Report Title:

Innovations Research and Development; Capital Investments

Description:

Establishes innovations research and development grant program in HTDC; merges the HSDC into the HTDC; establishes new part in HTDC statute to ensure continuity of HSDC programs and investments; unspecified appropriations. (SD1)

HOUSE OF REPRESENTATIVES

H.B. NO.

2181

TWENTY-THIRD LEGISLATURE, 2006

H.D. 2

STATE OF HAWAII

S.D. 1


 

A BILL FOR AN ACT

 

relating to economic Development.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

PART I

SECTION 1. The legislature finds that, during this robust economy, long-range planning is essential to ensure that Hawaii's economy is diversified, provides high-paying jobs to retain the best and brightest of its children, and can sustain growth into the future. The legislature finds that emerging Hawaii-based entrepreneurs in the fields of high technology, life sciences, and renewable energy represent the future for Hawaii. These types of enterprises are poised at the earliest stages of product development and need public financial support to move to the next level on the road to commercial success.

The purpose of this Act is to aggressively jump-start a new economy in Hawaii based upon high technology, life sciences, and renewable energy by establishing funds within the high technology development corporation to invest in these entrepreneurial ventures and by streamlining the State's high technology development bureaucracy by combining the high technology development corporation and the Hawaii strategic development corporation into one entity.

PART II

SECTION 2. Chapter 206M, Hawaii Revised Statutes, is amended by adding three new sections to be appropriately designated and to read as follows:

"§206M-A Innovations research and development grant program. (a) The development corporation shall establish a research and development grant program to provide:

(1) Startup funding for major research and development initiatives;

(2) Seed capital to develop a commercially viable new idea for a product or service in the fields of high technology, life sciences, or renewable energy; and

(3) Technical business support to projects funded by the grant program.

(b) Grants shall be awarded to Hawaii-based research institutions and enterprises through a competitive process and reviewed by technical advisory committees with subject matter expertise.

(c) The criteria for the award of grants for major research and development initiatives shall include:

(1) Commercialization potential of research;

(2) Industry participation;

(3) Ability to leverage non-state funds for on-going operations; and

(4) Overall business and scientific merit based upon expert review.

(d) The criteria for the award of grants for seed funding of product or service ideas shall include:

(1) Market need for the product or service;

(2) Commercial viability;

(3) Development timeline;

(4) Ability to receive matching funding from other sources;

(5) Potential to return within seven years revenue or profit sharing, royalties, license fees, or other income equal to three times the amount of the initial grant; and

(6) Potential to provide high-paying jobs for residents.

(e) The technical advisory committees shall make recommendations to the development corporation on grant awards, which shall be approved by a majority of the quorum of the board of directors of the development corporation or rejected by a two-thirds majority of the board. Startup funding for major research and development initiatives shall not exceed $3,000,000 per grant and may be allocated over two or more years. Seed capital grants shall not exceed $250,000 for a project. No additional funding shall be awarded except upon demonstrated progress toward product development and commercial success.

§206M-B Cooperation with the development corporation by state agencies. Every state agency may render services to the development corporation upon request of the development corporation.

§206M-C Annual audit. The books and records of the development corporation shall be subject to an annual audit by an independent auditor."

SECTION 3. Section 206M-1, Hawaii Revised Statutes, is amended by adding four new definitions to be appropriately inserted and to read as follows:

""Life sciences" means biology, cancer research, community healthcare, ocean sciences, agriculture, pharmacology, biotechnology, medical technology, or related fields.

"Renewable energy" means new and emerging technologies to produce electrical energy, without the use of fossil fuels, by wind, solar energy, hydropower, landfill gas, waste to energy, geothermal resources, ocean thermal energy conversion, wave energy, biomass, including municipal solid waste, biofuels, or fuels derived from organic sources, hydrogen fuels derived from renewable energy, or fuel cells where the fuel is derived from renewable sources.

"Seed capital" means:

(1) Financing provided for the earliest stage of business development that enables a project or idea to develop into a business;

(2) Equity or loan capital provided for a new or existing business undertaking;

(3) Funding to develop a concept or product idea to the state at which its practical and commercial viability can be assessed; and

(4) Funds invested in new and young companies that have not yet fully established commercial operations.

"Venture capital investment" means any of the following investments in a business:

(1) Common or preferred stock and equity securities without a repurchase requirement for at least five years;

(2) A right to purchase stock or equity securities;

(3) Any debenture or loan, whether or not convertible or having stock purchase rights, which are subordinated, together with security interests against the assets of the borrower, by their terms to all borrowings of the borrower from other institutional lenders, and that is for a term of not less than three years, and that has no part amortized during the first three years; or

(4) General or limited partnership interests."

