Socializing the Risk and Privatizing the Gain

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Introduction: Below is a post formerly published on the former Augusta Insider. It concerns relatively recent Maine Legislation . The summary in the legislation states "This bill is modeled on statutes in Arkansas, Iowa, Michigan, Montana and Utah. It authorizes the establishment of the Maine Fund of Funds within the Small Enterprise Growth Board for the purpose of increasing the availability of venture capital to the Maine economy. "

The legislation does not provide the specific statutes of the states that are used as a model for this investment scheme. I looked up the constitutions of Iowa and Arkansas to see what their statutes say about the creation of corporations. Iowa's constitution is very strict about prohibiting the creation of corporations by special acts of legislation, while Arkansas's allows for more latitude than the Maine State constitution. There are several states that use the same language prohibiting the formation of corporations by special acts of legislation. During the period from the American Revolutionary War to 1875 when Article IV, Part Third, Section 14 was added to the Maine State Constitution, Americans were very involved in their constitutions. There were many compilations of state constitutions published during that time, some of them organized by subject. A quater of a century, prior to the inclusion of Article IV, Part Third, Section 14, The Communist Manifesto was published , which targeted The United States of America as the enemy. The Communist Manifesto also targeted "capitalism" by which was meant "private capitalism" and the solution of course was "state capitalism" a system in which the flow of capital is owned and/or controlled by the state.

Then, as now, the states all look toward what the other states are doing.


Socializing the Risk and Privatizing the Gain



I recently wrote about two pending legislative bills, LD1 and LD166.

LD1666 grants tax credits to venture capitalists and non-profit organizations, regardless of their status as taxpayers. The appropriations committee declined LD1666, but that is of little consequence since the ability to provide tax credits to venture capitalists and non-profit organizations is granted by the latitude extended in LD1 The bill allows for loans procured by the newly created “Fund of Funds” to be secured by “tax credits” but the lenders need not be qualified Maine State taxpayers. LD 1 includes an assertion that the tax credit used to secure the loans is not a security but fails to provide substantiation for that claim. Given our lawmakers level of awareness of the Maine State Constitution, is it justified to accept their claims about whether the “tax credit” is, or is not, a “security” without any further input from outside opinions?

The legislation repeatedly inter-mixes the words “security” and “tax credit” in the definition of other terms

5. Lender. "Lender" means an entity that lends capital to the fund in exchange for a return on the lender's investment that conforms to the conditions of certificates issued as security for the debt.

2. Certificate. "Certificate" means a document executed by the board extending the State's guarantee to a lender by means of a refundable tax credit.

6. Refundable tax credit. "Refundable tax credit" means the credit authorized by Title 36, section 5219-DD that the State shall redeem for cash if the holder has no tax liability against which to apply the credit. A refundable tax credit may be owned and redeemed by the system. (Title 36,section 5219-DD is a credit applicable to dentists practicing in underserved areas. It is perplexing how the same statute is transposed to the venture capitalist investor, who, by the parameters stated in the legislation can invests anywhere in the world using the Fund of Funds as a conduit. The tax credit issued to dentists is not refundable)

§ 399. Refundable tax credits The board may issue to one or more lenders certificates for up to $80,000,000 in refundable tax credits as provided by Title 36, section 5219-DD (The tax credit in Title 36,section 5219-DD , issued to individual dentists is not to exceed $15,000 )

1. Redemption. Refundable tax credits may be redeemed only as necessary to offset a shortfall in scheduled payments on debt incurred to capitalize the fund. The rate of return, whether fixed or variable, must be determined by a formula stipulated in the certificate used as security. Refundable tax credits may not be redeemed for any default occurring after December 31, 2031. No more than $10,000,000 of refundable tax credits may be redeemed per calendar year.(The credit issued to dentists in Title 36,section 5219-DD, is not refundable. In the declined LD1666, The Tax credit for venture capitalists and non-profit organizations was capped at 60% )

4. Not securities. The refundable tax credits allowed or transferred pursuant to this section are not securities under Title 32, chapter 135. (You can read that definition by clicking on the link and judge for your self )

LD1, now enacted into law, is a far-reaching piece of legislation, expanding outward to partake in the limitless opportunities existing beyond Maine’s borders and backing up investments with tax payers dollars in the form of a guaranteed refundable State of Maine tax credit. The creation of “the Fund of Funds” is arguably in violation of Article IV. -- Part Three. Section 14 of the Maine State Constitution, which states:

Corporations shall be formed under general laws, and shall not be created by special Acts of the Legislature, except for municipal purposes, and in cases where the objects of the corporation cannot otherwise be attained; and, however formed, they shall forever be subject to the general laws of the State (emphasis added)

One need only to measure the rules, regulations, and guidelines presented in this bill against any standard definition of a corporation to judge for one’s self whether the words, “the fund of funds”, used in the legislation are cloaking the reality that the bill is in fact a charter for a new corporation. Even if one could argue exceptions to the rule that prohibits the creation of a corporation, through a special act of legislation, there is no general law in this state that grants corporations the right to back up investments with taxpayer dollars.


