New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on June 26, 2003, representing the position of the New York State Insurance Department.

Re: CAPCO Program

Question

Would a not-for-profit school constitute a qualified business in which a qualified investment may be made under the CAPCO law?

Conclusion

No, a not-for-profit school would not constitute a qualified business in which a qualified investment could be made under the CAPCO law.

Facts

A Venture Fund is currently conducting due diligence in connection with a proposed investment in a private, not-for-profit school. The inquirer is inquiring about the permissibility of the investment, specifically whether or not the school would be considered to be engaged in "commerce" as defined in the CAPCO law.

Analysis

Under the CAPCO law, an investment must meet the definition of a "qualified investment" in order to be permissible. The term "qualified investment" is defined, in pertinent part, as follows:

(9) "Qualified investment" - the investment of cash by a certified capital company in a qualified business for the purchase of any debt, equity or hybrid security, of any nature and description whatever, including a debt instrument or security which has the characteristics of debt but which provides for conversion into equity or equity participation instruments such as options or warrants. [emphasis supplied]

N.Y. Tax Law § 11(a)(9) (McKinney Supp. 2003).

The term "qualified business" is in turn defined in pertinent part as follows:

(6) "Qualified business" - an independently owned and operated business that meets all of the following conditions as of the time of the first investment in the business:

(A) It is headquartered in New York state, and its principal business operations are located in New York state, and the qualified investment it receives is used solely to support its business operations in the state, except for advertising, promotions and sales purposes. In cases where the qualified investment is made in a start-up company such capital must be used solely to establish and support its business operations in New York state, except for advertising, promotions and sales purposes.

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(C) It is involved in commerce for the purpose of developing and manufacturing products and systems, including but not limited to high technology products and systems such as computers, computer software, medical equipment, biotechnology, telecommunications equipment and products, processing or assembling all types of products, conducting research and development on all types of products or providing services, but excluding real estate, real estate development, insurance and businesses predominantly engaged in professional services provided by accountants, lawyers or physicians.

(D) For purposes of this paragraph, the term "independently owned and operated business" means (i) in the case of a corporation, a corporation where no more than fifty percent of the voting stock of the corporation is owned or controlled, directly or indirectly, by a single corporation, a single partnership or a single limited liability company, and (ii) in the case of a partnership, association, or other entity, a partnership, association or other entity where no more than fifty percent of the capital, profits or other beneficial interest in such partnership, association or other entity is owned or controlled, directly or indirectly, by a single corporation, a single partnership or a single limited liability company.

N.Y. Tax Law § 11(a)(6)(McKinney Supp. 2003).

The proposed investment would be made in a school organized as a not-for-profit entity. Such an investment would be beyond the scope of the CAPCO law. As an examination of the definition of "qualified business" demonstrates, the law envisions investments only in "for-profit" entities.

The provisions contained in § 11(a)(6)(D), relating to ownership/control requirements, strongly suggest that only for-profit enterprises are contemplated as proper entities for investment. That provision expressly refers to "voting stock", "profit" and "beneficial interest". Such terms as these cannot be used to describe a not-for-profit entity. Indeed, one of the hallmarks of such entities is the prohibition against the derivation of private benefit from such entities. See N.Y. Not-for-Profit Corp. Law Art. 5 (McKinney 1990) and the charitable organization provisions of the Internal Revenue Code, 26 U.S.C.A. § 501 et seq. (West Supp. 2003).

Accordingly, the proposed investment would not be permitted.

For further information one may contact Supervising Attorney Michael Campanelli at the New York City Office.