SECTION 4. Section 206M-1, Hawaii Revised Statutes, is amended by amending the definition of "high technology" to read as follows:

""High technology" means industries that are technology-intensive, including but not limited to electronics, biotechnology, software, computers, telecommunications, digital media, sensor and optic technology, information technologies, and other computer-related technologies."

SECTION 5. Section 206M-2, Hawaii Revised Statutes, is amended to read as follows:

"§206M-2 Establishment of the high technology development corporation; purpose. (a) There is established the high technology development corporation, which shall be a public body corporate and politic and an instrumentality and agency of the State. The development corporation shall be placed within the department of business, economic development, and tourism for administrative purposes, pursuant to section 26-35. The purpose of the development corporation shall be to facilitate the growth and development of the commercial high technology industry in Hawaii. Its duties shall include, but not be limited to:

(1) Developing and encouraging industrial parks as high technology innovation centers and developing or assisting with the development of projects within or outside of industrial parks, including participating with the private sector in such development;

(2) Providing financial and other support and services to Hawaii-based high technology companies;

(3) Collecting and analyzing information on the state of commercial high technology activity in Hawaii;

(4) Promoting and marketing Hawaii as a site for commercial high technology activity; and

(5) Providing advice on policy and planning for technology-based economic development.

(b) The governing body of the development corporation shall consist of a board of directors having [eleven] fifteen voting members. [Seven] Eleven of the members shall be appointed by the governor for staggered terms pursuant to section 26-34. [Six of the] Of the eleven members appointed by the governor, three shall be appointed from a list of nominees submitted by the president of the senate and three shall be appointed from a list of nominees submitted by the speaker of the house of representatives. The appointed members shall be from the general public and selected on the basis of their knowledge, interest, and proven expertise in, but not limited to, one or more of the following fields: finance, commerce and trade, corporate management, marketing, economics, engineering, [and] telecommunications, [and other high technology fields. The other appointed member shall be selected from the faculty of the University of Hawaii.] high technology, life sciences, or renewable energy technologies. All appointed members of the board shall continue in office until their respective successors have been appointed. The director of business, economic development, and tourism, the director of finance, [an appointed member from the board of the Hawaii strategic development corporation,] the president of the University of Hawaii, and an appointed member from the board of the natural energy laboratory of Hawaii authority, or their designated representatives, shall serve as ex officio voting members of the board. [The director of business, economic development, and tourism shall serve as the chairperson until such time as a chairperson is elected by the board from the membership.] The board shall elect [such] the chairperson of the board and other officers as it deems necessary.

(c) A board member shall not participate in any development corporation decision to invest in, purchase from, sell to, borrow from, loan to, contract with, or otherwise deal with any person with whom or entity in which the board member has a substantial financial interest.

[(c)] (d) The members of the board appointed under subsection (b) shall serve without compensation, but may be reimbursed for expenses, including travel expenses, incurred in the performance of their duties.

[(d)] (e) The board shall appoint a chief executive officer, who shall serve at the pleasure of the board and shall be exempt from chapter 76. The board shall set the salary and duties of the executive officer.

[(e)] (f) The board shall appoint a management advisory committee for each industrial park and related project or projects governed by the board. Each committee shall have five members, who shall serve without compensation but may be reimbursed for expenses incurred in the performance of their duties. The members shall be drawn from fields of activity related to each industrial park and related project or projects.

(g) A majority of all members of the board shall constitute a quorum to do business. Notwithstanding section 92-15, and except as provided in sections 206M-I and 206M-M, the board's decisions shall be made based upon majority vote of the quorum, except that decisions to reject recommendations from technical advisory committees relating to research and development grants pursuant to section 206M-A shall be made based upon a two-thirds majority of the board."

SECTION 6. Section 206M-15.6, Hawaii Revised Statutes, is amended to read as follows:

"[[]§206M-15.6[] Hawaii] High technology [loan revolving] research and grant special fund. (a) There is established the [Hawaii] high technology [loan revolving] research and grant special fund for the purpose of investing in technology development in Hawaii[.] through the innovations research and development grant program established pursuant to section 206M-A. The following shall be deposited into the [Hawaii] high technology [loan revolving] research and grant special fund:

(1) Appropriations from the legislature;

[(2) Moneys received as repayments of loans;

(3)] (2) Investment earnings; and

[(4) Royalties;

(5) Premiums, or fees or equity charged by the corporation, or otherwise received by the corporation; and

(6) Loans that are convertible to equity;]

(3) Any gifts, donations, or other sources of income that the special fund may receive;

provided that the total amount of moneys in the fund shall not exceed [$2,000,000] $           at the end of any fiscal year.

