A quiet effort is underway in the halls of the Tennessee General Assembly to pump at least another $40 million into the at times controversial TNInvestco tax credit plan to fund early and seed stage venture capital investments in Tennessee though the program and its enabling law are not quite a year old.

Tennessee Watchdog has learned that a key organization mandated by the law to aid in the selection process of venture capital firms under TNInvestco held deep misgivings last year about the lack of an “independent” board in the process used to choose the companies, including the allegation that the process had potentially been “subjugated to political influence.”

Internal documents and emails from the Tennessee Technology Development Corporation (TTDC) obtained by Tennessee Watchdog also show a considerable amount of strain in the working relationship over TNInvestco between the organization and state Economic and Community Development Commissioner Matt Kisber.

Back to the Well

Lawmakers in subcommittees of both chambers’ respective Commerce committees will begin considering an amendment this week from Gov. Phil Bredesen’s administration to broaden the Tennessee Small Business Investment Company Credit Act and the associated TNInvestco program.

In 2009, the law established a base of $120 million of insurance premium tax credits that six investment firms certified by the state can sell to insurance companies. The venture capital firms by law then invest the proceeds into Tennessee small businesses via early and seed stage capital.

Legislative sources said there are efforts underway by lobbyists employed by numerous venture capital firms to see the program expanded to included another two to four firms, meaning another $40 million to $80 million tax credits would be available for sale through TNInvestco.

A seemingly key player in the process to choose the TNInvestco companies is the TTDC, a state-chartered non-profit organization charged with playing a lead role in “capital formation” in Tennessee.

“TTDC serves as the state’s trusted advisor on strategic initiatives related to venture capital formation, research and development activity and high-potential entrepreneurship – the economic drivers of the 21st century innovation economy,” the organization’s website states.

TTDC is also written into the state law creating the TNInvestco program, which states in part that,” The department of revenue and the department of economic and community development, in consultation with the Tennessee Technology Development Corporation, shall review the applications and award the investment tax credits based on the overall strength of the application.”

Under the process set forth by the state departments of revenue and economic and community development to choose the TNInvestcos, TTDC was to complete “Phase I” evaluations of the TNInvestco companies which included an evaluation of the “character” of the executives in each company.

Phase II selections – the final choices for awarding tax credits to certified TNInvestco companies – are made by Department of Economic and Community Development Matt Kisber and Department of Revenue Commissioner Reagan Farr according to recent court filings and the TNInvestco process memo published jointly by both departments. The announcement of the original TNInvestco fund winners was made in November.

‘Horrified at the ramifications…’

In an internal TTDC document obtained by Tennessee Watchdog, senior members of the organization’s staff held serious concerns about the selection process of these companies and petitioned to Kisber and Farr that an “independent” board of experts should be allowed to help make the selections of TNInvestcos.

The key document is a September 22, 2009 internal memo at TTDC generated by its Vice President of Operations and Strategy Dan Schmisseur, originally intended for the TTDC Board’s executive committee. The memo outlines a variety of accusations and alleged flaws in the TNInvestco legislation, mainly that the process for choosing the companies had somehow become “political.”

“We are horrified at the ramifications from alleging inappropriate conduct, but that unfortunate outcome is trumped by the worst case scenario of a potentially transformational capital formation program being subjugated to political influence. Duty requires that we sound the alarm and ask the TTDC Board to intervene,” Schmisseur stated.

Schmisseur also asserts in his memo that TTDC and a working group of local venture capitalists known as the TN Capital Formation Board, advised the administration to include more independent oversight of the selection process, something that was never done.

“TTDC management, along with members of our operating committee, the TN Capital Formation Board, has consistently advised the Administration that the TNInvestco Program will be a success or failure based on the quality and integrity of the fund managers selected via the competitive application process. We have consistently advised that an ‘independent investment board’ of qualified professionals should be engaged to facilitate the application evaluation process,” Schmisseur wrote.

Finally, Schmisseur notes the application process was apparently broken into two parts so that only Department of Revenue employees are allowed to see the most vital application information in an effort to keep the “confidential” material outside the scope of open records requests.

Kisber’s Doghouse

Another component to the Schmisseur letter is his statement that TTDC has remained Kisber’s “doghouse” through most of the TNInvestco formation process, citing instances where TTDC has been left out of either credit for the program or meetings to discuss process.

A series of emails between Kisber and TTDC CEO Eric Cromwell also suggest a strained relationship between the two offices over which entity has control over TNInvestco.

In a July 23, 2009 email to Cromwell and Schmisseur, Kisber appears to admonish TTDC for statements made in public about the TNInvestco program.

“I believe it is important for you to recognize that by Tennessee law this is a program administered solely by ECD,” Kisber wrote. “All official communications about the program will originate from ECD. Any statements, directives, interpretations or policy discussions about ANY aspect of the administration of the program WILL come from ECD.”

As a subtext to the TNInvestco wrangling is the issue of TTDC’s ongoing funding, which comes at least in part from a state contract from Kisber’s department funded by a grant. A July 7, 2009 letter from Kisber to Cromwell states TTDC’s two-year grant cannot be extended as no extension language was written into the grant itself.

ECD Spokesperson Mark Drury told Tennessee Watchdog via email there is presently no specific funding in the administration’s budget for TTDC. Legislative sources said TTDC’s staff has been working the halls of the legislature very hard since session opened to prove the organization’s merit and seek additional funding.

In an interview with Tennessee Watchdog, Cromwell said the tension with Kisber’s office was natural. He also admitted the funding issue exists, with TTDC staff working on the funding problem “day-to-day.”

“Anytime you have strong-willed and opinionated individuals you are going to have a back and forth like that,” Cromwell said.

He also defended the apparently long-standing position of TTDC that there should be an independent board of professionals at a minimum aiding the state in the decision of where to assign tax credits and award TNInvestcos.

“That is the best practices way of looking at it,” Cromwell said.

While he did not disavow the points made in Schmisseur’s memo – which never made it to the TTDC board – he did dismiss its tone.

“That was a time period of great tension for the organization. It was more a blowing off steam kind of scenario. He put it into a memo that he regrets putting it in that way,” Cromwell said.

Drury, however, did provide some push back on Schmisseur’s memo when provided a copy by Tennessee Watchdog.

“The idea that the TNInvestco process was ‘subjugated to political influence’ is unfounded and I would suggest that if Mr. Schmisseur holds that view he is misinformed and should provide some factual basis for his allegation,” Drury stated in an email.

Drury would not comment on whether or not TTDC had proposed an independent advisory board for the TNInvestco process, noting ongoing litigation concerning open records and the TNInvestco process.

Tough Questions

Legislators who might play a major role in deciding whether the TNInvestco process is expanded even before its financial impact can be assessed appear skeptical.

House Commerce Committee Chair Beth Harwell (R-Nashville) conceded that a number of executives of prospective TNInvestco venture capital firms live in her district and want the expanded legislation passed.

Harwell said she has serious concerns over the existing process used to choose the companies who win the rights to sell the state’s tax credits. She also expressed concerns about Kisber’s office using a little-known facet of state law to seal the TNInvestco evaluations.

“I have always had reservations that only two commissioners – although two very fine commissioners and people – have that kind of authority,” Harwell said. “When dealing with public money it is hard to keep these kinds of discussions from being open to the public.”

Harwell also said she has concerns about the initial round of TNInvestco awards.

“In terms of who was awarded the money, there are concerns that there are two to four companies we are now looking at that might have been better choices that who we chose.”

“The goals was for us to encourage Tennessee’s economy with this money,” Harwell said. “I think there is going to be a tremendous amount of discussion in committee.”