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Investment firms seek changes to controversial $42M incentive program


PROVIDENCE, R.I. (WPRI) – A group of rebuffed investment companies is urging state regulators to loosen rules proposed for a controversial $42 million incentive program that the Raimondo administration has characterized as posing “imminent peril” to taxpayers’ money.

Advantage Capital, Enhanced Capital and Stonehenge Capital — three out-of-state investment firms trying to make in-roads into the so-called Small Business Development Fund — have submitted testimony to the R.I. Commerce Corp., asking the quasi-public agency to reconsider rules drafted for the program.

“We are hopeful that with the right changes to the proposed regulations, we can successfully raise a fund in Rhode Island and help continue to grow the Ocean State’s small businesses and startups,” Chloe Coniaris, an associate of Advantage Capital, said in submitted testimony.

Commerce officials have not been shy about their efforts to make it difficult for companies to qualify for the business incentive program, which has become a point of contention between Gov. Gina Raimondo and her fellow Democrats in the General Assembly.

Legislative leaders successfully championed the new program last year, arguing it would create a new funding source for the state’s cash-strapped small-business community, and offer an alternative to the suite of economic development tools rolled out under Raimondo.

The second-term governor, however, has been sharply critical of the program, saying it would only benefit out-of-state companies and could result in another deal like 38 Studios, the video game company that went bust after receiving a $75 million taxpayer-backed loan. The failed deal is still making headlines today.

Commerce went so far as to describe the incentive program as posing “imminent peril to the prudent investment of the state’s funds and taxpayers’ dollars,” according to documents submitted in support of the new rules.

Under current law, qualified investment firms put money into a fund that provides capital to small businesses. In addition to profiting off whatever returns the business generates, the investors also benefit from state tax credits totaling about 64 cents of every dollar.

The state recaptures some of the investment if the business does well, but Rhode Islanders are on the hook for up to $14 million a year in tax credits for investors, according to the Senate Fiscal Office.

When the program became law last year, Commerce — at Raimondo’s directive — quickly implemented emergency rules that set a high bar for investment firms to qualify to participate. The three firms currently seeking more lenient rules applied to participate, but were rejected in December after Commerce determined they failed to meet the required qualifications. (Two of the companies had lobbied lawmakers for the creation of the program.)

“At this time, we are unable to move your application to the next phase of the certification process as it is incomplete,” Commerce president and CEO Jesse Saglio wrote in letters dated Dec. 20. “As the application has been found incomplete, it is denied as of the date of this letter.”

The new rules – currently in a public-comment period – would replace the emergency regulations, formalizing the high bar. The companies are pushing back. Bill Fischer, a spokesperson for the companies, said the current rules make it impossible to participate.

“We are not seeking more lenient rules. We are seeking implementation of the law,” Fischer said. “The regulations as proposed make the program inoperable.”

Coniaris, whose firm operates in about 30 states, said the two biggest areas of concern are a bonding requirement and a condition that applicants comply with global investment performance standards known as GIPS.

The bonding requirement – which would require applicants to file a high-rated bond or other surety accepted by Commerce that equals the amount of tax credits sought in the deal – is unusual in Rhode Island, according to Coniaris, and would have a negative impact on the economy.  

“This new requirement is not authorized in the statute nor found in other Commerce economic development incentive programs,” she said. “Nowhere else is an applicant required to file a financial guarantee bond in the amount of the tax credits sought by the applicant.”

Carling Dinkler, vice president of Enhanced Capital, cited a regulatory analysis accompanying the draft rules that estimated the bonding requirement would cost fund managers $193,500 to $967,000 each year.  

Coniaris argues the company’s second concern, the global set of investment performance standards, is unreasonable because it does not require applicants to have invested $100 million in nonpublic companies as currently required in the law. Such a safeguard is important, Coniaris added.

“There is no federal or state requirement for private equity and venture capital funds to comply with GIPS, and many funds across the country have not chosen to do so at this point,” she said.

Dinkler also argued that the GIPS requirement did not come up during any of the four legislative hearings held during consideration of the new incentive programs last year in the House and Senate.  

“As we have stated previously, the statute does not require program applicants to demonstrate compliance with GIPS,” Dinkler said in submitted testimony.

Enhanced Capital cited several other issues with the proposed regulations, including strict rules surrounding bank referrals, letters of support from governmental agencies and Commerce oversight of investments. Stonehenge Capital officials, meanwhile, testified in person on Tuesday and plan to file written testimony, according to a spokesperson.

How much the investors’ concerns are taken into consideration largely depends on how much the arguments resonate with Commerce officials. Commerce spokesperson Matt Sheaff on Wednesday said regulators already made slight changes to the bonding and GIPS requirements before issuing the final rules proposal.

But he underscored that regulators could still consider further changes, adding that the period for public comment is open until Feb. 28.

When the public comment period ends, regulators will consider testimony in the weeks following and then make a final determination. There’s no hard timeline for when that decision will be made, but the emergency regulations currently in place expire at the end of March.

“We’re going to analyze all comments after the 28th and make a decision after that,” Sheaff said.

Eli Sherman ( is a Target 12 investigative reporter for WPRI 12. Follow him on Twitter and on Facebook.

Copyright 2020 Nexstar Broadcasting, Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


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