification,
the secretary, by written notice, shall inform the officers of the CFC and
the board of directors, managers, trustees or general partners that they
shall be decertified within 120 days from the date of mailing of the notice,
unless they correct the deficiencies detailed in the notice and demon-
strate to the secretary's satisfaction that the CFC is again in compliance
with the requirements for certification as determined by the secretary.
(c) At the end of the 120 day grace period, if the CFC is still not in
compliance, the secretary may send a notice of decertification to the CFC
and to the secretary of revenue including a list of the decertified capital
investments by investor and transferee.
(d) Decertification of a CFC prior to the CFC meeting all require-
ments of paragraphs (1) through (4) of subsection (a) of section 5, and
amendments thereto, shall cause the recapture of all tax credits previously
allowed to an investor or transferee and the forfeiture of all future tax
credits to otherwise be claimed by an investor or transferee with respect
to any certified capital investment in the decertified CFC.
(e) Decertification of a CFC after it has met all requirements of par-
agraphs (1) through (4) of subsection (a) of section 5, and amendments
thereto, shall cause the forfeiture of tax credits commencing with the
taxable year of the investor or transferee in which the decertification arose
and for all future taxable years with no recapture of tax credits allowed
to an investor or transferee with respect to the taxable years which ended
before the decertification occurred. Once a CFC has invested 100% of
its certified capital in qualified Kansas businesses, all future tax credits to
be claimed pursuant to this act by investors or transferees with respect
to such CFC shall not be subject to recapture.
Sec. 7. The secretary shall prepare and submit an annual report to
the governor and the legislature no later than October 1 of each year.
Such report shall be presented to the standing committee on commerce
in the senate, standing committee on economic development in the house
of representatives and the joint committee on economic development.
Such report shall include but not be limited to:
(a) The total dollar amount each CFC received from all investors
allowed tax credits and any other investors and the identity of all investors
allowed tax credits;
(b) the total amount invested by each CFC in qualified Kansas busi-
nesses, the identity and location of those businesses, the amount invested
in each qualified Kansas business and the total number of permanent full-
time jobs created or retained by each qualified Kansas business as a result
of the investment; and
(c) the cumulative amount of any liquidating disbursements received
by the state from the CFC's.
Sec. 8. The secretary may revoke the certification of a CFC if any
material representation to the secretary in connection with the application
process proves to have been falsely made or if the application materially
violates any requirement established by the secretary.
Sec. 9. (a) Any investor that is not subject to taxation under the pro-
visions of the Kansas income, privilege or premium tax that makes a cer-
tified capital investment shall be deemed to acquire an interest in the
nature of a transferable 50% tax credit. The credit established pursuant
to this act may be sold or transferred subject to approval by the secretary.
An investor as described in this section shall not be allowed a refund for
the interest herein created. Only the full amount of the credit for any one
investment may be transferred, and the credit may be transferred only
one time. Documentation of any credit transfer shall be provided to the
secretary. The secretary shall transmit a copy of such documentation to
the secretary of revenue.
(b) The secretary, after consulting with the secretary of revenue, shall
develop such rules and regulations as are necessary to facilitate the op-
eration of the transfer program consistent with the interest of the state
in tracking the transfer of ownership and the use of tax credits earned by
Date Composed: 10/10/2002 Date Modified: 10/10/2002