PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following action:
Action taken:
Addition of Part 4252 to Title 21 NYCRR.
Statutory authority:
Urban Development Corporation Act, sections 9-c and 16-u; L. 1968, ch. 174
Finding of necessity for emergency rule:
Preservation of public health, public safety and general welfare.
Specific reasons underlying the finding of necessity:
The current economic crisis, including high unemployment and the immediate lack of seed stage capital for job generating small business, are the reasons for the emergency adoption of this Rule which is required for the immediate implementation of the Innovate NY Fund Program in order to promptly provide assistance to the State’s small businesses engaged in one or more emerging technology fields and demonstrating a potential for substantial growth and job development. These businesses shall be in the pre-revenue, recently established revenue stream phase or not yet in receipt of institutional investments. This assistance will sustain and increase employment generated by these businesses.
Subject:
Innovate NY Fund.
Purpose:
Provide the basis for administration of The Innovate NY Fund.
Text of emergency rule:
Part 4252
INNOVATE NY FUND
Section 4252.1 Purpose
The purpose of these regulations is to facilitate administration of the Innovate NY Fund (the “Fund” or the “Program”) authorized pursuant to section sixteen-u of the New York State Urban Development Corporation Act (the “Act”).
Section 4252.2 Definitions
The following terms shall have the meanings given below:
1. “Beneficiary Company” shall mean a Seed Stage Business that an Investment Entity selects for a Fund investment (also referred to as a “Portfolio Company” after the Fund investment is made).
2. “Carried Interest on Capital Gains” shall mean the share of any profits that the owners, partners or members of an Investment Entity receive as compensation.
3. “Corporation” shall mean the New York State Urban Development Corporation d/b/a Empire State Development, a corporate governmental agency of the State of New York, constituting a political subdivision and public benefit corporation created by chapter one hundred seventy-four of the Laws of nineteen hundred sixty-eight, as amended.
4. “Disbursement Process” means the process for disbursing Program funds to Investment Entities.
5. “Due Diligence” shall mean an in-depth investigative approach to evaluating the Beneficiary Company and verifying an investment opportunity, which may include assessment of the management team, business plan, financial history, financial projections, and the Beneficiary Company’s technology and products/services.
6. “Emerging Technology Field” shall mean one or more of the emerging technologies, as defined in section thirty-one hundred two-e of the Public Authorities Law, or any field, area or technology that is achieving or has the potential to achieve contemporary technological advances, innovation, transformation or development.
7. “Equity” shall mean common stock, convertible preferred stock, stock warrants or convertible notes or bonds that can also convert to common stock, and similar types of securities.
8. “Follow-on Investment” shall mean a subsequent investment made by an investor after an initial round of investment in a Portfolio Company.
9. “Hybrid Investment” shall mean an investment that combines Equity and debt features, such as preferred stocks, convertible bonds, and convertible notes.
10. “Investment Entity” shall mean a regional and local economic development organization, technology development organization, research university, or investment fund that provides or is otherwise qualified to make seed-stage investments in companies located in the State of New York.
11. “Leveraging” or “leverage” shall mean utilizing investment assets alongside other sources of capital.
12. “Matching Investment Funds” shall mean monies secured in addition to Program funds.
13. “Portfolio Company” shall mean a Beneficiary Company after the Fund investment is made.
14. “Seed-Stage Business” shall mean a Small Business, located in New York State and working in one or more Emerging Technology Fields, which demonstrates a potential for substantial growth and job development, has the potential to generate additional economic activity in New York State, and that is pre-revenue, has only begun to earn revenue, or has not yet received institutional investments.
15. “Small Business” shall have the meaning as set forth in section 131 of the Economic Development Law.
16. “State” shall mean the State of New York.
Section 4252.3 Investment Objectives
The Fund objective is to invest in Seed Stage Businesses through Investment Entities that are selected by and are under contract to the Corporation. Investment priority shall be given to Seed Stage Businesses involved in commercialization of research and development or high technology manufacturing.