(b) Subject to legislative appropriation, the development corporation may expend moneys in the fund for the innovations research and development grant program pursuant to section 206M-A, including costs to administer the program; provided that the expenditures shall not exceed $           in any fiscal year."

SECTION 7. (a) The high technology development corporation shall develop a master plan for the direction of high technology in the State, which shall include:

(1) A list of goals established for the high technology sector in the State;

(2) A plan to reach the established goals; and

(3) A timeline for implementation and completion.

(b) The high technology development corporation shall submit the master plan and a report, including proposed legislation, to the legislature and the governor, not later than twenty days prior to the convening of regular session of 2007, and shall issue an updated report every December thereafter that reassesses the master plan.

SECTION 8. There is appropriated out of the general revenues of the State of Hawaii the sum of $          , or so much thereof as may be necessary for fiscal year 2006-2007 to be deposited into the Hawaii technology loan revolving fund.

SECTION 9. There is appropriated out of the Hawaii technology loan revolving fund the sum of $          , or so much thereof as may be necessary for fiscal year 2006-2007 to be used for the purposes of this part.

The sum appropriated shall be expended by the high technology development corporation for the purposes of this part.

PART III

SECTION 10. Chapter 206M, Hawaii Revised Statutes, is amended by adding a new part to be appropriately designated and to read as follows:

"Part . STRATEGIC DEVELOPMENT

A. General Provisions

§206M-D Definitions. As used in this part:

"Economic development project" means an endeavor related to industrial, commercial, or advanced technology-based agricultural enterprise. Economic development project shall not include that portion of an endeavor devoted to the construction of housing.

"Enterprise" means a person with a place of business in Hawaii that is, or proposes to be, engaged in business in Hawaii, provided that the endeavor shall not be devoted to the sale of goods at retail, construction of housing, or tourism- related services.

"Minority-owned businesses" means businesses at least fifty per cent owned, controlled, and managed by socially or economically disadvantaged persons.

"Person" means a sole proprietorship, partnership, joint venture, corporation, or other association of persons organized for commercial or industrial purposes.

"Professional investor" means any bank, bank holding company, savings institution, trust company, insurance company, investment company registered under the Federal Investment Company Act of 1940, financial services loan company, pension or profit-sharing trust or other financial institution or institutional buyer, licensee under the Federal Small Business Investment Act of 1958, or any person, partnership, or other entity of whose resources a substantial amount is dedicated to investing in securities or debt instruments and whose net worth exceeds $250,000.

§206M-E High technology development corporation; purpose under this part. (a) The purpose of the development corporation under this part shall be to encourage economic development and diversification in Hawaii through innovative actions in cooperation with private enterprises. The development corporation shall establish programs to stimulate private capital investment in Hawaii toward investments that promote the welfare of citizens in this State, economic growth, employment, and economic diversification.

(b) The development corporation may use public funds to provide incentives to private investment activity, by co-investing public funds in private financial organizations to increase the impact of the public investment, while utilizing the investment acumen of the private sector, and by using public funds to reduce the risks of private investments. The development corporation shall have the flexibility to provide various types of financial assistance. When providing financial assistance, the development corporation shall make provision for the recovery of its expenditures, to the extent practicable.

§206M-F Powers of the development corporation. (a) In addition to the powers authorized under section 206M-3, the development corporation shall have all of the powers necessary to carry out its purposes that shall include but not be limited to the power to:

(1) Finance, conduct, or cooperate in financing or conducting technological, business, financial, or other investigations that are related to or likely to lead to business and economic development by making and entering into contracts and other appropriate arrangements, including the provision of loans, start-up and expansion capital, and other forms of assistance;

(2) Solicit, study, and assist in the preparation of business plans and proposals;

(3) Provide advice and technical and marketing assistance, support, and promotion to enterprises in which investments have been made;

(4) Coordinate the development corporation's programs with any education and training program;

(5) Carry out specialized programs designed to encourage the development of new products, businesses, and markets;

(6) Prepare, publish, and distribute technical studies, reports, bulletins, and other materials as it deems appropriate, subject only to the maintenance and respect for confidentiality of client proprietary information;

(7) Organize, conduct, sponsor, or cooperate in and assist in the conduct of conferences, demonstrations, and studies relating to the stimulation and formation of businesses and to fulfilling the objectives and purposes of chapter 211G;

(8) Provide and pay for advisory services and technical, managerial, and marketing assistance, support, and promotion as may be necessary or desirable to carry out the purposes of this part;

(9) Acquire, hold, and sell qualified securities;

(10) Consent, subject to the provisions of any contract with noteholders or bondholders, whenever the corporation deems it necessary or desirable in the fulfillment of the purposes of this part, to the modification, with respect to rate of interest, time of payment of any installment of principal or interest, or any other terms, of any contract or agreement of any kind to which the development corporation is a party;

