Current through Register Vol. XLI, No. 50, December 13, 2024
Section 117-1-6 - Investment Requirements, Reporting, Record Keeping, Prohibitions, Sale or Liquidation and SBIC Compliance6.1. Investments. -- A Qualified Company shall invest each separate capital base in Qualified Investments in accordance with the schedule set forth in Subsection 6.3 of this Rule. The portion of each separate capital base of a Qualified Company not required to be invested in Qualified Investments under Subsection 6.3 of this Rule shall be maintained or invested by the Qualified Company in one or more of the following: (i) in Qualified Investments; (ii) in bank accounts and financial institutions which are located in the State of West Virginia; (iii) other interest bearing instruments with a maturity of less than one (1) year which are obtained from and managed by a West Virginia corporation, as defined in Subdivision 3.2.c of this Rule; or (iv) a fund authorized by the Authority pursuant to W. Va. Code § 5E-2-4(b). After a Qualified Investment is made, the Qualified Company shall obtain and submit to the Authority with the next semi-annual report of the Company, required to be filed pursuant to Subsection 5.1 of this Rule, affidavits prepared by any authorized officer, partner, owner, limited liability company member or manager, or trustee of the business invested in, which set forth the following: 6.1.a. That it is a business located in or principally based in West Virginia;6.1.b. That more than fifty percent (50%) of its assets and operations, as defined in Subsection 2.29 of this Rule, are located in West Virginia;6.1.c. That more than fifty percent (50%) of its employees are West Virginia residents; and6.1.d. A brief description of the activities in which the business is engaged.6.2. Affidavit from Qualified Company. -- A Qualified Company shall submit to the Authority, contemporaneous with the filings required under Subsection 6.1 of this Rule, affidavits prepared by an authorized officer, partner, owner, limited liability company member or manager, or trustee of the Qualified Company which demonstrate: 6.2.a. That the business invested in is not a business engaged in an activity prohibited by Subsection 6.5 of this Rule;6.2.b. That the business invested in is a West Virginia Business as defined in Subsection 2.29 of this Rule; and6.2.c. That the West Virginia Business invested in is engaged in activities that meet the requirements of a Qualified Investment, as specified in Subsection 2.22 of this Rule.6.3. Schedule of Qualified Investments. -- A Qualified Company shall invest each capital base in Qualified Investments according to the following schedule: 6.3.a. At least thirty-five percent (35%) of its capital base within one (1) year of the date on which the Qualified Company was designated as a Qualified West Virginia Capital Company by the Authority or, relative to a separate capital base designated as qualified pursuant to Subsection 4.1 of this Rule, within one (1) year of the date on which that separate capital base was designated as qualified by the Authority;6.3.b. At least fifty-five percent (55%) of its capital base within two (2) years of the date on which the Qualified Company was designated as a Qualified West Virginia Capital Company by the Authority or, relative to a separate capital base designated as qualified pursuant to Subsection 4.1 of this Rule, within two (2) years of the date on which that separate capital base was designated as qualified by the Authority; and6.3.c. At least seventy-five percent (75%) of its capital base within three (3) years of the date on which the Qualified Company was designated as a Qualified West Virginia Capital Company by the Authority or, relative to a separate capital base designated as qualified pursuant to Subsection 4.1 of this Rule, within three (3) years of the date on which that separate capital base was designated as qualified by the Authority.6.3.d. The provisions of this Subsection 6.3 do not apply to the capital base of a Qualified Company which is a SBIC provided that the capital base was qualified on a date on or after June 13, 2001.6.4. Limitation of Qualified Investment. -- No more than thirty percent (30%) of the total equity raised by a Qualified Company may be invested in any one West Virginia Business. For purposes of this Subsection, "equity" means the total of all the capital bases designated as qualified by the Authority.6.5. Investment in Certain Businesses Prohibited. 6.5.a. A Qualified Company shall not invest any of its capital base in any of the following businesses: 2. Savings & Loan Associations;4. Financial or Investment Advisors;5. Brokerage or Financial Firms;6. Other Capital Companies;7. Charitable and religious institutions;8. Businesses engaged in conventional oil and gas exploration;10. Businesses engaged in Residential Housing or Development; or11. Any other business which the Authority determines to be against the public interest, the purposes of the Act or in violation of any law.6.5.b. For the purposes of Paragraph 6.5.a.10 of this Rule, "residential housing or development" shall not include "tourism." "Tourism", as referred to in Subsection 2.22 of this Rule, includes, by way of example and not by way of limitation, housing which is to be sold as second residences or which is rented or leased to the public for overnight stay and which in either event is located