The Maine Capital Corporation-Seeds of Fundamental Transformation

The capital stock was issued on August 7, 1980, to 6 individuals, 6 corporations, and 19 banks. THE MAINE CAPITAL CORPORATION Report of a Study by the JOINT STANDING COMMITTEE ON TAXATION 

This blog is the opinion of a layperson and citizen of Maine.

In the year 1976, under the leadership of Governor Longley's board, the Maine constitutional government was replaced with a centrally managed government based on public-private relationships. Longley's special board was composed, of the heads of Maine's largest and most powerful industries. The board produced a report identifying two objectives. One objective was to eliminate the municipal referendum on economic development bonds authorized by the Home Rule amendment to the Maine constitution in 1969.

The other objective, identified in The Governor's Task Force for Economic Redevelopment, Recommended Legislation for an Economic Development Program -110th Congress was, pursuant to the Maine Constitution, Article IV, Part Third, sections 13 & 14, equally unconstitutional. That objective was to charter the Maine Capital Corporation.

Neither the report by the Governor's Task Force of 1976 nor 1984. report of a study by the Joint Standing Committee on Taxation to the 111th Maine Legislature measures the consistency of the legislation chartering the Maine Capital Corporation with the Maine Constitution, the enabling authority for Maine statutory law.

The 1984 report is an evaluation of how the purpose of the law, which enabled the charter of the Maine Capital Corporation and associated tax credits, in the proposed interest of Maine small business economic development, was met in practice. Also required by PL 19 Chapter 686, was an examination of the income tax credits as they relate to Maine economic development.

Although the stated primary goal of the Maine Capital Corporation is not the same goal as stated in the enabling legislation, the primary objective of the MCC is no different from that of most venture capital firms throughout the nation. According to Venture Economics, "The primary motivation for venture capital investment is to achieve very large capital gains for investors." By depending upon a strictly private venture capital investment company which has obligations to stockholders and no State imposed performance standards as a means to promote economic development of the State, the State of Maine has accepted the premise that the injection of venture capital in the Maine economy, is itself, a public benefit and promotes economic development. The more pertinent issue in this case may be the degree of effectiveness of a private, Maine based venture capital firm in providing needed capital to the Maine economy. report of a study by the Joint Standing Committee on Taxation to the 111th Maine Legislature

Both the majority and minority opinions of the Joint Standing Committee, concurred that the purpose of the enabling act of legislation had not been met but concluded that the corporation had significant potential and should be given the opportunity to realize that potential by taking away the limit on capitalization and the requirement that the geographical area be limited to Maine. To avoid the danger that the geographical expansion would result in investments concentrated outside the state, it was recommended that a percentage of the increase in investments be reserved for Maine.

The Joint Standing Committee recommended that a 1981 change to the statute, which extended the tax credit to any investor in the Maine Capital Corporation be reverted back to restricting tax credits to the original stockholders, composed of  6 individuals, 6 corporations, and 19 banks.

The original law creating the MCC limited the income tax credit provision to "subscribers in the common stock of the Maine Capital Corporation." The Attorney-General's office interpreted "subscribers in the common stock" to be the initial investors in the Maine Capital Corporation. According to this opinion, " ... a transferee purchasing stock from a subscriber is not a subscriber, and thus, the credit cannot extent to transferees. report of a study by the Joint Standing Committee on Taxation to the 111th Maine Legislature

No explanation is offered for the interpretation supported by the Maine Attorney General's Office, In this author's opinion. words must be added to the law to support the Attorney General's interpretation. "Initial investor" qualifies a subset of common stockholders. Not discussed is that when the tax credit is transferred with a private sale of stock, does it surrender the power of taxation to the Maine Capital Corporation and violate the Maine Constitution, Article IX General Provisions, Section 9.  Power of taxation.  The Legislature shall never, in any manner, suspend or surrender the power of taxation. This leads to asking if the tax credit suspends the power of taxation?