(11) Accept donations, grants, bequests, and devises of money, property, service, or other things of value that may be received from the United States or any agency thereof, any governmental agency, or any public or private institution, person, firm, or corporation, to be held, used, or applied for any or all of the purposes specified in this part. Receipt of each donation or grant shall be detailed in the annual report of the development corporation. The report shall include the identity of the donor or lender, the nature of the transaction, and any conditions attaching thereto;

(12) Invest any funds held in reserves or sinking funds, or any funds not required for immediate disbursement, in these investments as may be lawful for fiduciaries in the State;

(13) Acquire real property, or an interest therein, by purchase or foreclosure, where that acquisition is necessary or appropriate to protect or secure any investment or loan in which the development corporation has an interest, and sell, transfer, and convey the property to a buyer and, if the sale, transfer, or conveyance cannot be effected with reasonable promptness or at a reasonable price, to lease the property to a tenant;

(14) Acquire, own, hold, dispose of, and encumber personal property of any nature, or any interest therein;

(15) Enter into agreements or other transactions with any federal, state, or county agency;

(16) Make contracts and execute all instruments necessary or convenient for the carrying on of its business;

(17) Appear in its own behalf before state, county, or federal agencies;

(18) Procure insurance as may be necessary;

(19) Appoint officers, including a chief investment officer, employees, consultants, agents, and advisors, who shall not be subject to chapter 76, and prescribe their duties and fix compensation within the limitations provided by law;

(20) Appoint advisory committees as deemed necessary; and

(21) Exercise any other powers of a corporation organized under the laws of the State.

(b) To avoid any conflicts of interest, the development corporation shall keep its venture capital investment operations separate from other operations of the development corporation.

(c) The development corporation shall not promise to answer for the debts of any other person.

§206M-G High technology investment revolving fund. (a) There is established the high technology investment revolving fund. The following moneys shall be deposited into the high technology investment revolving fund and shall not be considered part of the general fund:

(1) All moneys appropriated by the legislature;

(2) Moneys received as repayments of loans;

(3) Moneys earned on investments;

(4) Moneys received;

(A) Pursuant to a venture agreement;

(B) As royalties;

(C) As premiums or fees charged by the corporation; or

(D) Otherwise received by the development corporation.

(b) Moneys in the high technology investment revolving fund may be used for investments in Hawaii-based businesses, including high technology, life sciences research, and renewable energy and in venture capital investments; provided that the expenditures shall not exceed $           in any fiscal year.

§206M-H Cancer detection development revolving fund; establishment. (a) There is established the cancer detection development revolving fund to be administered by the development corporation to assist enterprises that develop healthcare and biomedical technology to detect cancer, including cervical cancer, in its early stages.

(b) The cancer detection development revolving fund shall not be considered part of the general fund and shall consist of moneys:

(1) Appropriated by the legislature;

(2) Received as repayments of loans;

(3) Earned on investments;

(4) Received pursuant to a venture agreement;

(5) Received as royalties; and

(6) Received as premiums or fees charged by the development corporation or otherwise received by the development corporation.

§206M-I Actions of the development corporation; guidelines. (a) The development corporation shall take actions necessary to achieve the purposes and objectives of this part. The development corporation shall evaluate all programs after three years to determine their effectiveness. The development corporation shall establish rules to ensure equal opportunity to minority-owned businesses, and shall encourage the development of minority-owned businesses. The development corporation shall support and encourage participation by Hawaii companies in federal grant programs, such as the Small Business Innovation Research Program.

(b) Financial participation shall be made on the condition that the recipient of the assistance shall utilize the money to assist economic development projects within the State that have potential for creating new jobs or retaining current jobs within the State.

(c) Financial participation by the development corporation in private financial investment funds shall be made with the provision that the private fund shall make investments in Hawaii in amounts at least equal to the amount of state participation.

(d) The development corporation shall not make direct investments in individual businesses. The development corporation shall not acquire securities to an extent that would provide the development corporation effective voting control of any enterprise, after giving effect to the conversion of all outstanding convertible securities of the enterprise.

§206M-J Business and industry evaluation and priorities for job opportunity and economic development. The development corporation shall develop procedures to set priorities as to which types of businesses and industries are most likely to provide significant opportunities for economic development and diversification in the State, consistent with the purposes of this part. This evaluation shall take into account the guidelines provided by the state plan for economic development. Based upon these findings, the development corporation shall establish targets by which the operations and programs of the development corporation shall be guided.

§206M-K Requests for assistance from the development corporation; procedure. (a) The board shall approve or disapprove requests for assistance within ninety days of receiving a written application. Upon written request by an applicant, the board may reconsider its denial of an application for assistance or may waive the ninety-day deadline for approving or disapproving an application.

