Current through Register Vol. 35, No. 18, September 24, 2024
A. INTRODUCTION:
(1) The 1990 New Mexico legislature passed an
amendment (House Bill 140) to the original 1987 venture capital statute which
created a New Mexico-oriented venture capital program, and authorized up to
one-half percent of the severance tax permanent fund for potential investment
in New Mexico based venture capital funds. This amended statute is contained in
Section
7-27-5.15
NMSA 1978.
(2) This new program is
the New Mexico venture capital investment program (NMVCIP) of the STPF, and is
a differential rate program which was intended by the legislature to encourage
development of a venture capital industry within the state. The NMVCIP has
several provisions that differ from the original 1987 program (the venture
capital investment program, or VCIP) contained in Section
7-27-5.6 NMSA 1978 and
implemented by Section I [now 2.60.20.8 NMAC] of this Manual. These amended
provisions are listed below under New Mexico venture capital fund requirements.
The policies and procedures contained in Section I [now 2.60.20.8 NMAC] will
also apply to NMVCIP investments except where changed in Section II [now
2.60.20.9 NMAC]. The NMVCIP investments are required to be prudent investments
and are subject to the exercise of good business judgement by the VCIAC and
state investment council. The sub-sections listed below will correspond by
title to those in Section I [now 2.60.20.8 NMAC] and contain any changes
applicable to the NMVCIP.
(3) It
should be noted that a New Mexico venture capital fund could apply for
investment consideration under either the VCIP or the NMVCIP.
B. NEW MEXICO VENTURE CAPITAL FUND
REQUIREMENTS:
(1) New Mexico venture capital
funds which wish to qualify under Section
7-27-5.15
NMSA 1978 must meet certain statutory requirements. Specifically, each New
Mexico venture capital fund must be a limited partnership or corporation
organized and operating in the United States and maintaining its principal
active office in New Mexico that:
(a) has as
its primary business activity the investment of funds in return for equity in
businesses for the purpose of providing capital for start-up, expansion, new
product development or similar business purposes;
(b) holds out the prospects for capital
appreciation from such investments;
(c) has a minimum committed capital of
$1,250,000;
(d) has full-time
management with at least three years of professional experience in assessing
the growth prospects of businesses or evaluating business plans, and who has
established permanent residency in the state;
(e) is committed to investing in New Mexico
one hundred percent of the investment made by the state investment officer
pursuant to this section in businesses with a principal place of business in
the state and holds promise for attracting additional capital from individual
or institutional investors nationwide to businesses in the state;
(f) accepts investments only from accredited
investors as that term is defined in Section 2 of the Federal Securities Act of
1933, as amended, (
15 U.S.C.
Section 77(b)) and rules
and regulations promulgated pursuant to that section; and
(g) receives at least forty percent of the
fund's capital from institutional investors other than the state of New Mexico,
which includes pension funds, insurance companies, corporations, trust funds,
foundations, venture capital funds and financial institutions.
(2) If an investment is made under
this section, not less than $500,000 or more than $3,000,000 may be invested in
any one New Mexico venture capital fund, and such investment shall not exceed
forty percent of the committed capital of that fund. Investments shall be made
only in the initial offering of a New Mexico venture capital fund, provided
that any investment may be made in one or more increments. The state investment
officer is authorized to make investments pursuant to this section contingent
upon a New Mexico venture capital fund securing paid-in investments from other
accredited investors for the balance of the minimum committed capital of the
fund.
(3) In making investments
pursuant to this section, the council shall give consideration to investments
in New Mexico venture capital funds whose investments enhance the economic
development objectives of the state.
C. PROGRAM STRUCTURE: Total investment in the
New Mexico venture capital investment program is limited to one-half percent of
the book value of the STPF by Section
7-27-5.15.
D. DIVERSIFICATION: The general comments on
diversification in Section I., Paragraph B. [now Subsection B of 2.60.20.8
NMAC] are also applicable to the New Mexico venture capital investment program.
Proper diversification is the most basic and essential requirement of any
prudent investment program, and in order to control risk adequately in the
venture capital investment class (the riskiest of all major investment
classes), the NMVCIP will be considered as one element in the overall VCIP for
diversification purposes. Since some diversification parameters such as
geography will be necessarily restricted by the in-state requirements of the
NMVCIP, the remaining diversification parameters will become much more
critical.