Section 9.  Power of taxation.  The Legislature shall never, in any manner, suspend or surrender the power of taxation

The enabling 1979 law extended tax credits to subscribers of the common stock of the Maine Capital Corporation. 1981 legislation defined the tax credit as applying to any stockholder in the corporation, consistent with the Maine Constitution, Article IX, Section 8

Section 8.  Taxation.  All taxes upon real and personal estate, assessed by authority of this State, shall be apportioned and assessed equally according to the just value thereof.

The original stockholders took objection to the change for reasons left unexplained in the Joint Standing Committee report. The report does not say the defined number of shares is increased but states that there was a million-dollar cap on the capitalization making investors eligible for a total of  $500,000.00 in tax credits. Additional shares would have reduced the amount of the tax credit per shareholder. If the number of shares is decreased when a shareholder sells a portion of his shares to a new shareholder, the value per share for the original shareholder increases. Since selling stocks with the tax credits can be interpreted as transferring the power of taxation, it might explain why there is no provision in the law governing the sale of stocks as a transference of the tax credit.

 As a result of its investigation, the Joint Standing Committee on Taxation discovered that the enabling legislation and income tax credit provisions were amended in 1979. In the process of revising the income tax credit provisions to facilitate administration of the tax credits, the Legislature may have inadvertently expanded eligibility for MCC tax credits. Initially, only the original subscribers of MCC stock were eligible for tax credits, but currently, any investor in the corporation may qualify for the credits. The Committee unanimously recommends revision of the income tax credit to apply only to the original subscribers.THE MAINE CAPITAL CORPORATION Report of a Study by the JOINT STANDING COMMITTEE ON TAXATION 

In the section, above, it is suggested that changes enacted by the Legislature to extend the tax credits, on an ongoing basis, "may have been inadvertent". One wonders how conscientious can the law-making body be if they make such changes accidentally. I submit that it was done intentionally. Extending the tax credit to all investors furthers consistency with the Maine Constitution, Section 8: Taxation.  All taxes upon real and personal estate, assessed by authority of this State, shall be apportioned and assessed equally according to the just value thereof." By restricting the tax credits to the original stockholders. it becomes government in the interests of an oligarchy.

The Maine Constitution, Article IV, Part Third Section 14 prohibits the Maine Legislature from chartering corporations by special act of legislation, with exceptions for municipal purposes and if the object of the corporation cannot be achieved another way.  MCC enabling legislation defines the object of the Maine Capital Corporation as growing small business and rural economic development in the State. Clearly, economic development can be done by another means such as within the free enterprise economy by diversified resources. The institution of a centrally managed economy represents a change in the governing political philosophy. 

The enabling legislation's parameters of economic development include:

1. Develop or promote development of new businesses

2. Promote viable business expansions

3. Encourage capital reinvestments

4.. Reduce unemployment

5. Increase per capita income.

The primary objective of the Maine Capital Corporation according to the MCC brochure  is to 

"create long term capital appreciation for the venture's stockholders and for Maine Capital Corporation."  

The Oversight Committee hired the Beldon Hull Daniels firm to produce a report studying the effectiveness of the Maine Capital Corporation. A report entitled, Maine Small Business Development Finance by Belden Hull Daniels, presents the most detailed and relevant discussion, which I have come across in my years of studying Maine small business economic development policy. However, the Oversight Committee report deals only with how to attract investors to the Maine Capital Corporation and makes no recommendations relevant to measuring the effectiveness of the Maine Capital Corporation on Maine small business economic development.

The Daniels report concludes that

" MCC believes that it cannot compromise its expectations of return or any other investment criteria when looking for ventures in Maine. This would suggest that only expected returns in the range of 25-30 percent would be acceptable to MCC.Maine SmallBusiness Development Finance by Belden Hull Daniels.

