The office of Tennessee's State Comptroller says that the Tennessee Department of Economic and Community Development's administration of the state's TNInvestco venture capital program "has serious and pervasive problems."
TNInvestco was launched in 2009 to provides tax credits to funds that in turn have invested in start-up and fast-growing companies to foster entrepreneurial activity. The recipients of tax credits were chosen by the state through an application process that required them to meet certain criteria in order to qualify.
The Comptroller’s report says "the program was launched without adequate safeguards in place to determine that the companies receiving start-up funding were actually eligible to do so. Those safeguards are still lacking."
Tennessee's Department of Economic and Community Development is responsible for monitoring the program, but current ECD Commissioner Bill Hagerty recused himself from that oversight — he has a stake in one of the TNInvestco firms — and designated another member of his staff to provide oversight. According to the Comptroller's auditors, that oversight is sorely lacking in a number of areas: ECD officials have failed to complete adequate annual reviews, complete their annual report and evaluate program risks in their annual risk assessment.
Auditors also found that ECD staffers did not ensure that the companies receiving tax credits completed the statutorily required investment strategy scorecards, provided required accounting reports of specific procedures, or provide audited financial statements in a timely fashion.
The Comptroller's report — download it here — did determine that the TNInvestcos invested in qualified businesses and made qualified distributions, and that their investments in seed or early-stage companies met the requirements of state law. The report also determined that the TNInvestcos maintained the certification required by the law and submitted the required Qualified Business Forms. ECD officials approved those forms, but the audit found that the department did not adequately document the process used.
In other words, according to the State Comptroller's office, the problems they found are not with the TNInvestcos — who have put to work about $90 million of the $140 million at their disposal — but with ECD's record-keeping and management of the program.
"Without adequate documentation, top ECD officials might have difficulty determining if the required investment strategy benchmarks are being met and if investments are free from fraud, waste or abuse," the Comptroller's report says. "Furthermore, the lack of documentation raises questions about how accurate reports can be provided to the governor’s office."