Lawmakers might soon take up a bill that would put North Carolina into the venture capital business by using taxpayer funds to subsidize private investments in biotechnology startups.
Critics call the move foolish in a shaky economy, comparing it to federal government bailouts of Wall Street and the banking industry. Others are concerned that the proposal would run afoul of the state constitution.
“It’s a giveaway for a certain class of people, and it’s a giveaway that is not needed,” said Rep. George Cleveland, an Onslow County Republican.
The measure, known as the Life Sciences Development Act (House Bill 530), would establish a private limited liability company to make taxpayer-funded loans of up to $30 million each to biotech companies. To underwrite the loans, the Life Sciences Development company would sell equity certificates (similar to shares of ownership) to investors.
The goal: spur economic growth, create jobs in a down economy, and increase the state’s attractiveness to outside industry.
Venture capital typically is used to fund early investments in companies that are too risky to attract financing from formal financial institutions such as commercial banks. Businesses seeking venture capital offer the potential for rapid growth and high returns; investors receive a stake in the company’s ownership while assuming a significant risk that the company will fail and all of their money would be lost. In many instances, venture capital investors provide not only money but also management expertise.
It’s the second time in as many years that Democrats have pushed the measure. An initial attempt failed in the waning hours of the General Assembly’s long session last year, when legislators couldn’t reach a compromise on differing House and Senate versions.
Now, the bill could be on the fast track. The measure was on the House’s concurrence agenda the opening day of the short session May 11, but it was later removed from the calendar.
A joint conference committee was appointed June 9 to reexamine the bill, adjust it if necessary, and send it back to the House and Senate floor, where lawmakers only could vote it up or down.
Supporters of the bill didn’t respond to repeated phone calls and e-mails asking for comment. But during debate on the House floor in August, they trumpeted the bill as an economic boon.
“It’s an important public-private partnership that I think helps us move the whole state forward in the life sciences industry,” said House Majority Leader Hugh Holliman, D-Davidson.
Rep. Pryor Gibson, a Democrat from Anson County, said that the bill blazes new territory and is needed. “It’s time for us to do some bold, innovative things,” he said.
‘Totally ludicrous’
One particular provision has stoked the ire of opponents. It would cover investors’ outlays by giving them taxpayer-funded credits if returns from the startup companies weren’t as much as expected. Foes of the proposal say the credits would have taxpayers assume at least part of the venture capitalists’ risk.
“For the state to get involved with private investment and guaranteeing a return out of the taxpayers’ pocket is totally ludicrous,” Cleveland said. “And for the powers to be to say that this is something we really need to spur development in bio fields, or any field, I think is really outrageous.”
In addition to fiscal concerns, opponents say the measure would be unconstitutional. Jason Kay, a senior staff attorney with the N.C. Institute for Constitutional Law, said the bill authorizes the state to lend its taxing authority to a private entity.
“It is a constitutional problem to give a private company the authority to exercise power that is traditionally reserved for the government — the power of taxing or untaxing its citizens,” Kay said. “If voters feel that elected officials have given out too many tax breaks, the voters know where to find them. But when a private company does so, there is no recourse at the ballot box.”
Rep. Rick Glazier, D-Cumberland, a frequent supporter of economic incentives to businesses, said he thinks there will be changes to the bill. Glazier parted company with many of his colleagues in raising concerns about the measure last session.
“I know the constitutional objections are being and have been reviewed at length by a number of stakeholders and supporters of the bill,” he said. “I have not seen another draft yet.”
Biotech risks
Other states have rolled out similar proposals, though North Carolina’s version has a unique twist by using public funds exclusively.
Maryland Gov. Martin O’Malley, a Democrat, unveiled a measure earlier this month that would reward insurance companies with tax credits for investing in venture infrastructure. Florida has had a similar fund for years.
The Tar Heel State already has some experience in biotech funding. The N.C. Biotechnology Center, created in 1984, is a nonprofit organization that’s received more than $200 million from taxpayers to fund biotech projects in the state.
The center claims to have created 55,000 jobs at 500 companies, but Triangle Business Journal reported in 2005 that the center’s biotech investment portfolio had lost 41 percent of its value over the previous two years. The value of its investments had fallen by $11.23 million since 2002, the newspaper reported.
In 2007, the Journal also reported that a $10 million investment by the Biotechnology Center in a venture capital fund was worth only $1.3 million when the fund closed down.
David N. Bass is an associate editor of Carolina Journal.