Rep. Reilly’s Legislation Designed Increase Venture Capital Investments in Rhode Island

Back in 2002, Representative Reilly introduced the Rhode Island Certified Capital Company Act:

Rhode Island, said Rep. Donald O. Reilly Jr. (D-Dist. 67) of Cumberland, currently ranks 36th in the nation in the amount of venture capital it receives for small businesses.

“Increased venture capital investments made in small businesses located in Rhode Island will lead to job creation and increased tax revenue for the state. That’s not wishful thinking. It is happening in other states all around the country and it’s time it happens in Rhode Island,” said Representative Reilly.

The means to that end is a bill introduced by Representative Reilly this legislative session, which was scheduled for a hearing today before the House Committee on Finance. The bill (2002-H 8183) would establish the Rhode Island Certified Capital Company Act, an economic development program designed to increase the amount of venture capital investments made in Rhode Island.

As proposed in the bill, the state would provide financial incentives to insurance companies in the form of tax credits to create private state venture capital funds. The funds (CAPCOs) would be used to make investments in Rhode Island small businesses. Those small businesses would then be able to create new jobs that would in turn increase Rhode Island’s tax base.

“We are looking at this as a way to create jobs, to diversity our economy and to increase our tax base in Rhode Island,” said Representative Reilly. “There is absolutely no down side. On the contrary, this could be the best economic development program to happen to our state in years. It is estimated that for every dollar the state is giving in tax credits, we would recoup $4 to $5 in income taxes.”

Louisiana was the first state to establish a CAPCO Act. Since 1983, 12 CAPCO pools have been established in that state totaling $600 million and resulting in the creation of several thousand new jobs. Other states that have established CAPCOs include Missouri, New York, Florida, Wisconsin, Colorado, Texas, Alabama and Georgia.

“Venture capital backed companies would create more value for Rhode Island than non-venture backed companies,” said Representative Reilly. “A venture backed company typically generates twice as many jobs as non-venture backed firms; produces new jobs at a rate of 40 percent per year; creates high-quality skilled positions at four times the rate of the general economy, and mostly operates in high tech sectors where jobs pay almost twice as much as the state’s median income.”

Under the Reilly legislation, professional venture capitalists with at least four years experience and $500,000 in cash could apply to manage and invest sums of that money. The venture capitalists would be certified by the Rhode Island Economic Development Corporation to create certified capital companies with the state money.

In addition to investing in Rhode Island small businesses, 10 percent of each CAPCO’s money would be earmarked for the Samuel Slater Technology Fund, which provides seed money to spur investments in new technology firms in the state.

The CAPCO program, said Representative Reilly, also leverages additional capital by attracting out-of-state venture capital firms to participate in funding CAPCO portfolio companies. “In Missouri, for instance, $140 million in tax credits have attracted $1.76 billion in leveraged capital.”

“The bottom line is, this is about creating jobs and expanding the economic base, i.e. tax revenues, in our state,” said Representative Reilly. “In Missouri, during the first two-and-a-half years of the program, more than 1,600 new jobs were created.”

“In periods of economic downturn, states must act to provide incentives that create, build and sustain small companies. The CAPCO program is an effective public/private partnership that helps small business, creates new jobs and benefits the state economy in the long run,” he said.

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