Current through Register Vol. 35, No. 16, August 27, 2024
Section 2.60.20.9 - NEW MEXICO VENTURE CAPITAL INVESTMENT PROGRAM (NMVCIP)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.