The Daniels report questions whether this primary objective of MCC is consistent with the objective in the enabling law and does not agree with the Joint Standing Committee's central premise, that, "what is good for Maine capital is good for the State of Maine."

The Belden Hull Daniels report argues that the MCC looks for a minimum rate of return of 25 to 30% on its investment. Furthermore, the Daniels report asserts that this rate of return is substantial compared to the actual investment of $500,000 by the stockholders. The 50% income tax credit reduces the $1,000,000 investment to $500,000 and increases the effective rate of return to 50-60 percent. "Maine SmallBusiness Development Finance by Belden Hull Daniels.

The Daniels report strongly urges that the MCC be made accountable to the State with respect to the purposes established in the law, suggesting minimum standards and goals be included in the law, such as the number of new jobs to be created, for investors to qualify for the tax credit. In subsequent development of Maine economic development policy, this advice will be taken but in such a way that an artificial upper crust of the economy is created through taxpayer subsidies, damaging the middle sector of the Maine economy, which carries the burden of subsidizing the top.

The Standing Committee report simplifies the task of Maine economic development to creating attractive terms for investors in the Maine Capital Corporation. Although the Daniels report is comprehensive and cost the taxpayers of Maine, the Daniels report is all but ignored by the Standing Committee when the solutions recommended by the Joint Standing Committee address only the interests of investors in MCC. There are no measures recommended by the Committee to assure that the Maine Capital Corporation grows Maine's small business economy.

In the first year of operation, the MCC contracted with the Maine Development Foundation which agreed to provide facilities and personnel to the venture capital firm at a rate not to exceed $65,000 per year. Using the administrative and staff resources of the Maine Development Foundation the MCC made its first investment of $52,000 in a firm entitled Cabletronix in Rockland. In June, 1981, Cabletronix fi1ed for bankruptcy. report of a study by the Joint Standing Committee on Taxation to the 111th Maine Legislature

The Maine Development Foundation was chartered by the Maine Legislature when the Longley administration established a centrally managed economy in Maine. The Maine Development Foundation (corporation) is as unconstitutional as the Maine Capital Corporation pursuant to Article IV, Part Third, Section 14 of the Maine Constitution. The Maine Development Foundation still exists today. It's board members are found on the most influential boards across the State.

 The Maine Capital Corporation was repealed in 1994 with a Statement of Fact that it had fulfilled its original public purpose. The repeal of the Maine Capital Corporation was co-ordinated by the Joint Standing Committee with the ending of the tax credits. Once the tax credits no longer existed, it was interpreted as there is no further purpose to be fulfilled by the Maine Capital Corporation and the Joint Standing Committee recommended that the Maine Capital Corporation be reverted to a corporation operating under Maine general law, consistent with the Maine Constitution, Article IV, Part Third, Section 13 and 14.

Section 14.  Corporations, formed under general laws.  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. Maine Constitution

Spokespersons for the Maine Capital Corporation compare its investment strategy to "most other venture capital firms". The comparison, by both the Maine Capital Corporation and the Beldon Hull Daniels Report ,of MCC to any other private venture capital corporation, supports the argument that the charter of the MCC corporation by the Maine Legislature violated Article IV, Part Third Section 14 of the Maine Constitution, which prohibits the Legislature from chartering corporations with only two exceptions, one for municipal purposes, and the other if the object of the corporation cannot be done another way:

The Maine Capital Corporation argued that:

1. the low capitalization does not allow for many losses and does not generate sufficient income to pay administrative costs and offer attractive returns to investors,

2. the investment strategy of the MCC is no different than the investment strategy of most venture capital firms, (emphasis mine)

3. the investment of $250,000 in Maine businesses and future investments in themselves, fulfill the public purpose in the enabling legislation, and (emphasis mine)

4. The MCC is a private firm in which investors are eligible for income tax credits in return for risking their private' fortunes. The income tax credits are not state investment. (emphasis mine)
report of a study by the Joint Standing Committee on Taxation to the 111th Maine Legislature

Neither report includes what is found outside of the enabling statute, in the taxation chapter of the Maine statutes, which is the Maine Capital Corporation tax credit, including a 100% general corporate tax exemption for small business investment companies. The MCC tax credit has since been repealed but the general 100% tax exemption remains in place. The exemption was placed within the statutes, separately from the charter for the Maine Capital Corporation.