E. PARTNERSHIP
GUIDELINES: The NMVCIP is restricted to funds that maintain their principal
active office in New Mexico. In addition, each New Mexico fund selected under
the NMVCIP for investment will be required to certify in the partnership
documents that it will maintain its principal active office in the state for
the life of the partnership.
F.
PARTNERSHIP SELECTION CRITERIA:
(1) In
addition to the basic statutory requirements listed under New Mexico venture
capital fund requirements [now Subsection B of 2.60.2.9 Nmac] above, the
committee seeks to prudently invest in New Mexico partnerships with at least
the following characteristics:
(a) partners
that have significant venture capital experience;
(b) partners that are well known to each
other and have worked together as partners;
(c) partners that have demonstrated
successful investment performance records;
(d) partners that have appropriate experience
for the proposed industry focus of the fund;
(e) partners that have appropriate experience
for the proposed stage focus of the fund;
(f) partners that are raising a fund that has
a size consistent with their investment strategy and human resources
capabilities;
(g) partners that
have the ability to source many of their own deals;
(h) partners that have the time, experience
and interpersonal skills to work effectively with their portfolio companies;
and
(i) partnerships in which the
compensation plan for the general partners is fair, creates the proper
incentives, and rewards the general partners for superior long-term
performance.
(2) The
primary goal of the committee's selection process will be to identify and
invest in people that have the necessary experience to succeed in the New
Mexico venture capital environment. This effort will be highly critical for the
NMVCIP, since most venture capital investment opportunities in New Mexico will
probably occur in early stage (seed/startup) high technology companies. These
highly specialized investments are the riskiest in the venture capital
universe. The partnership criteria listed above define the basic standards of
prudence used by the venture capital industry in evaluating venture capital
fund investments. The same comments on the importance of selecting experienced
and successful general partners expressed in Section I.C. above [now Subsection
C of 2.60.20.8 NMAC] will apply to the NMVCIP, and will be even more critical
in this New Mexico only program.
G. INVESTMENT DECISION PROCESS:
(1) The investment decision process will be
essentially the same as that contained in Section I., Paragraph D. [now
Subsection D of 2.60.20.8 NMAC]. The advisor will conduct a full evaluation on
each New Mexico based fund applying for investment consideration under either
the NMVCIP or the VCIP. The advisor will not reject any New Mexico funds
without first consulting with the committee and investment office staff. The
advisor will not be required to make any recommendations for or against
investment on any New Mexico funds applying under the NMVCIP or the VCIP. A
comprehensive evaluation report (investment memorandum) on each fund will be
forwarded by the advisor to the VCPM when complete, and the fund proposal will
be placed on the agenda for consideration by the committee at the next
scheduled meeting. All New Mexico based funds will receive a complete hearing
before the committee. The committee will make the investment decision using the
advisor's investment memorandum as well as all other information available on
each proposal.
(2) If a New Mexico
based fund is recommended for investment by the committee and the investment is
subsequently approved by the state investment council, the council, if so
requested by that fund, may authorize the state investment officer to issue a
contingent letter of commitment to that fund. The contingent letter of
commitment will require that the fund obtain the balance of the required
minimum committed capital prior to the commitment taking effect, and will
contain a clause indicating that the council may cancel the contingent
commitment at any time if there is any change in the circumstances that led to
its issuance.
H.
PARTNERSHIP DOCUMENTATION PROCEDURES: The advisor will process all NMVCIP
partnership documents in exactly the same manner as outlined in Section I.,
Paragraph E [now Subsection E of 2.60.20.8 NMAC]. For NMVCIP proposals, the
statutory reference will be Section
7-27-5.15
NMSA 1978.
I. CLOSING PROCEDURES:
Closing procedures will be exactly as stated in Section I., Paragraph F [now
Subsection F of 2.60.20.8 NMAC].
J.
DISTRIBUTION MANAGEMENT PROCEDURES: Distribution management procedures will be
exactly as stated in Section I., Paragraph G [now Subsection G of 2.60.20.8
NMAC].
K. MONITORING PROCEDURES:
The advisor will be responsible for monitoring the activities of all NMVCIP
partnerships in which investments are made in exactly the same manner as
outlined in Section I., Paragraph H [now Subsection H of 2.60.20.8
NMAC].
L. REPORTING PROCEDURES:
Reporting procedures will be exactly as stated in Section I., Paragraph I [now
Subsection I of 2.60.20.8 NMAC].
M.
CHANGES AND REVISIONS: This policy and procedures manual will be reviewed at
least annually and revised as necessary.