near an established tourism resort. A Qualified Company desiring to make a "tourism" investment pursuant to this Subdivision or Subsection 2.22 shall obtain certification from the Authority that the investment is eligible for qualification as a "tourism" investment prior to making the investment.6.6. Alter Ego Investments Prohibited. -- W. Va. Code § 5E-1-13(b) prohibits a Qualified Company which is not a SBIC from investing any portion of its capital base, or making other investments, in a business that is the "alter ego" of the Qualified Company.6.6.a. Relative. -- For purposes of Subsection 6.6 of this Rule, the term "Relative" means a blood relative, a spouse, a spouse of a Blood Relative, or a person who is a Relative of a spouse, including persons related by a step or adoptive relationship, or a member of a common household. The term "Blood Relative" includes lineal descendants, ancestors, brothers and sisters, nephews and nieces, uncles and aunts, and first cousins.6.6.b. Substantially Related. -- A business is an alter ego of a Qualified Company if ownership of the business and ownership of the Qualified Company are "substantially related". Ownership of a business and ownership of a Qualified Company are "substantially related" if one or more of the following conditions are present at the time the investment is made or while the investment is outstanding: 1. Any investor in the Qualified Company is, or is a Relative (as defined in Subdivision 6.6.a of this Rule) of, an investor in or owner of the business. An investor in any parent business is considered an investor in all subsidiaries of the parent business for the purposes of this Paragraph.EXAMPLE:A Qualified Company is formed with A, B and C as investors. Qualified Company makes an investment in a West Virginia Business. For the purposes of Paragraph 6.6.b.1 of this Rule, the West Virginia Business would not be an "alter ego" of the Qualified Company as long as:(i) neither A, B nor C is an investor or owner of the West Virginia Business, and; (ii) no blood relative, spouse, spouse of a blood relative, relative of a spouse, or member of the household of either A, B or C is an investor or owner of the West Virginia Business.2. There is an agreement, written or oral, between the Qualified Company and the business that the investment by the Qualified Company in the business is conditioned upon the business (1) entering into any contract, agreement or other arrangement with an investor in the Qualified Company or a Relative (as defined in Subdivision 6.6.a of this Rule) of an investor, or with any business owned or controlled by an investor in the Qualified Company or a Relative of an investor, or (2) applying the invested funds to a purpose that will, clearly and naturally, substantially benefit an investor in the Qualified Company, a Relative of an investor, or any business owned or controlled by an investor in the Qualified Company or a Relative of an investor;EXAMPLE 1: A Qualified Company is formed with A, B and C as investors. Qualified Company's investment in XYZ, a West Virginia Business, is conditioned upon XYZ entering into a contract with Company Q, a business owned or controlled by investor B. Qualified Company would be prohibited from investing in XYZ on these conditions.EXAMPLE 2:Qualified Company is formed with A, B and C as investors. Qualified Company's investment in XYZ, a West Virginia Business, is conditioned upon XYZ using the investment to install certain equipment that will necessitate the use of supplies sold exclusively by Company Q, a business owned or controlled by Investor B. Qualified Company would be prohibited from investing in XYZ on these conditions.3. The investment by the Qualified Company is conditioned upon a reciprocal investment by another West Virginia Qualified Company in a business owned or controlled by an investor in the Qualified Company; or4. The investment by the Qualified Company results in there being either (i) no equity ownership in the business other than the Qualified Company or (ii) the non-Qualified Company ownership in the business lacks economic substance. EXAMPLE 1: Qualified Company owns ninety percent (90%) of XYZ, a West Virginia Business. The remaining ten percent (10%) ownership in XYZ is owned by an individual, M, who received his shares at no cost to him or her, and an individual, N, to whom Qualified Company loaned the money needed to purchase N's shares. The loan to N is on a non-recourse basis, meaning that N has no personal liability to repay the loan. The non-Qualified Company ownership by M and N in XYZ "lacks economic substance" and, pursuant to Paragraph 6.6.b.4 of this Rule, ownership of XYZ and Qualified Company are "substantially related." Therefore, XYZ would be an "alter ego" of Qualified Company and Qualified Company's investment in XYZ would be prohibited.EXAMPLE 2: Qualified Company owns eighty-five percent (85%) of the stock of XYZ, a West Virginia Business which manufactures widgets. Qualified Company paid $85,000.00 for its stock. The remaining fifteen percent (15%) of the stock is owned by an individual, K, who received his or her share by contributing to XYZ machinery used to manufacture widgets, which machinery has been appraised at $15,000.00. The non-Qualified Company ownership by K does not "lack economic substance" and, pursuant to Paragraph 6.6.b.4 of this Rule, XYZ would not be an "alter