LD1 identifies the preferred lender as “the system” and defines the “system”, for the purposes of the legislation as “the Maine Public Employees Retirement System”. It states that the purpose of the “fund of funds” is to make a profit for the lender. It identifies the board as the Small Enterprise Growth Fund and at the same time it loosens the requirements that the funds be invested in the Maine Economy


Were it not for the fact that mutual funds offer no guarantees, LD 1 reads like the creation of a mutual fund by the government and for the government. To confirm this for your self, read LDI side by side with the definition of a Mutual Fund.


Lawmakers and citizens of Maine should be familiar with Article IX, Section 14 of the Maine State Constitution, which begins with the following words:



In the charter creating “The Fund” and “The Fund of Funds”, it is stipulated that the administration costs are to be derived from the funds themselves. In the case of The Small Enterprise Growth Fund, there is a 10% taxpayer investment for which any profits derived always roll over to re-invest in the fund. It is fair to speculate as to whether the legislative charter that created The Small Enterprise Growth Fund enables the administration costs to be paid by the taxpayer. If the annual report were publicly accessible one would be able to make a comparison between administration costs and the 10% roll-over tax payer investment. The SEGF website is not a government website, and so it is reasonable to conclude that the SEGF is legally structured as a separate private economy entity.

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“The Fund of Funds” does not rely on a 10% investment from the taxpayer. Instead It uses the taxpayer to provide security for that which, by another name, is a mutual fund.


br />In the words of Elliot Spitzer, former Attorney General of New York, you cannot “socialize the risk and privatize the gain”, but this is exactly what the “Fund of Funds” achieves.


The charter (LD1) creating the “Fund of Funds” extends the reach of The Small Enterprise Growth Fund (since 2014 known as the Maine Venture Fund) , while LD 1659 directly applies this expansion to include The Small Enterprise Growth Fund (the Maine Venture Fund), authorizing it to invest in a “side” fund for which there are no defining parameters. It also permits the side funds to be structured as a “revolving fund”, which is the structure used for taxpayer investments in The Small Enterprise Growth Fund (the Maine Venture Fund). The charter also permits side funds to be structured as “as a fund in which the investor will have funds drawn and returned over an agreed time period.” in other words to have an “exit strategy” which is a demand placed on “the fund” by the unidentified venture capitalists who account for the other 90% of The Small Enterprise Growth Fund’s(the Maine Venture Fund) resources.


“The Fund” and the “Fund of Funds’ are justified by it’s creators with the end of attracting capitalization for the Maine economy, and focuses special attention on investments in technology. This is an “end justifies the means” validation for the betrayal of sworn oaths to uphold the Maine State and United States constitutions. The founding fathers of the United States Constitution had the wisdom to consider the spectrum of human character in creating a constitutional system of checks and balances. The charter establishing the “Fund of Funds”, at best, assumes that only the best of human character will ever administer this fund, while it leaves the door wide open for exploitation and corruption.


In addition it gives an unfair advantage to government chartered investment corporations competing in the same market as private sector investment corporations. According to Article IV, Part Third, Section 14 of the Maine State Constitution, all corporations are subject to general laws- however they are formed. Where is the general law that allows corporations, in general , to use tax payer dollars to further their own ends- and in the case of  The Maine Public Employees Retirement Fund , to embed contractual agreements in The Maine State Constitution?


We have heard of similar investment strategies in recent history. Iceland, Harvard University and Bernie Maddoff come to mind. Like our lawmakers, the investors in these “financial vehicles” believed in the assured wisdom of their investment strategies.


There are no parameters within the legislative charters that limit the scope of investments outside of the Maine state economy. Given this lack of definition, an investment or lender in China is authorized. Investments in China and third world economies are attractive to high growth investors due to nearly, absent labor rights laws and minimal environmental regulations making it substantially less expensive to do business in those economies than in the United States.


The charter that created the Small Enterprise Growth Fund (the Maine Venture Fund), included “public good” mandates. The new legislation deregulates the fund from the original parameters and so negates the “public good” used to justify the creation of the SEGF.


Whenever a loan is guaranteed by a refundable tax credit, Maine taxpayers carry the risk, but there are no benefits for the general taxpayer to compensate for their contribution and/or the risk, other than the vaguely defined phrase that it “benefits the economy”- but so do those funds if they are retained by the original creators of underlying wealth through lower taxes and the latter option does not violate our constitution.

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