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HEADS YOU WIN, TAILS WE LOSE…

February 20, 2002

…is the concept behind the venture capital legislation. A state-owned for-profit corporation will set up a "fund of funds" partnership to invest in venture capital pools. The venture capital pools are to be chosen based on their commitment of funds to Iowa.

Investors in the "fund of funds," which we will call the FOF, will receive certificates maturing no sooner than 2005 entitling them to a tax credit. This credit will reduce their Iowa tax dollar for dollar to the extent the return on the FOF is less than a fixed return computed on the certificate. In other words, the investors in the FOF get the upside, but the state absorbs the downside - and even some of the upside, to the extent that there is a positive return lower than the amount set by the certificate.

In other words - heads, the investors win, tails the state loses. It is not clear how interests in the funds of funds will be offered to investors. Because an Iowa tax credit is the major attraction to the fund, only Iowa taxpayers will be interested. The legislation provides that interests in the FOF will be permissible investments for state-chartered banks, credit unions and domestic insurance companies.

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