(b) Any person who submits any statement, report, application, or other document to the development corporation that is known to the person to be false in any material respect shall be guilty of a class C felony.

(c) The development corporation may condition any assistance of any type by placing restrictions on the recipient in regard to the recipient's assets or indebtedness or in any other manner deemed appropriate by the development corporation. A recipient who accepts assistance from the development corporation shall be deemed to agree to be bound by any conditions or restrictions imposed by the development corporation.

§206M-L Private sector financial support. Significant private sector financial support shall be associated with any economic development project for which the development corporation provides assistance.

§206M-M Limitations on debt owed to the development corporation. Not more than $5,000,000 in financial assistance, excluding rights and royalties under a venture capital agreement, shall be provided to any one enterprise at any time. The direct investments of the corporation shall not exceed five per cent of the assets of the development corporation, excluding rights and royalties under a venture capital agreement; provided that by a two-thirds vote of the board, this amount may be increased to a limit of twenty-five per cent of the total assets of the development corporation.

§206M-N Annual report. Notwithstanding section 206M-3.5, the development corporation shall submit a complete and detailed report of the development corporation's specific activities under this part to the legislature. The report shall be submitted not later than twenty days before the convening of the regular session of 2007, and every year thereafter.

§206M-O Construction of this part. This part shall be liberally construed to effect its purposes.

B. Program for Seed Capital Assistance

§206M-P Establishment. The development corporation shall establish a program for seed capital assistance.

§206M-Q Seed capital investments. Subject to this part, the development corporation may invest in:

(1) A certified development company under sections 501 to 503 of the Small Business Investment Act of 1958, 15 U.S.C. 695 to 697, and the regulations adopted under those sections;

(2) A small business investment company under the Small Business Investment Act, 15 U.S.C. 631 to 634, 636 to 649, and the regulations adopted under those sections;

(3) A minority enterprise small business investment corporation or equivalent venture capital corporation;

(4) A similar entity that may leverage its capital under a federal program; or

(5) A seed capital fund or partnership.

§206M-R Purposes and terms of investments. (a) Investments may be used for any purpose consistent with the purposes and objectives of this part, including but not limited to:

(1) Developing a working prototype;

(2) Preparing a development plan;

(3) Performing an initial market analysis;

(4) Organizing a management team; and

(5) Any other purpose reasonably related to an economic development project.

(b) Investments may be made on terms and conditions as the development corporation determines to be reasonable, appropriate, and consistent with the purposes and objectives of this part.

C. Program for Venture Capital Assistance

§206M-S Establishment. The development corporation shall establish a program for venture capital.

§206M-T Venture capital investments. Subject to this part, the development corporation may invest in:

(1) A certified development company under sections 501 to 503 of the Small Business Investment Act of 1958, 15 U.S.C. 695 to 697, and the regulations adopted under those sections;

(2) A small business investment company under the Small Business Investment Act, 15 U.S.C. 631 to 634, 636 to 649, and the regulations adopted under those sections;

(3) A minority enterprise small business investment corporation or equivalent venture capital corporation;

(4) A similar entity that may leverage its capital under a federal program; or

(5) A venture capital fund or partnership.

§206M-U Purposes and terms of investments. (a) Investments may be used for any purpose consistent with the purposes and objectives of this part.

(b) Investments may be made on terms and conditions as the development corporation determines to be reasonable, appropriate, and consistent with the purposes and objectives of this part.

D. Program for Capital Access

§206M-V Establishment. The development corporation shall establish a program for capital access.

§206M-W Financial assistance. The development corporation, through the program for capital access, may:

(1) Procure insurance, a guarantee, or a letter of credit from any source for all or a part of a loan, debenture, or lease of others, public or private, or a revenue bond issue of the State or other entity or authority authorized by law to issue revenue bonds; and

(2) Procure insurance, a guarantee, or a letter of credit for either a single loan, debenture, or lease or for any combination of loans, debentures, or leases or a single revenue bond issue or for all or a part of any combination of revenue bond issues.

§206M-X Purposes and priorities required in the procuring of insurance, loan guarantees, or letters of credit. (a) Insurance, guarantees, or letters of credit procured pursuant to section 206M-U shall be procured only for economic development projects within the State that are consistent with the purposes and objectives of this part.

(b) The development corporation shall give paramount priority in procuring insurance, guarantees, and letters of credit to economic development projects that have the greatest potential for creating new jobs or retaining current jobs within the State.