Section 4252.4 Selection of Investment Entities
The Corporation shall identify and select Investment Entities through one or more competitive statewide, regional or local solicitations. Investment Entity applicants shall be evaluated on criteria including, but not limited to, the applicant's: (a) record of success in raising investment funds and successfully investing them; (b) capacity to perform Due Diligence and to provide management expertise and other value-added services to Beneficiary Companies; (c) financial resources for identifying and investing in seed-stage and early-stage companies; (d) ability to secure non-State Matching Investment Funds at a ratio that is equal to or greater than one-to-one (1:1); (e) ability to evaluate the commercial potential of emerging technologies; (f) ability to secure partnerships with local or regional investors; (g) conflict of interest policy acceptable to the Corporation; (h) investment record and capacity to invest in the State; (i) management fees, promotes, share of return and other fees and charges and; (j) other criteria that the Corporation determines is relevant to making investment decisions consistent with the purposes of the Fund. Applicants must specify particular industry sector, regional or other investment strategies. The Corporation shall determine the amount of the Program funds to commit to an Investment Entity. After an Investment Entity is under contract to the Corporation, the Corporation may award additional Program funds to an Investment Entity without an additional solicitation.
Section 4252.5 General Requirements
1. The Corporation and each Investment Entity receiving Program funds shall enter into one or more written agreements governing the Corporation’s investment, which may include a Limited Partnership Agreement, that are consistent and in compliance with the Act, including section 16-u thereof, this rule, and other applicable laws and regulations.
2. The Corporation shall distribute Program funds promptly pursuant to a Disbursement Process agreed to between the Corporation and the Investment Entity in order to enable the Investment Entity to fulfill its commitments to Beneficiary Companies in a timely manner.
3. The commitment period for an Investment Entity to make investments with the Program funds shall typically be three years or less.
4. Returns on investments or interest accrued with respect to Program funds received by an Investment Entity through the Fund shall be returned to the Corporation in accordance with the agreements entered into between the Investment Entity and the Corporation.
Section 4252.6 Eligible Investments in Beneficiary Companies
In order to be eligible for an investment, including a Follow-on Investment, that includes Program funds, a Beneficiary Company must be a Seed-Stage Business. Prior to the investment of Program funds in a Beneficiary Company, the Beneficiary Company must agree, pursuant to a written agreement satisfactory to the Corporation, that the Beneficiary Company will be located and remain located within the State for a period satisfactory to the Corporation and that in the event that the Beneficiary Company breaches such obligation, the Corporation shall have all remedies at law and such other remedies as the Corporation may set forth in the agreement with the Beneficiary Company, which may include recovery or recapture, if full or in part, of the Program funds investment.
Investment Entities shall not invest Program funds in a Beneficiary Company in an amount greater than five hundred thousand dollars, or seven hundred fifty thousand dollars in the case of a biotechnology-related Beneficiary Company, at any one time, unless the Beneficiary Company and the Investment Entity can demonstrate to the satisfaction of the Corporation that exceeding the applicable investment limit significantly increases the potential of the investment to result in substantially greater growth, job development, and additional economic activity in New York State and the Corporation consents to such greater investment in writing. Program funds may be used for Follow-on Investments in Portfolio Companies, subject to the investment amount limits and exceptions set forth above. Investments in Beneficiary Companies may take the form of Equity or Hybrid Investments.
Section 4252.7 Fund Accounts
Each participating Investment Entity shall deposit Program funds and program related investment proceeds (including, without limiting the foregoing, returns and interest) into a bank account in a State or Federally chartered banking institution, satisfactory to the Corporation, or as otherwise agreed in writing between the Corporation and the Investment Entity.
At such time as an Investment Entity has invested fifty percent of the Program funds committed to such Investment Entity and annually thereafter, the aggregate investments of Program funds by the Investment Entity in Beneficiary Companies shall be leveraged with Matching Investment Funds from private sources of capital, excluding investments after the initial funding round, at a ratio equal to or greater than two to one (2:1). Investments made in funding rounds prior to the date of the initial investment of Program Funds shall not be counted toward satisfying this Matching Investment Funds requirement. Funding provided by the State of New York, including, but not limited to, Small Business Technology Investment Fund proceeds, does not satisfy this Matching Investment Funds requirement.
Section 4252.9 Fees and Capital Gains
The Investment Entities may charge fees, pursuant to a written schedule of fees, and receive Carried Interest on Capital Gains with the prior written approval of the Corporation. The amount of any fees and the amount of the Carried Interest on Capital Gains will be detailed in the agreements to be entered into between the Investment Entity and the Corporation. Returns to the Corporation, such as capital gains and the return of the investment, will be detailed in the agreements to be entered into between the Investment Entity and the Corporation.
