SSTI Digest

The IRS released its long-anticipated second tranche of rules on Wednesday, and the regulations provide some clarity around using Opportunity Zones to invest in businesses. Specific examples include details on defining a business’ operations within a zone and funds’ ability to reinvest proceeds. However, further clarification is needed, including around investors’ treatment of interim sales, and additional changes are forthcoming. A partial summary of the 169 pages of new rules follows, and SSTI will provide additional updates as the full implications become clearer.

SSTI’s letter to the Treasury on the first set of rules emphasized three areas that required clarity, and the new rules take steps toward all three items.

1.    Safe harbor for initial investments by Qualified Opportunity Funds (QOFs)

State funding for higher education has only halfway recovered in the 10 years since the Great Recession, according to a recent State Higher Education Finance (SHEF) report. The report also found that while higher education funding is stabilizing, the shift to greater reliance on tuition as a revenue source has leveled off, but remains higher than since before the Great Recession. During the Great Recession, appropriations dropped 24.4 percent from the high in 2008 ($8,848 per full-time equivalent enrollment) to $4,489 in 2012 due to enrollment growth without a proportional funding increase. That trend reversed in 2013 as appropriations increased for five straight years, but have remained flat from 2017 to 2018.

As the technology behind renewable energy continues to advance, recent research finds that the public sector plays an important role in catalyzing innovation. This can be seen in three main ways: by funding basic research on renewable energy in all 50 states; by partnering with cleantech startups; and by supporting cleantech clusters through networks, commercialization assistance, and access to capital. Taken together, this recent research suggests that public-sector partnerships can complement industry’s role in growing the green economy at the federal, state and local levels.

Concerns over national security have prompted the Treasury Department’s Committee on Foreign Investment in the U.S. (CFIUS) to force international investors to divest from two American tech startups, a move that will affect entrepreneurs and investors alike, according to a recent article by from Jeff Farrah of the National Venture Capital Association. Writing in TechCrunch, Farrah notes that historically CFIUS has targeted areas such as ports and real estate, but is beginning to focus its attention on how access to personal data can serve as a national security threat.

As the American population ages — by 2035, the country will have more people aged at least 65 than under 18 — so do the country’s business owners. Over the past few years, several studies have attempted to measure how many companies may transition ownership over the next decade, with estimates ranging as high as 10 million small businesses. These studies generally agree that while changes are on the horizon, few companies are even as prepared as having identified a potential successor. Colorado and Massachusetts are stepping into this planning void with a suggestion of their own: transitioning interested small businesses to employee ownership.

This week SSTI wraps up this year’s coverage of innovation-related initiatives covered in governors’ state of the state and budget addresses. This week Louisiana Gov. John Bel Edwards was the last governor to deliver a state of the state address in 2019, and he used his time to highlight the state’s surplus, a first since he has been in office. The governor is taking advantage of the new financial security to focus on funding for basics such as teacher pay and education among other things. He also voiced his support for raising the minimum wage and closing the gender wage gap in Louisiana:

“I am also committed to ensuring all high school students have access to dual enrollment opportunities at our colleges. Students who participate in dual enrollment are more likely to meet college readiness benchmarks and boast higher college completion rates. It’s a chance for students to get real college experience before they get there. And it could even be a chance for Louisiana colleges to have an edge on keeping high-performing students in state after they finish high school.”

The trend of fewer, larger deals that emerged over the past few years continued through the first quarter of 2019, according to newly released data from PitchBook and the National Venture Capital Association. U.S. activity in the quarter included $32.6 billion of capital investment on 1,853 deals, making it the second-highest quarterly capital investment total in the last decade. The latest edition of Venture Monitor also features a new dataset on investment in female-founded companies, which accounted for 2.2 percent of total VC deal value and 5.5 percent of total VC deal count in the first quarter. The report notes that foreign investment and immigration are two major policy issues that will be critical to how 2019 shapes up.

Seven regional innovation cluster (RIC) initiatives have each been awarded $500,000 from the U.S. Small Business Administration. Although the SBA has yet to publish an official press release indicating the release of the 2019 Regional Innovation Cluster awardees, SSTI identified the awardees through other sources, such as USASpending.gov and a review of local news media. Read on for more information on the program’s awardees.

Two community colleges in Florida became the winners of the 2019 Aspen Prize for Community College Excellence, which recognizes high achievement and performance among America’s community colleges. Winners were Indian River State College (IRSC) ($350,000) in Fort Pierce, Florida, and Miami Dade College ($350,000) in Miami; Odessa College and Palo Alto College in Texas and Pierce College in Washington were named as Rising Stars ($100,000 each). The $1 million shared prize is awarded every two years and focuses on student success, looking at institutional performance in four areas: student learning; certificate and degree completion; success after graduation in the labor market and in transfer to four-year institutions; and equity in access and success for students of color and low-income students.

The prize finalists came from different contexts, from rural and urban areas, serving demographically different student bodies, and offering a mix of technical workforce and academic transfer programs, and each was noted as having designed thoughtful approaches.

The Oakland-based Kapor Center, a nonprofit focused on leveling the playing field in tech, has announced the Tech Done Right (TDR) Challenge with funds from the Bill and Melinda Gates Foundation. With an emphasis on growing opportunities for women and people of color in the sector, the challenge will fund organizations with innovative solutions to building diverse, inclusive, and thriving tech ecosystems. Awardees will receive one-time grants beginning at $100,000. The challenge is now open and accepting applications here, with a submission deadline of Tuesday, May 7.

While the overall Chinese economy may be facing a slowdown, the venture capital (VC) market continues to report strong growth and became the second largest VC market by total capital invested in 2018, according to a new report from PitchBook. The report, Venture Capital in China, highlights the growing prominence of Chinese startup capital with nearly 30 percent of global VC directed into Chinese startups in 2018.

A recent article from Pew Charitable Trusts shows how routine evaluations can help states make tangible improvements to their tax incentives. According to Pew, 30 states now have laws requiring evaluation of the incentives, and recent examinations in several states included key components that helped to inform the results. When analyses started with an effort to determine the specific goals of each incentive, their effectiveness was more easily determined. High-quality evaluations also measured economic impact. For instance, Rhode Island’s evaluation of the Motion Picture Production Tax Credit showed that revenue gained would never match the cost of the program.

Pew recommends that states should create processes to regularly study tax incentives, produce high-quality evaluations that draw clear conclusions, and use the findings to inform policy decisions. Pew found that when policy makers have high-quality evaluations, they use them, which may mean a decision to end a program that is not performing as expected.