ego" of Qualified Company.EXAMPLE 3: Qualified Company owns ninety shares (equaling ninety percent (90%)) of the stock of XYZ, a West Virginia Business. Qualified Company paid $90,000.00 or $1,000.00 per share for its stock. The remaining ten shares (or ten percent (10%)) of the stock of XYZ are owned by an individual, D, who bought such stock for $10.00 or $1.00 per share. Furthermore, Qualified Company and D have an agreement by which Qualified Company has the right to buy D's shares in XYZ at any time for $1.00 per share. The non-Qualified Company ownership by D "lacks economic substance" under Paragraph 6.6.b.4 of this Rule for two reasons: (i) D's investment of $10.00 in XYZ is so minimal that D's investment is risk-free, and (ii) D's agreement with Qualified Company may result in D not receiving the benefits of ownership in XYZ.6.6.c. Control of Board of Directors. -- A business is an alter ego of a Qualified Company if the board of directors of the business is controlled by the Qualified Company, unless control consists of no more than a simple majority of the board. In order to determine control, directors of the business that exercise control on behalf of the Qualified Company include directors of the business that are (i) employees, officers, directors, limited liability company managers or other management personnel of the Qualified Company; (ii) persons who are investors in the Qualified Company; or (iii) persons who are Relatives (as defined in Subdivision 6.6.a of this Rule) of an investor in, or employee, officer, director, limited liability company manager or other management official of, the Qualified Company. Non-Qualified Company directors include individuals who do not meet the preceding conditions of this Subdivision. If the business is not a corporation then the same rules concerning control apply to the managing body for the business.6.7. Management Interlock Prohibited. 6.7.a. General Rule. -- Except when required in order to remedy problems arising from a lack of profitability in the business or from dishonesty of the persons managing the business or from the death or unanticipated departure of a person occupying a key management position in the business, a Qualified Company which is not a SBIC may not manage any business in which the Qualified Company has invested. Therefore, unless otherwise provided, no investor, director, officer or employee of the Qualified Company can occupy a management position in the business. A "management position" includes any position or office, other than membership on the board of directors, however described by title or office, where the individual has responsibility for and authority over all or any portion of the day-to-day operations of the business. In the case of a general partnership or a limited liability company, a general partner or member is not considered to occupy a management position in the business merely because the general partner or member regularly exercises his or her voting rights as long as the general partner or member is not responsible for and does not have authority over all or any portion of the day-to-day operations of the business.EXAMPLE:Qualified Company is one of five general partners in a general partnership which is a West Virginia Business. By written agreement within the partnership or by written contract, a general partner other than Qualified Company is designated the "Managing Partner" and is given authority over the day-to-day operations of the partnership. In this case, Qualified Company does not occupy a management position in the West Virginia Business even though Qualified Company would exercise its right to vote on the person who would occupy the position of Managing Partner.6.7.b. Lack of Profitability Exception. -- In order to establish that occupation of management positions is required in order to cure a lack of profitability in the business, the Qualified Company shall demonstrate that the expenses of the business have exceeded the revenues of the business for two consecutive fiscal quarters. If the Qualified Company takes control of management of the business, it shall relinquish control within a reasonable time after the revenues of the business have exceeded the expenses of the business for two consecutive fiscal quarters. In no event shall the Qualified Company have control of management of the business for a period exceeding twenty-four (24) months, even if profitability is not restored at the end of the twenty-four (24) month period.6.7.c. Cure of Dishonesty Exception. -- In order to establish that occupation of management positions is required in order to cure dishonesty within management, the Qualified Company shall demonstrate that there is substantial reason to believe that existing members of management have violated state or federal law in connection with the performance of their duties for the business, that the suspected violations pose a significant risk of detriment to the business, and that an independent investigation of the suspected wrongdoing was undertaken, the results of which indicate the occurrence of a violation of law. Breach of fiduciary duty and negligence without more do not constitute "dishonesty." Where dishonesty in management is established, an investor, director, officer or employee of the Qualified Company may serve as an interim replacement of existing management for a maximum period of six (6) months.6.7.d. Death or Departure Exception. -- In situations involving the death or unanticipated departure of a person occupying a key management position in the business, an investor, director, officer or employee of the Qualified Company may serve as an interim replacement of that person for a maximum period of six (6) months. 