The "New Jersey Innovation Evergreen Act" auctions tax credits for cash that will be used to invest in innovation as a catalyst for economic growth and advance the competitiveness of the State’s businesses in the global economy. The Economic Development Authority (EDA) must auction up to $300 million in tax credits in annual amounts not to exceed the limitations established by this bill.
Some pertinent terms defined in the bill include:
“Follow-on investment” A subsequent investment made by an investor who has a previous investment in a New Jersey high-growth business.
“High-growth business” A business that is growing significantly faster than the average growth rate of the economy. Or a start-up company that is investing in developing a product or new business model that will allow it to grow significantly faster than the average growth rate of the economy within the next three to five years.
“Incentive area” An area in this state: (1) designated pursuant to the State Planning Act, as Planning Area 1 (Metropolitan); or (2) that has been designated as a qualified Opportunity Zone.
“Innovation ecosystem” Funding, programs, and events that support the establishment and expansion of high-growth companies in targeted sectors. Examples of such funding, programs, and events include: mentoring programs for start-ups, meet-up or networking events, funding for locating a business in a collaborative workspace, programs that provide businesses services, and entrepreneurial education to companies.
“Principal business operations” At least 50% of the business’s employees, who are not primarily engaged in retail sales, reside in the state, or at least 50% of the business’s payroll for employees not primarily engaged in retail sales is paid to individuals living in this state.
“Purchaser” An entity registered to do business in this state with the Director of the Division of Revenue and Enterprise Services in the Department of the Treasury that purchases an allocation of tax credits under the program.
“Qualified business” A business that, at the time of the first qualified investment in the business and throughout the period of the qualified investment under the program, is registered to do business in this state with the Director of the Division of Revenue and Enterprise Services in the Department of the Treasury. Its principal business operations are located in the state and it intends to maintain its principal business operations in the state after receiving a qualified investment under the program. A business engaged in a targeted industry and employs fewer than 250 persons at the time of the qualified investment.
“Qualified investment” The direct investment of money by the fund in a qualified business for the purchase of shares of stock, with an additional investment in an option, warrant, or a follow-on investment, in the discretion of the authority, all matched by an investment by a qualified venture firm.
“Special purpose vehicle” An entity controlled by or under common control with a venture firm that is formed solely for the purpose of investing in a New Jersey high-growth business alongside the venture firm.
“Targeted industry” Any industry identified by the authority that initially includes advanced transportation and logistics, advanced manufacturing, aviation, autonomous vehicle and zero-emission vehicle research or development, clean energy, life sciences, hemp processing, information and high technology, finance and insurance, professional services, film and digital media, non-retail food and beverage businesses including food innovation, and other innovative industries that disrupt current technologies or business models.
“Venture firm” A partnership, corporation, trust, or limited liability company that invests cash in a business during its early or expansion stages in exchange for an equity stake. Venture firm may include a venture capital fund, a family office fund, or a corporate investor fund, provided that a professional manager administers the venture firm.
A-4 establishes the NJ Innovation Evergreen Fund to allocate the funds to qualified venture firms to make qualified investments of capital in qualified businesses through a special purpose vehicle.
EDA is required to sell tax credits to purchasers through a competitive auction process.
A potential purchaser must:
- Specify tax credits amounts, but not less than $1,000,000. They will pay in exchange for requested amount of tax credits, which cannot be less than 85% of the requested dollar amount of tax credits.
- Commit to serve on the New Jersey Innovation Evergreen Advisory Board.
- Provide mentorship, networking, and collaboration opportunities to qualified businesses that receive funding under the program.
- Provide any other information deemed necessary by EDA.
Purchases must enter into a contract with the EDA that includes payment information and the commitments made by the purchaser in its auction bid. A purchaser must apply a credit awarded against the State tax liability due of the purchaser for the current privilege period as of the date of the credit's approval. A purchaser may carry forward an unused credit resulting from the limitations, if necessary, for use in the seven periods next following the period for which the credit is awarded.
EDA is required to establish an application process and determine the form and manner through which a venture firm may make and file an application for certification as a qualified venture firm. In evaluating applicants for certification as a qualified venture firm, EDA must establish weighted evaluation criteria with a minimum acceptable score. The legislation establishes the minimum benchmark for the evaluation criteria.
EDA must also establish a criteria to determine certification or basis of refusal of certification. EDC cannot certify a venture firm as a qualified venture firm if the venture firm has:
(1) An equity capitalization, net assets, or written commitments of less than $10,000,000 in the form of cash or cash equivalents on the date the determination for certification is made.
(2) Fewer than two principals or persons employed to direct the qualified investment of capital with at least five years of money management experience in the venture capital or private equity sectors on the date the determination for certification is made.
EDA is authorized to allocate money credited to the fund to one or more qualified venture firms for qualified investments at the times, in the amounts, and subject to the terms and conditions that the authority will determine to be necessary and appropriate. Each qualified investment cannot exceed $5 million in initial investment, exclusive of follow-on investments.
However, if a qualified investment is in a business: (a) which utilizes intellectual property that is core to the its business model and was developed at a New Jersey-based college or university; (b) is considered a university spin-off business as determined by EDA; or (c) is certified by the State as a “minority business” or a “women’s business,” then the qualified investment cannot exceed $6.25 million in initial investment, exclusive of follow-on investments.
EDA has a goal for 25% of the monies to be allocated to qualified investment firms investing in businesses located in opportunity zones.
The qualified venture is required to submit an annual report to the EDA.
The legislation also establishes the New Jersey Innovation Evergreen Advisory Board in, but not of, EDA to provide guidance and networking opportunities to qualified businesses. The board members, serving in a voluntary capacity, will be appointed by EDA from the purchasers and other strategic partners identified by the chief executive officer, to support the State’s innovation ecosystem.
EDA will be required to prepare biannual reports on the program submitted to the Governor and Legislature. The report must include:
- The names and locations of qualified businesses receiving capital
- The amount of each qualified investment
- A report by a certified public accountant of the consolidated performance of the fund
- The cumulative amount of capital committed by purchasers
- The rate and amount of fees charged by each qualified venture firm, including performance-based earnings and carried interest; the classification of each qualified business according to the industrial sector and the size of the qualified business; the State’s return on investment; the total number of jobs created in the State by the qualified business after the qualified investment; the average wages paid for the jobs; and any other metrics the authority determines are relevant based upon national best practices.
The legislation authorizes EDA to implement regulations for 180 days then go through the normal rule making process.
Contact: Lori Buckelew, Assistant Executive Director, lbuckelew@njlm.org, 609-695-3481, x112