If one searches the Maine Capital Corporation, one will come across Title 10, Chapter  108: THE MAINE CAPITAL CORPORATION. Click on this link and it appears that the entire Act has been repealed. This Act is the "enabling legislation" referred to by the report.

However, the actual tax credit is located in two separate locations under TAXATION. Curiously, when googling the Maine Capital Corporation, today, the link to §5167. Credit for investment in The Maine Capital Corporation under Title 36: TAXATION Part 8: INCOME TAXES Chapter 811: COMPUTATION OF TAXABLE INCOME OF RESIDENT ESTATES AND TRUSTS, is displayed at the top of the list. If you click on that link, it appears that the credit was repealed and that is all there is to it, but that is deceptive.

There is another section to Title 36, Part 8, which is not displayed on the Google search. Under Title 36: Part 8: Chapter 817: IMPOSITION OF TAX ON CORPORATIONS is found §5202 and most importantly, §5202-A, which makes small business investment companies exempt from taxation. At the time the Maine Capital Corporation tax credit was written into the TAXATION chapter of the Maine statutes, refundable tax credits were first coming into use across the USA. Although the legislation does not identify the Maine Capital Corporation tax credit as a refundable tax credit, considering that the same chapter included a 100% tax exemption, as a section of the MCC tax credit, it is, by design, a refundable tax credit. A refundable tax credit means that if no taxes are owed, the public owes the holder a cash payout. The credit is not an investment, which anticipates receiving something in return. It is a gift which takes the risk out of the investment. (This author is not a tax lawyer and puts forth this observation as a common-sense  speculation, only.)

§5202. Credit for investment in The Maine Capital Corporation (REPEALED) SECTION HISTORY
1977, c. 531, §4 (NEW). 1981, c. 364, §67 (RP).

§5202-A. Small business investment companies exempt
Corporate small business investment companies, licensed under the United States Small Business Investment Act of 1958, as amended, and commercially domiciled in Maine and doing business primarily in Maine, shall be exempt from taxation under this Part. [1977, c. 640, §2 (NEW).]SECTION HISTORY
1977, c. 640, §2 (NEW).

... the enabling legislation was amended in 1979 to expand the financing methods of the MCC from solely investing equity capital to also include loans and guarantees. The purpose of this change was to allow the MCC to operate as a Small Business Investment Corporation under the Small Business Administration. This new function allows the SBIC or the MCC in this case to borrow money from the SBA to loan to small business. A SBIC can borrow up to 3 times its capital  report of a study by the Joint Standing Committee on Taxation to the 111th Maine Legislature

The rational found in "4. The MCC is a private firm in which investors are eligible for income tax credits in return for risking their private' fortunes" is an incomplete truth. The language is suggestive that personal (private) fortunes are being invested. The pool of investors is composed of  6 individuals, 6 corporations, and 19 banks. Investments typically involve risk in return for an opportunity for profit. The Maine taxpayers are either directly refunding 50% of the investment or carrying the burden of the investor's taxes, for which the Maine taxpayers do not receive a share of the profits. It is the Maine taxpayers who are taking on risk without a measurable opportunity to profit.

Accepting the reasonable assumption that the tax credit was treated as a refundable tax credit, an investment of $250,000, at a direct cost to taxpayers of $500,000.00 cannot be said to fulfill a public economic development purpose since the public is clearly the loser in this picture. If the Small Business Investment Corporation could borrow three times its capital, that meant that MCC had 3,000,000.00 in funds to lend or invest in Maine small businesses. Of the $250,000.00 reported as an investment, $50,000.00 was a loan. With only $200,000.00 of a total $1,000,000.00 invested in Maine small businesses, reported in the 1984 report, by June of 1983 MCC had invested $800,000.00 in interest-earning accounts in its own shareholder's banks.