§206M-Y Conditions for procuring of insurance, loan guarantees, or letters of credit. (a) Insurance, guarantees, or letters of credit shall not be procured pursuant to section 206M-U unless the development corporation is assured that the loans, debentures, or leases insured, or guaranteed, or for which letters of credit are issued, shall be used to assist economic development projects that also have significant private sector financial support.

(b) Insurance, guarantees, or letters of credit may be procured on terms and conditions as the development corporation, in its sole discretion, determines to be reasonable, appropriate, and consistent with the purposes and objectives of this part.

(c) The development corporation shall charge the lender or the borrower, or both, a fee or premium for procuring loan, debenture, or lease insurance, guarantee, or a letter of credit. Rules for premiums or fees shall be established by the development corporation pursuant to chapter 91.

§206M-Z Program for capital access participation agreements. The development corporation shall enter into agreements with lenders for participation in the program for capital access that shall include but not be limited to:

(1) Authorization for the lender to determine, collect, and transmit to the development corporation a fee or premium charge within a specified range established consistent with the purposes and objectives of the development corporation;

(2) Specification of whether the premium charge shall be paid by the lender, the borrower, the development corporation, or by a combination thereof in specified proportions;

(3) The procedure by which a lender may make a claim upon the development corporation upon default by the borrower and the conditions under which a claim may be made; and

(4) The maximum amount of claims a lender may make upon the development corporation, which amount may be equal to or less than the proportion of the total premiums contributed by the development corporation.

§206M-AA Establishment of special funds to secure loan insurance obligations; source of funds. The development corporation may establish a special fund or funds for capital access into which fees or premiums collected by the development corporation are deposited.

E. Hawaii Technology Investment Program

§206M-BB Definitions. As used in this subpart:

"Biotechnology" means fundamental knowledge regarding the function of biological systems from the macro level to the molecular subatomic levels that has application to development including the development of novel products, services, technologies, and subtechnologies from insights gained from research advances that add to that body of fundamental knowledge.

"Computer data" means any representation of information, knowledge, facts, concepts, or instructions that is being prepared or has been prepared and is intended to be processed, is being processed, or has been processed in a computer or computer network.

"Computer program" means an ordered set of computer data representing coded instructions or statements that, when executed by a computer, causes the computer to perform one or more computer operations.

"Computer software" means computer data, a computer program, or a set of computer programs, procedures, or associated documentation concerned with the operation and function of a computer system and includes both systems and application programs and subdivisions, such as assemblers, compilers, routines, generators, and utility programs.

"Financial organization" means an organization authorized to do business in Hawaii that is:

(1) Certified as an insurer by the insurance commissioner;

(2) Licensed or chartered as a financial institution by the commissioner of financial institutions;

(3) Chartered by an agency of the federal government;

(4) Subject to the jurisdiction and regulation of the federal Securities and Exchange Commission; or

(5) Any other entity otherwise authorized to do business in the State that meets the requirements of this subpart.

"Program" means the Hawaii technology investment program.

"Program manager means a financial organization selected by the development corporation to manage the program.

"Qualified high technology business":

(1) Means a business, employing or owning capital or property, or maintaining an office, in this State that:

(A) Conducts more than fifty per cent of its activities in performing qualified research in this State; or

(B) Receives more than fifty per cent of its gross income derived from qualified research; provided that the income is received from:

(i) Products sold from, manufactured in, or produced in the State; or

(ii) Services performed in this State.

(2) Does not include:

(A) Any trade or business involving the performance of services in the field of law, architecture, accounting, actuarial science, consulting, athletics, financial services, or brokerage services;

(B) Any banking, insurance, financing, leasing, rental, investing, or similar business; any farming business, including the business of raising or harvesting trees; any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 611 (with respect to allowance of deduction for depletion), 613 (with respect to basis for percentage depletion), or 613A (with respect to limitation on percentage depleting in cases of oil and gas wells) of the Internal Revenue Code;

(C) Any business operating a hotel, motel, restaurant, or similar business; and

(D) Any trade or business involving a hospital, a private office of a licensed health care professional, a group practice of licensed health care professionals, or a nursing home.

"Qualified research" means:

(1) The same as in section 41(d) of the Internal Revenue Code; or

(2) The development and design of computer software using fourth generation or higher software development tools or native programming languages to design and construct unique and specific code to create applications and design databases for sale or license; or

(3) Biotechnology;

provided that more than fifty per cent of the business' activities are qualified research.

"Venture capital investment" means any of the following investments in a qualified high technology business:

(1) Common or preferred stock and equity securities without a repurchase requirement for at least five years;

(2) A right to purchase stock or equity securities;

(3) Any debenture or loan, whether or not convertible or having stock purchase rights, which:

(A) Is subordinated, together with security interests against the assets of the borrower, by their terms to all borrowings of the borrower from other institutional lenders;

(B) Is for a term of not less than three years; and

(C) Has no part amortized during the first three years;

(4) General or limited partnership interests; and

(5) Membership interests in limited liability companies.