6.8. Conflict of Interest. -- No officer, member, or employee of the Authority shall be financially interested, directly or indirectly, in any Qualified Company.6.9. Limitation on Financial Institutions. 6.9.a. No more than forty-nine percent (49%) of the total capital base of any Qualified Company which is not a SBIC may be owned by banks, savings and loan associations, savings banks, or other financial institutions, or any affiliate thereof, as investors. For the purposes of Subsection 6.9 of this Rule, "total capital base" means the total of all the capital bases designated as qualified by the Authority.6.9.b. The following are "affiliates" of a bank, savings and loan association, savings bank, or other financial institution for purposes of Subsection 6.9 of this Rule and W. Va. Code § 5E-1-20: 1. A holding company of the financial institution;2. A wholly owned subsidiary of the financial institution;3. A corporation, partnership or other entity of which the financial institution has majority ownership; or4. A member of the same controlled group (as defined for federal income tax purposes) as the bank, savings and loan association, savings bank, or other financial institution.6.9.c. No officer, employee, or director of a financial institution, or any affiliate thereof, may vote as a member of the board of any Qualified Company which is not a SBIC, if the matter being voted on affects the financial institution for which the board member served as an officer, employee or director. If the Qualified Company is not a corporation, then the restriction also applies to the managing body of the Qualified Company.6.10. Sale or Liquidation of Qualified Investments.6.10.a. Maintenance of Investment. -- A Qualified Company shall maintain its Qualified Investments for a period of at least five (5) years, except that a Qualified Company receiving repayment or return of a Qualified Investment (exclusive of interest, dividends or other earnings on the investment) shall reinvest the company's repaid or returned cost basis in the investment in a Qualified Investment which remains outstanding for a period of time at least equal to the remainder of the initial five-year term, with reinvestment to be made within twenty-four (24) months from the date of repayment or return, unless a waiver is obtained from the Authority prior to the end of the twenty-four (24) month period; provided that, the returned amounts may be accumulated for six (6) months before the aforesaid twenty-four (24) month period commences; and, provided further, however, that this Subsection does not apply to Qualified Investments made by a Qualified Company which is a SBIC on a date on or after June 13, 2001. 1. Debt Investment. -- For purposes of Subdivision 6.10.a of this Rule and W. Va. Code § 5E-1-12(b), a debt investment, as defined at Subsection 2.10 of this Rule, is considered to be "maintained" for the required five-year period (i) to the extent of the amount written off, when the debt investment becomes uncollectible and is written-off by the Qualified Company; (ii) to the extent of amounts repaid, when the unpaid balance is subsequently written-off and installment payments received by the Qualified Company each year did not exceed thirty percent (30%) of the original principal balance or, if the payments did exceed the thirty (30%) limit, they were determined by a normal amortization schedule based upon at least a five (5) year term; or (iii) to the extent of the entire investment, when the debt investment is not repaid in full for at least five (5) years and installment payments received by the Qualified Company each year during the required five-year period do not exceed thirty percent (30%) of the original principal balance, except that installment payments received by the Qualified Company each year during the required five-year period may exceed thirty percent (30%) of the original principal balance if the installment payments are determined by a normal amortization schedule. If a Qualified Company receives installment payments during any one year of the required five-year period, not determined by a normal amortization schedule, which exceed thirty percent (30%) of the original principal balance of the debt investment, or if a Qualified Company receives repayment in full of a debt investment prior to the end of the five (5) year period, the Qualified Company shall reinvest all repaid principal pursuant to Subdivision 6.10.a of this Rule and W. Va. Code § 5E-1-12(b), but the amount of any remaining unpaid principal balance remain a Qualified Investment and need not be reinvested if thereafter maintained in compliance with this Rule and the Act. For purposes of Subdivision 6.10.a of this Rule, "normal amortization" represents the regular and equal payment necessary to be made at the end of each period that will repay both the interest on the loan and the original loan amount.EXAMPLE 1:A. Qualified Company makes a $100,000.00 qualified debt investment with a stated maturity date of five (5) years in XYZ, a West Virginia Business. XYZ makes payments to Qualified Company so that the following amounts of the principal balance are repaid in the first two (2) years: Year 1: $10,000.00 principal repaid