The Maine Capital Corporation also " invests idle cash in certificates of deposit and money market accounts with shareholder banks. As of June 30, 1983, these investments were approximately $800,000, and income from those investments for 1983 was $95,000." report of a study by the Joint Standing Committee on Taxation to the 111th Maine Legislature

 A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing funds on demand. A CD is typically issued electronically and may automatically renew upon the maturity of the original CD. When the CD matures, the entire amount of principal,as well as interest earned, is available for withdrawal. Investopedia

 Money market accounts are typically able to offer higher annual percentage yields than savings accounts as the vehicles invest in a variety of options from which traditional passbook accounts are restricted. Banking institutions provide access to insured money market deposit accounts (MMDA). MMDA’S offer FDIC backing and the portfolios typically invest in short-term, liquid securities. They are able to offer a higher interest rate by requiring a higher minimum balance, and by placing restrictions on the number of withdrawals the account holder may take over a given period of time. This restriction makes them less liquid than a checking account, but more liquid than bonds. Money markets pursue investing deposits in vehicles such as certificates of deposit, government securities, and commercial paper that offer higher yields than are generally found in savings accounts.
Investopedia

In expanding the financing methods of the MCC to include loans and guarantees, the MCC violated the original rationale for forming the Maine Capital Corporation as stated in the report for the Governor's Task Force of 1976:

The Legislature finds that one of the limiting factors on the beneficial economic development of the State is the limited availability of capital for the long-term needs of Maine businesses and entrepreneurs. In particular, the lack of equity capital to finance new business ventures and the expansion or recapitalization of existing businesses is critical. This lack of equity capital may prevent worthwhile businesses from being established; it may also force businesses to use debt capital where equity capital would be more appropriate. This creates debt service demands which a new or expanding venture may not be able to meet successfully, causing the venture to fail because of the lack of availability of the appropriate kind of capital.
The Governor's Task Force of 1976

In the following section, the Maine Capital Corporation threatened to take their investments elsewhere, if it did not get its terms written into Maine law:

The Maine Capital Corporation argues that if no changes are made with respect to the low capitalization and the geographical investment restriction (limited to Maine businesses), the MCC will form a "sister Corporation'" able to invest anywhere. If the capitalization ceiling is removed, but the geographical restriction is not eliminated, the MCC argues that out-of-state investors, the major source of investment capital) will not invest in the MCC. http://lldc.mainelegislature.org/…/Rp…/kf1080_z99m2_1984.pdf

During the Angus King Administration, the Maine Legislature chartered a new venture capital firm, today called the Maine Venture Fund. The Maine Venture Fund is structured as a public fund, in which investments "roll over" in the manner of a non-profit, and the side funds, which are left to be managed and defined at the discretion of the board. The Maine Venture Fund is promoted as investing exclusively in Maine businesses, but with the loose structuring of the side funds, that statement should be taken with a grain of salt, noting that in the original act chartering the Maine Venture Fund, it was, and is, still called the Small Enterprise Growth Fund- a name shared in the definitions with the public part of the fund, while the term "Side Fund" refers to side funds, defined and administered by the board at its own discretion. The co-existence of two sets of funds in the contemporary public-private investment company, the Maine Venture Fund, mirrors "the sister Corporation" proposed by the Maine Capital Corporation.

The Joint Standing Committee report ends with this paragraph suggesting the Maine Capital Corporation be ended in 1988, keeping the 100% tax exemption, provided in §5202-A. Small business investment companies exempt, in place, obscured and separated from a plethora of acts, passed since 1984, creating refundable tax credits for investors.