Section 4252.10 Auditing, Compliance and Reporting
The Corporation shall evaluate the investment activities of each participating Investment Entity in conformance with the agreements to be entered into between the Corporation and the Investment Entity, in accordance with the criteria set forth in section 16-u of the Act, and this rule and in accordance with other applicable law and regulations. Each Investment Entity will be required to provide quarterly and annual reports outlining the impact and effectiveness of the investments made, current status, leveraged funds, business revenue, numbers of jobs created, and other items as determined by Corporation. These annual reports and additional reports as requested at the discretion of the Corporation may be required to include:
a. The number of investments made;
b. The type of each investment;
c. The location of each Beneficiary Company;
d. The amount of Program funds and private funds invested in each Beneficiary Company;
e. The projected and actual number of jobs created or retained by each Beneficiary Company receiving Program funds;
f. The type of product or technology being developed or produced by each Beneficiary Company; and
g. Such other information as the Corporation may require.
The Corporation may conduct or request audits of the Investment Entities in order to ensure compliance with the provisions of section 16-u of the Act, any regulations promulgated with respect thereto and agreements between the Investment Entities and the Corporation of all aspects of the use of Program funds and investment transactions.
In the event that the Corporation finds substantive noncompliance at any time, the Corporation may terminate the Investment Entity’s participation in the Program. The agreements between the Corporation and the Investment Entity shall provide that, upon termination of an Investment Entity’s participation in the Program, the Investment Entity shall return to the Corporation, promptly after its demand thereof, all Program funds held by the Investment Entity, and provide to the Corporation, promptly after its demand thereof, an accounting of all Program funds, including all currently outstanding investments that were made using Program funds. Notwithstanding such termination, the Investment Entity shall remain liable to the Corporation with respect to any unpaid amounts due from the Investment Entity pursuant to the terms of the agreements between the Corporation and the Investment Entity. In the event that an Investment Entity’s participation in the Program is terminated, the Corporation, in its discretion, may transfer to one or more of the other participating Investment Entities without an additional solicitation all or part of the award made to such Investment Entity.
Section 4252.11 Confidentiality and State Employees
To the extent permitted by law, all information regarding the financial condition, marketing plans, customer lists, or other trade secrets and proprietary information of a Beneficiary Company shall be confidential and exempt from public disclosures.
To the extent permitted by law, no full-time employee of the State of New York or any agency, department, authority or public benefit Corporation thereof shall be eligible to receive assistance under this Program.
Section 4252.12 Non-Discrimination and Affirmative Action
The Corporation’s affirmative action and non-discrimination policies and programs are grounded in both public policy and applicable law, including but not limited to, Section 2879 of the Public Authorities Law, Article 15-A of the Executive Law and Section 6254(11) of the Unconsolidated Laws. These laws mandate the Corporation to take affirmative action in implementing programs. The Corporation has charged the affirmative action department with overall responsibility to ensure that the spirit of these mandates is incorporated into the Corporation’s policies and projects. Where applicable, the affirmative action department will work with applicants in developing an appropriate Affirmative Action Program for business and employment opportunities generated by the Corporation’s participation of the Program.
This notice is intended
to serve only as an emergency adoption, to be valid for 90 days or less. This rule expires December 9, 2012.
Text of rule and any required statements and analyses may be obtained from:
Antovk Pidedjian, Sr. Counsel, New York Urban Development Corporation, 633 Third Avenue, 37th Floor, New York, NY 10017, (212) 803-3792, email: apidedjian@esd.ny.gov
Regulatory Impact Statement
1. Statutory Authority: Section 9-c of the New York State Urban Development Corporation Act Chapter 174 of the Laws of 1968 (Uncon. Laws section 6259-c), as amended (the “Act”), provides, in part, that the Corporation shall, assisted by the Commissioner of Economic Development and in consultation with the Department of Economic Development, promulgate rules and regulations in accordance with the State Administrative Procedure Act.