§206M-CC Formation of Hawaii technology investment program. (a) The development corporation shall establish the Hawaii technology investment program for the purpose of allowing individual investors to contribute to the program to invest venture capital in businesses in Hawaii.

(b) The development corporation may implement the Hawaii technology investment program through a regulated investment company under the terms and conditions established by this section. The development corporation may make changes to the program as required for participants to obtain the federal and state income tax benefits or treatment provided by sections 851 to 855 of the federal Internal Revenue Code of 1986, as amended.

The development corporation may establish a program in which the dividends distributed by the regulated investment company are exempt from income taxation under chapter 235. If the development corporation establishes a program that is proposed to be exempt from income taxation under chapter 235, it shall furnish sufficient information and notify the department of taxation and investors of the tax exempt status of that program.

(c) The development corporation may implement the program through the use of financial organizations as program managers. Under the program, individuals may establish accounts directly with a program manager.

(d) The development corporation may solicit proposals from one or more financial organizations to act as a program manager. Financial organizations submitting proposals shall describe the investment instrument. The development corporation shall select as program managers the financial organizations from among the bidding financial organizations that demonstrate the most advantageous combination, both to potential program participants and this State, based on the following factors:

(1) The financial stability and integrity of the financial organization;

(2) The ability of the financial organization to establish or act as a regulated investment company for the purposes of this subpart;

(3) The ability of the financial organization to satisfy recordkeeping and reporting requirements for the purposes of a program that allows a program that is exempt from taxation under chapter 235;

(4) The financial organization's plan for promoting the program and the resources it is willing to allocate to promote the program;

(5) The fees, if any, proposed to be charged to persons for opening accounts;

(6) The minimum initial deposit and minimum contributions, subject to this section that the financial organization will require;

(7) Other benefits to the State or its residents included in the proposal, including fees payable to the State to cover expenses to operate the program.

(e) The development corporation may enter into a management contract of up to ten years with a financial organization. The financial organization shall provide investment instruments meeting the requirements of this section. The management contract shall include, at a minimum, terms requiring the financial organization to:

(1) Take any action required to keep the program in compliance with requirements of this section and to manage the program to meet the requirements of sections 851 to 855 of the federal Internal Revenue Code of 1986, as amended;

(2) Keep adequate records of each account, keep each account segregated from each other's account, and provide the development corporation with the information necessary to prepare any necessary statements;

(3) Provide the development corporation with the information necessary to determine compliance with this section;

(4) Provide the development corporation with access to the books and records of the financial organization to the extent needed to determine compliance with the contract;

(5) Hold all accounts for the benefit of the account owner;

(6) Be audited at least annually by a firm of independent certified public accountants, selected by the financial organization, and provide the results of the audit to the development corporation; and

(7) Provide the development corporation with copies of all regulatory filings and reports related to the program made by the financial organization during the term of the management contract or while it is holding any accounts, other than confidential filings or reports that will not become part of the program. The financial organization shall make available, for review by the development corporation, the results of any periodic examination of the financial organization by any state or federal banking, insurance, or securities commission, except to the extent that the report or reports may not be disclosed under applicable law or the rules of the examining agency.

(f) The development corporation may require an audit to be conducted of the operations and financial position of the program manager at any time if the development corporation has any reason to be concerned about the financial position, the recordkeeping practices, or the status of accounts of the program manager.

(g) During the term of any contract with a program manager, the development corporation shall conduct an examination of the program manager and its handling of accounts. The examination shall be conducted at least biennially if the program manager is not otherwise subject to periodic examination by the commissioner of financial institutions, the Federal Deposit Insurance Corporation, or other similar entity.

(h) If selection of a financial organization as a program manager is not renewed, after the end of the term:

(1) Accounts previously established and held in investment instruments at the financial organization may be terminated;

(2) Additional contributions may be made to the accounts;

(3) No new accounts may be placed with the financial organization; and

(4) Existing accounts held by the financial organization shall remain subject to all oversight and reporting requirements established by the development corporation.

If the development corporation terminates a financial organization as a program manager, the development corporation shall take custody of accounts held by the financial organization and shall seek to promptly transfer the accounts to another financial organization that is selected as a program manager and into investment instruments as similar to the original instruments as possible.

(i) The development corporation may enter into contracts for the services of consultants for rendering professional and technical assistance and advice and any other contracts that are necessary and proper for the implementation of the program.

(j) The program shall only allow contributions from individual investors in amounts ranging from a minimum of $1,000 to a maximum of $100,000 per investor.

