The Office of General Counsel issued the following opinion on March 28, 2003, representing the position of the New York State Insurance Department.

Proposed Investment

Question:

Is the proposed investment in the proposed investment company, (hereinafter company), acceptable under the New York Certified Capital Companies ("CAPCO") Law?

Conclusion:

As currently proposed, the investment would not constitute a "qualified investment" under the New York CAPCO statute.

Facts:

The inquirer submitted an application to the company. This application was rejected following its review by the CAPCO working group. The inquirer has asked for a reconsideration of this finding.

The company is engaged in the business of advertising sales. Specifically, the company sells advertising space located on taxi-cab displays. These displays are remotely controlled, enabling the displays to vary according to location. According to the inquirer’s previously submitted application, as presently proposed, the company is currently seeking funding for the following purposes:

1. Design of the commercial version of the taxi-top display;

2. Production of the taxi-top display;

3. Expand use of display to other metropolitan markets; and

4. Hire additional sales and marketing staff.

The taxi-tops used are manufactured in large part by a company subsidiary located in Israel. An unspecified portion of the financing would necessarily be transmitted to the Israeli subsidiary.

Analysis:

N.Y. Tax Law § 11(a)(6) (McKinney 2000) defines a "qualified business" in pertinent part, as follows:

"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.

(B) It has either (i) no more than one hundred employees, at least eighty percent of whom are employed in New York state or, (ii) no more than two hundred employees, at least eighty percent of whom are employed in this state, and during the fiscal year immediately preceding the qualified investment it had, together with its affiliates, gross revenues of no more than five million dollars, on a consolidated basis as determined in accordance with generally accepted accounting principles, except that, with respect to certified capital company program three, in the case of a company located in an empire zone established pursuant to article eighteen-B of the general municipal law such gross revenues shall not exceed eight million dollars.

(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.

N.Y. Tax Law § 11(a)(6) (McKinney 2000)(emphasis added).

As indicated by the above-quoted provision, the investment as proposed would not constitute a qualified investment because a portion of the investment is earmarked for the design and building of the taxi-tops; activities which, according to the application, take place at the Israeli subsidiary. N.Y. Tax Law § 11(a)(6)(A) expressly requires that the funds to be invested be used solely to support the New York State operations of the business. This provision has consistently been interpreted as requiring that the funds obtained through the CAPCO Program by a qualified business be utilized in New York, which is wholly consistent with the CAPCO statute’s ostensible purpose of increasing employment in New York.

The inquirer raised several alternative arguments to the Department’s previously expressed objection to the investment. 1 With respect to the first, the relative "immateriality" of the funds that will be utilized in Israel, the Department notes that the statute contains no "de minimis" type exception.

The inquirer’s second suggestion is whether the dissolution of the subsidiary (thus making the Israeli personnel direct employees of the company itself) would correct the situation. Such a change would not serve to make the investment permissible in that the funds would still be used by the qualified business outside of New York State. The fact that the company would still meet the § 11(a)(6)(B) requirement that eighty percent of employees be located in New York after such a change would not eliminate the objection to the requirement of use in New York set forth in § 11(a)(6)(A).

The third alternative suggestion is that the proposed funds to be invested by the inquirer’s firm (which would comprise 21% of the total funding in this round of financing) could somehow be "limited" to New York State operations. The fungible nature of money, however, makes such a proposal a matter of form only.

Finally, the inquirer had suggested the alternative of entirely spinning off the Israeli subsidiary, to the effect that any materials purchased from it would effectively constitute purchase from a third party vendor. This suggestion does have some merit, in that the CAPCO law does not absolutely prohibit a qualified business from using a portion of the invested funds to purchase needed materials from non-New York vendors. Rather, the law prohibits the use of funds from supporting the non-New York operations of a qualified business.

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

1 The inquirer’s letter also raised the issue of whether the nature of the company’s business impacted its status as a qualified business. The company is in the advertising sales business, which clearly constitutes the "provision of services" as indicated in § 11(a)(6)(C). The Department’s objection to the investment did not involve this issue.