Year 2: $31,000.00 principal repaid
B. The repayment of $31,000.00 of principal in Year 2 violates the thirty percent (30%) limitation in Paragraph 6.10.a.1 of this Rule if the payment would exceed payments under a normal amortization schedule.C. Given that the Year 2 payments exceed payments under a normal amortization schedule, Qualified Company would be required to reinvest $41,000.00 (principal payments received in Years 1 and 2) pursuant to Subdivision 6.10.a of this Rule and W. Va. Code § 5E-1-12(b). The remaining $59,000.00 in principal owed would remain a Qualified Investment as long as the provisions of this Rule and the Act are followed. EXAMPLE 2:A. Qualified Company makes a $100,000.00 qualified debt investment with a stated maturity date of five (5) years in XYZ, a West Virginia Business. XYZ makes payments to Qualified Company so that the following amounts of the principal balance are repaid in the first four (4) years: Year 1: $25,000.00 of principal repaid
Year 2: $25,000.00 of principal repaid
Year 3: $25,000.00 of principal repaid
Year 4: $25,000.00 of principal repaid
B. The repayment of principal in Years 1 - 4 does not violate the thirty percent (30%) limitation of Paragraph 6.10.a.1 of this Rule. However, since the entire principal balance has been repaid by the end of Year 4, the investment has not been maintained for at least five (5) years and, therefore, must be reinvested pursuant to Subdivision 6.10.a of this Rule and W. Va. Code § 5E-1-12(b). EXAMPLE 3:A. Qualified Company makes a $100,000.00 qualified debt investment with a stated maturity date of five (5) years in XYZ, a West Virginia Business. XYZ makes payments to Qualified Company so that the following amounts of the principal balance are repaid in the first two (2) years: Year 1: $10,000.00 principal repaid
Year 2: $15,000.00 principal repaid
B. In Year 3, the remaining $75,000.00 of principal due on this debt investment becomes uncollectible and is written-off by Qualified Company as a bad loan. The entire debt investment is considered maintained for the required five-year period and no reinvestment of any portion of this investment is required.2. Early Repayment. -- A Qualified Company which is unable to maintain a Qualified Investment for the required five-year period due to voluntary repayment of the investment in full by the West Virginia business in advance of the required five-year period, repayment in advance of the required five-year period due to default by the West Virginia business and acceleration of the loan, or otherwise, shall reinvest its repaid or returned cost basis in the investment as is required by W. Va. Code § 5E-1-12(b) and Subdivision 6.10.a of this Rule.3. Equity Investment. -- For purposes of Subdivision 6.10.a of this Rule and W. Va. Code § 5E-1-12(b), an equity investment, as defined at Subsection 2.16 of this Rule, is considered to be "maintained" for the required five-year period, to the extent of the amount not recovered and written-off, upon the dissolution, liquidation or other termination of operations of the West Virginia business.4. Waiver. -- A Qualified Company desiring a waiver from the Authority of its obligation to reinvest its repaid or returned cost basis from a Qualified Investment which has not been maintained for the required five-year period pursuant to W. Va. Code § 5E-1-12(b) and Subdivision 6.10.a of this Rule shall request a waiver in writing and send the request by certified mail to the Authority at the following address: West Virginia Economic Development Authority, NorthGate Business Park, 160 Association Drive, Charleston WV 25311-1217. The request shall contain the name, mailing address, and telephone number of a person that can be contacted by the Authority for further information concerning the request. The Qualified Company shall provide any additional information requested by the Authority regarding a waiver request.6.10.b. Sale or Liquidation. -- A Qualified Company may sell or liquidate a Qualified Investment which has been maintained for the required five-year period; however, the initial cost basis of the Qualified Investment shall be maintained or invested by the Qualified Company in one or more of the following:1. Qualified Investments;2. Bank accounts and financial institutions which are located in the State of West Virginia; and3. Other interest bearing instruments with a maturity of less than one (1) year which are obtained from and managed by a West Virginia corporation, as defined in Subdivision 3.2.c of this Rule.6.11. Equity Capitalization Over Four Million Dollars. -- If a Qualified Company raises capital in excess of Four Million Dollars in a fiscal year, the capital in excess of Four Million Dollars does not constitute a part of the capital base of the company and is not subject to the restrictions and requirements of Section 6 of this Rule.6.12. Compliance of SBICs with Qualified Company Status.A Qualified Company with SBIC status shall at all times remain in full compliance with the provisions of the Act and this Rule applicable to Qualified Companies which are SBICs, as well as with the provisions of the Small Business Investment Act, 15 U.S.C. §§ 661 et seq., as amended, and the federal regulations promulgated under that Act.