(k) The program manager shall invest all contributions received from investors in securities not limited to legal investments under state laws relating to the investment of trust fund assets by trust companies, including those authorized by article 8 of chapter 412. Contributions shall be used for venture capital investment. Investment may be made in any manner the program deems correct. If no venture capital investment is available at the time a contribution is made to the program, the program manager may invest the contribution in any manner allowed a regulated investment company until a venture capital investment opportunity occurs. While the program manager should make a best effort to make venture capital investments as defined in section 206M-BB, if no such venture capital investment is available in Hawaii, then the program manager may make venture capital investments outside Hawaii.

(l) The development corporation may adopt any necessary rules under chapter 91."

PART IV

SECTION 11. Section 211G-1, Hawaii Revised Statutes, is amended by amending the definition of "corporation" to read as follows:

"Corporation" means the [Hawaii strategic] high technology development corporation, a public body corporate and politic and an instrumentality and agency of the State, established under chapter [211F.] 206M."

SECTION 12. Chapter 211F, Hawaii Revised Statutes, is repealed.

SECTION 13. On the effective date of this Act, all moneys existing in the Hawaii strategic development corporation revolving fund established pursuant to section 211F-5, Hawaii Revised Statutes, shall be transferred and deposited into the high technology investment revolving fund established under section 206M-F, Hawaii Revised Statutes.

SECTION 14. All rights, powers, functions, and duties of the Hawaii strategic development corporation are transferred to the high technology development corporation.

All officers and employees whose functions are transferred by this Act shall be transferred with their functions and shall continue to perform their regular duties upon their transfer, subject to the state personnel laws and this Act.

No officer or employee of the State having tenure shall suffer any loss of salary, seniority, prior service credit, vacation, sick leave, or other employee benefit or privilege as a consequence of this Act, and such officer or employee may be transferred or appointed to a civil service position without the necessity of examination; provided that the officer or employee possesses the minimum qualifications for the position to which transferred or appointed; and provided that subsequent changes in status may be made pursuant to applicable civil service and compensation laws.

On the effective date of this Act, the president of the Hawaii strategic development corporation shall be the chief investment officer of the high technology development corporation and shall perform the duties in accordance with section 10 of this Act and as may be assigned by the board of directors composed under section 16 of this Act.

An officer or employee of the State who does not have tenure and who may be transferred or appointed to a civil service position as a consequence of this Act shall become a civil service employee without the loss of salary, seniority, prior service credit, vacation, sick leave, or other employee benefits or privileges and without the necessity of examination; provided that such officer or employee possesses the minimum qualifications for the position to which transferred or appointed.

If an office or position held by an officer or employee having tenure is abolished, the officer or employee shall not thereby be separated from public employment, but shall remain in the employment of the State with the same pay and classification and shall be transferred to some other office or position for which the officer or employee is eligible under the personnel laws of the State as determined by the head of the department or the governor.

SECTION 15. All appropriations, records, equipment, machines, files, supplies, contracts, books, papers, documents, maps, and other personal property heretofore made, used, acquired, or held by the Hawaii strategic development corporation relating to the functions transferred to the high technology development corporation shall be transferred with the functions to which they relate.

SECTION 16. (a) To ensure continuity during the merger required under part III of this Act, notwithstanding any law to the contrary, including the numerical limitations placed on the composition of the board of directors of the high technology development corporation under this Act, upon the effective date of this Act, the board of directors of the Hawaii strategic development corporation shall serve on the board of directors of the high technology development corporation until such time as their respective terms of office expire; provided that:

(1) The board members of the Hawaii strategic development corporation may only vote on matters germane to the new part established pursuant to part III of this Act;

(2) The board members of the Hawaii strategic development corporation shall have all the powers and duties vested in the board of directors pursuant to part III of this Act;

(3) The department of business, economic development, and tourism shall only have one ex-officio member on the board composed under this section; and

(4) No member who concurrently sat on both the high technology development corporation's and the Hawaii strategic development corporation's boards of directors prior to the effective date of this Act, nor any person appointed to temporarily replace any such board member, shall have more than one vote on matters before the board composed under this section.

(b) No directorship on the boards of directors for the high technology development corporation or the Hawaii strategic development corporation for which the term of office expires on either June 30, 2006, or June 30, 2007, shall be refilled for any subsequent term upon the expiration of the affected board member's term; provided that this subsection shall not apply to an ex-officio member whose selection to either board is due to the member's governmental position.

(c) The governor may stagger the terms of high technology development corporation board members appointed after the effective date of this Act to ensure that the number of high technology development corporation board members equal seventeen by July 1, 2008.

SECTION 17. In codifying the new sections added by sections 2 and 10 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

SECTION 18. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 19. This Act shall take effect on July 1, 2006.