Section 16-u of the Act provides for the creation of the Innovate NY Fund (the “Program”) and authorizes the New York State Urban Development Corporation d/b/a Empire State Development (the “Corporation”), within available appropriations, to fund investments in small businesses engaged in one or more emerging technology fields and demonstrating a potential for substantial growth and job development. These businesses shall be in the pre-revenue, recently established revenue stream phase or not yet in receipt of institutional investments. The investments will be made in these small businesses through investment entities that are selected by and are under contract with the Corporation.
2. Legislative Objectives: Section 16-u of the Act (Uncon. Laws section 6266-u, added by Chapter 103 of the Laws of 2011) sets forth the Legislative objective of authorizing the Corporation, within available appropriations, to provide funds to investment entities, including regional and local development organizations, technology development organizations, research universities and investment funds that provide seed-stage investments to support emerging New York state businesses that have demonstrated potential for substantial growth and job development in an emerging technology field and have the potential to generate additional economic activity in New York State. The adoption of 21 NYCRR Part 4252 will further these goals by setting forth the types of available assistance, evaluation criteria, the application process and related matters for the Program.
3. Needs and Benefits: The State has allocated $25,922,157 of federal funds for this program. Innovate NY will provide investments to investment entities, in order to provide funding for those organizations’ equity and quasi equity investments in New York’s eligible small businesses. Small businesses have been determined to be a major source of employment throughout New York State. Small businesses have historically had difficulties obtaining financing or refinancing in order to remain competitive and grow their operations, and the current economic difficulties have exacerbated this problem. Providing loans to small businesses should sustain and potentially increase the employment provided by such businesses, especially during this period of historically high unemployment and underemployment. The Program allows the Corporation to use investment entities contracted through a competitive process by the Corporation to invest Program funds. The rule further facilitates the administration of the Program by defining eligible and ineligible small businesses and eligible uses of the proceeds of loans to small businesses and other criteria to be applied by the institutions in making loans to small businesses.
4. Costs: The Program is funded by a State appropriation of federal funds in the amount of $25,922,157 dollars. Pursuant to the rule, the principal amount of Program funds invested will not be greater than $500,000 (or greater than $750,000 in the case of any individual biotechnology-related beneficiary) at any one time, unless the beneficiary company can demonstrate to the satisfaction of the Corporation that exceeding the applicable investment limit significantly increases the potential of the investment to result in substantially greater growth, job development, and additional economic activity in New York State and the Corporation consents to such investment in writing. The costs to investment entities that participate in the Program would depend on the size of their existing fund and their particular structure for sourcing, evaluating, and monitoring investments. The investment entities will propose a compensation structure for administering the Innovate NY funds, and that structure is likely to include both a management fee and a component of carried interest on capital gains. While industry standard is 20% carried interest in capital gains and a 2.5% yearly management fee that declines over time, we expect that respondents may be more competitive.
5. Paperwork / Reporting: There are no additional reporting or paperwork requirements as a result of this rule for Program participants except those required by the statute creating the Program such as an annual report on the organization’s lending activity and providing information in connection with an audit by the Corporation with respect to the organization’s use of Program funds. Standard applications and documents used for most other assistance by the Corporation will be employed in keeping with the Corporation’s overall effort to facilitate the application process for all of the Corporation’s clients.
6. Local Government Mandates: The Program imposes no mandates – program, service, duty, or responsibility – upon any city, county, town, village, school district or other special district.
7. Duplication: The regulations do not duplicate any existing state or federal rule.
8. Alternatives: While larger financial institutions can potentially provide small business financing and the investment entities already provide small business financing, the access of seed-stage businesses to capital is very limited. The State has established the Program in order to enhance the access of small businesses to such financing, and the proposed rule provides the regulatory basis for providing investment entities for lending to small businesses in accordance with the statutory requirements of the Program.
9. Federal Standards: There are no minimum federal standards related to this regulation. The regulation is not inconsistent with any federal standards or requirements.
