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To encourage investments in new business ventures, traditionally more risky than established businesses, Oklahoma officials created two Capital Formation Incentive Acts to offset up to 30% of the investor risk, using tax credits.

The acts are:

  • Small Business Capital Formation Incentive Act. Eligible for 20% in tax credits.
  • Rural Venture Capital Formation Incentive Act. Eligible for 30% in tax credits.

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Basics

Tax credit allowed: 20% of amount invested for urban investments (counties with >100,000 people)

Tax credit allowed: 30% credit of amount invested for rural investments (counties <100,000  people)

Has a capitalization of not less than 1 million dollars, (or 500 thousand for the rural credit)

Has not invested more than 20% of its capitalization (25% for rural tax credits) in any one company at any one time

 

End investment must be to qualifying Oklahoma small business venture that:

Needs financial assistance to commence or expand such business which provides or intends to provide goods or services

Qualifies as a "small business" under Small Business Administration guidelines

Is not primarily engaged in oil & gas exploration, real estate development, real estate sales or rentals, wholesale sales, retail sales, farming, ranching, banking, or lending or investing funds in other businesses.

Has a Standard Industrial Classification code under any Major Group Number of Divisions A, C, D, E, F or I, with the following exceptions:

  • Major Group 1 of Division A
  • Major Group 2 of Division A

Expends at least 50% of the proceeds of the qualified investment for the acquisition of tangible or intangible assets within 18 months after the date of the qualified investment

For the rural tax credit, the principal place of business must also be located within a Nonmetropolitan area of the state & deriving 75% of its gross revenue from a NMA.

Small business venture may not use invested funds to acquire 51% or more of any other legal entity within six months of investment.

See for yourself. For complete details download the act in PDF format. Download

Here are two of several important angles to be aware.

  1. Money at risk: means exactly that. The amount of the investment investors could loose if the venture fails.
  2. The fact tax credits are used is very significant.

The idea behind the Capital Formation Incentive Act was to create jobs. The rationale behind these programs is creating jobs boosts the economy and increased taxes make up for the costs. A valid approach, assuming the jobs are actually created? In the case of Oklahoma, no requirements are placed on a venture that jobs actually be created! Just here's the money, do with what you please. Those receiving the money have no obligations.

The normal and responsible method, used by most states, to insure jobs are actually created, is to pay the risk offset out as it is incurred. One effective way this works is allowing the employer to keep a percent of the payroll taxes they collect for the state. This allows the business to operate with less funds and the state only pays for an actual job created.

The investors are better off, because they only have to put up 70% to start. Rather than put up 100% and get 30% back. This doesn't penalize the business because they get the benefit when needed.

This is ordinary responsible day to day management techniques that has been in use world wide, for centuries.

Yet Oklahoma's Governor and State Lawmakers disregarded its most fundamental responsibility to protect the public's interest.

Simple oversights? Or,

State protected captive market?

The act requires that any business venture wishing to participate in this program must go through one of a small but very select group of crony Oklahoma "Venture Capital Companies." Only these "Venture Capital Companies" are eligible to apply for the tax credits. These "Venture Capital Companies" These crony "Venture Capital Companies" then use the tax credits to lure investors. In the end the "Venture Capital Companies" not only realize a huge windfall profit, all paid by the Oklahoma taxpayer, the "Venture Capital Company," not the investors, own a sizeable portion of every successful business. In theory this small group could own and control virtually all of Oklahoma's new business growth.

State subsidized money tree!

Hard to imagine when you read the bill, and see there were several issues that were covered in lengthy and specific detail.

  • The criteria for a venture capital company to participate is written in a way to exclude all but a very small group of crony venture capital companies.
  • That only the wealthy can participate.
  • The most lengthy and detailed part of the bill is to protect the names and amounts of those receiving tax credits.

In addition to the protection the act gives

Unrestricted access!   Unlimited tax credits!   Free of laws to violate!

While void of the most fundamental protection for the public:

No transparency!   No benchmarking!  
  No accountability! No program oversight!

For your convenience we have provided a link to the complete "Capital Formation Incentive Act".

We encourage you to read the act for yourself, but don't expect to find highlighted wording stating "this is how we are going to cheat the tax payers." A catty remark to emphasize the point, that the scheme is obviously very well disguised. Part of disguise is the document is extremely wordy, 86 pages, with a lot of redundancy. The first pages are one sentence with wording repeated over and over.

The key is to look for what is missing as mentioned elsewhere. Borrowing the words of David Hariton, a tax partner at law firm Sullivan & Cromwell in New York, "They hide the ball within a matrix of boiler-plate recitations of complex regulations."

To read online go to the following Website and search for Senate Bill 1577 passed in 2006.    Go search

To download in PDF format. Download

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