The Office of General Counsel issued the following opinion on June 24, 2004 representing the position of the New York State Insurance Department.

Re: CAPCO - Interpretation of Qualified Business

Question Presented:

May there be co-makers on a note issued in connection with a qualified investment in the qualified business under the New York Certified Capital Company ("CAPCO") Law?


Generally, a qualified investment is one that is made to a single entity. In certain circumstances, however, several affiliated companies with a complete identity of ownership may be aggregated and considered to constitute the qualified business for purposes of the application of the CAPCO statute. In such cases, these affiliated companies may be co-makers of a note evidencing the qualified investment. In the instant case, however, the affiliated companies do not have the same ownership and thus may not be aggregated for consideration as a single qualified business. Nor can they be co-makers of a note.


ABC Capital Fund New York, LLC ("ABC") is contemplating making a qualified investment in the above-referenced company. The organization of the FB family of affiliates is as follows: FB Holding Company, LLC ("FBHC") is the sole owner of FB Manufacturing and Distribution, LLC ("Manufacturing"). FBHC has no employees or operations. Its purpose is to serve as the sole member and owner of Manufacturing, which is the entity through which all operations of the business will be conducted. FB Distribution, LLC ("Distribution") is currently an entity with substantially common ownership as FBHC. It is engaged in the wholesale distribution of the FB product line.

According to the application, it is proposed that prior to the investment by ABC, substantially all of the assets and employees of Distribution will be transferred to Manufacturing. The application is silent as to Distribution’s liabilities. Distribution will be remain in existence but will be inactive.

The application for the proposed investment was initially approved by the Department. The non-objection letter issued by the Department to that effect listed only FBHC as the qualified business. This non-objection letter was not withdrawn, but the 60-day window for the making of the investment had expired before the investment was made. ABC has since refiled the application. Upon this second review, the CAPCO group recommended that the investment be disapproved because the affiliated entities were listed as "co-makers" of the Note. The Term Sheet for the transaction identified "the company" as both FBHC and Manufacturing.


Under the CAPCO program, qualified investments must be made in a "qualified business". That term is defined under the CAPCO statute 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.

(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…

(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 Department has generally interpreted the term "qualified business" to mean a single corporation or partnership. This interpretation is based on the fact that the wording of the statute in several provisions appears to imply that a qualified business is a single partnership, corporation or other entity. See, N.Y. Tax Law § 11(a)(6)(D). This interpretation has met with some objection, prompting this and other inquiries. Such an interpretation, however, may prove to be unnecessarily strict. In many cases, a single business operation may in fact be organized as an agglomeration of two or more entities. These entities may in fact share identical ownership, but happen to be organized as distinct entities for certain practical business reasons. Disallowing an investment by a CAPCO in a business organized along such lines could preclude a useful investment on purely formalistic grounds. Such a result would be counter to the overall purpose of the CAPCO statute.

Accordingly, if a business enterprise is organized as two or more distinct legal entities, but each of these entities ultimately share identical ownership and are engaged together in activities constituting business operations that otherwise meet the criteria of the conduct of a qualified business under the CAPCO statute, then such a consolidated group may be viewed as a qualified business for purposes of applying the CAPCO statute. Furthermore, there would be no rationale in such a case for preventing the members of such a group from acting as co-makers of a note issued in connection with a qualified investment.

The FB transaction does not fit into the above-described model. In the transaction as proposed, both Manufacturing and Distribution would be co-makers of the note issued by FBHC. While Manufacturing is wholly owned by FBHC, Distribution is not (although its assets and employees will, prior to the transaction, be acquired by Manufacturing). Thus, as proposed, a partially unrelated entity would be a co-maker of the note. It is the Department’s view that multiple entities may be regarded as constituting a single qualified business only when all the entities share the same ownership.

Were the Department to allow partially unrelated entities to aggregate themselves into a single "qualified business", it would establish a problematic precedent. Specifically, it could lead to other requests in which the relationship between the entities comprising the qualified business are perhaps more tenuous. This could needlessly introduce further complexity to CAPCO transactions (such as the use and distribution of CAPCO funds) and the concomitant additional burden on the Department's limited resources. Accordingly, only entities with the same ownership may be considered as constituting a single qualified business, and only such entities may act as co-makers on notes.

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