10. Compliance Schedule: The regulation shall take effect immediately upon adoption.
Regulatory Flexibility Analysis
1. Effects of Rule: In the rule: “Small business” is defined as a business that is resident and authorized to do business in the State, independently owned and operated, not dominant in its field, and employs one hundred or fewer persons on a full time basis; “Investment Entity” is defined a regional and local economic development organization, technology development organization, research university, or investment fund that provides or is otherwise qualified to make seed-stage investments in companies located in the State of New York and “Seed-Stage Business” is defined as a small business, located in New York State and working in one or more emerging technology fields, which demonstrates a potential for substantial growth and job development, has the potential to generate additional economic activity in New York State, and that is pre-revenue, has only begun to earn revenue, or has not yet received institutional investments. The rule will facilitate the statutory Program’s purpose of having New York State Urban Development Corporation d/b/a Empire State Development (the “Corporation”) make investments in investment entities in order to provide funding in principal amounts equal to or less than five hundred thousand dollars to small businesses, or seven-hundred fifty thousand to biotechnology-related small businesses, with the possibility of additional funding under prescribed circumstances, located within the State, that are engaged in one or more emerging technology fields and demonstrating a potential for substantial growth and job development. These businesses shall be in the pre-revenue, recently established revenue stream phase or not yet in receipt of institutional investments.
2. Compliance Requirements: There are no compliance requirements for local governments in these regulations. Small businesses must comply with the compliance requirements applicable to all participating lending institutions regardless of size. Eligible small businesses receiving funds must use the funds for a business purpose and remain in the State for a period acceptable to the Corporation. Penalties will be imposed for any failure to meet requirements. This is a voluntary program. Entities not wishing to undertake the compliance obligations need not participate.
3. Professional Services: Applicants do not need to obtain professional services to comply with these regulations.
4. Compliance Costs: There are no compliance costs for small businesses and local governments in these regulations.
5. Economic and Technological Feasibility: There are no compliance costs for small businesses and local governments in these regulations so there is no basis for determining the economic and technological feasibility for compliance with the rule by small businesses and local governments.
6. Minimizing Adverse Impact: This rule has no adverse impacts on small businesses or local governments because it is designed to provide funds to investment entities in order to enhance the ability of such organizations to invest in small businesses.
7. Small Business and Local Government Participation: A number of investment entities that provide equity or quasi-equity investing in small businesses were surveyed by the Corporation and were supportive of the Fund and its structure. A number of roundtable discussions were held as part of the 2009 Small Business Task Force as well as Legislature- sponsored sessions, where various stakeholders supported and advocated for such a fund. Creation of such a seed fund was one of the primary recommendations of the 2009 Small Business Task Force.
Rural Area Flexibility Analysis
1. Types and Estimated Numbers of Rural Areas: Investment entities serving all of the 44 counties defined as rural by the Executive Law § 481(7), are eligible to apply for the Innovate NY Fund (the “Program”) assistance pursuant to a State-wide request for proposals.
2. Reporting, Recordkeeping and Other Compliance Requirements and Professional Services: The rule will not impose any new or additional reporting or recordkeeping requirements other than those that would be required of any investment entity receiving similar equity investments, on such matters as financial condition, required matching funds, and utilization of Program funds; no additional acts will be needed to comply other than the said reporting requirements and the making of equity investments in small businesses in the normal course of the business for any investment entity that receives Program assistance; and, it is not anticipated that applicants will have to secure any additional professional services in order to comply with this rule.
3. Costs: The costs to investment entities that participate in the Program would depend on the size of their existing fund and their particular structure for sourcing, evaluating, and monitoring investments. The investment entities will propose a compensation structure for administering the Innovate NY funds, and that structure is likely to include both a management fee and a component of carried interest on capital gains. While industry standard is 20% carried interest in capital gains and a 2.5% yearly management fee that declines over time, we expect that respondents may be more competitive.
4. Minimizing Adverse Impact: The purpose of the Program is to provide funds to investment entities which will invest in seed-stage companies. This rule provides a basis for cooperation between the State and investment entities, including investment entities that serve rural areas of the State, in order to maximize the Program’s effectiveness and minimize any negative impacts for such investment entities and the small businesses, including small businesses located in rural areas of the State, that such investment entities serve.
5. Rural Area Participation: This rule maximizes geographic participation by not limiting applicants to those located only in urban areas or only in rural areas.
Job Impact Statement
These regulations will not adversely affect jobs or employment opportunities in New York State. The regulations are intended to improve the economy of New York by providing greater access to capital for small businesses working in one or more emerging technology fields. The Program includes minorities, women and other New Yorkers who have difficulty accessing regular credit markets.
There will be no adverse impact on job opportunities in the state.
