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49th State Angel Fund Policies and Procedures Policies and Procedures Municipality of Anchorage May 2012 DRAFT 49th State Angel Fund Policies and Procedures DRAFT Table of Contents 1. Purpose ................................................................................................................................1 2. 49SAF Program ...................................................................................................................2 3. 2.1 Overview ......................................................................................................................2 2.2 Management .................................................................................................................4 2.3 Composition of the Advisory Committee ......................................................................5 2.4 Conflict of Interest/Use of Funds ..................................................................................6 2.5 Allocated Funding from the United States Department of Treasury...............................7 2.6 49SAF Program Income ...............................................................................................7 2.7 49SAF Program Eligible Expenses ...............................................................................8 Investment Management ......................................................................................................8 3.1 Business Model of Angel Investing and Venture Capital...............................................8 3.2 Risk Tolerance ..............................................................................................................9 3.3 49SAF Intended Lifespan, Return on Investment, and Averages ...................................9 3.4 Investment Strategy ......................................................................................................9 3.5 Invested Funds Policy .................................................................................................... 10 4. 5. 6. Application and Investment Process ................................................................................... 10 4.1 Overview of Application and Investment Processes for Entrepreneurs ........................ 10 4.2 Applicant Eligibility Criteria....................................................................................... 12 4.3 Applicant Evaluation Criteria...................................................................................... 15 4.4 Applicant Funding Amounts and Timeframes ............................................................. 16 4.5 Required Documentation ............................................................................................ 17 Indirect Investments ........................................................................................................... 17 5.1 Limitations ................................................................................................................. 18 5.2 Process ....................................................................................................................... 18 5.3 Criteria ....................................................................................................................... 18 5.4 Eligibility ................................................................................................................... 18 SSBCI Reporting and Record Retention Requirements....................................................... 19 6.1 Quarterly Report Schedule .......................................................................................... 19 6.2 Quarterly Report Requirements................................................................................... 20 6.3 Annual Report Schedule ............................................................................................. 20 49th State Angel Fund Policies and Procedures DRAFT 6.4 Annual Report Requirements ...................................................................................... 20 6.5 Final Report ................................................................................................................ 22 6.6 Reporting of Certain Material Events .......................................................................... 22 6.7 Record Retention and Audit Rights ............................................................................. 23 7. Performance Metrics .......................................................................................................... 24 8. Risk Management .............................................................................................................. 24 9. Glossary ............................................................................................................................. 25 Appendix A: 6.50.030 - Investment guidelines for Municipal Funds Appendix B: Municipality of Anchorage Operating Policy/Procedure Exhibit 1: Small Business Borrower/Investee Certification for Use of Proceeds Exhibit 2: Sex Offender Certification Form Exhibit 3: Lender/Investor Certification for Use of Proceeds Exhibit 4: Quarterly Certification Form Exhibit 5: Scorecard Guidance 49th State Angel Fund Policies and Procedures 1. DRAFT Purpose The mission of the 49th State Angel Fund (49SAF) is to: Provide a source of capital to high-growth businesses to promote entrepreneurship and foster innovation, creating jobs and economic benefit for Anchorage. Help strengthen the local angel investment network and attract additional venture capital to the city. Assist early-stage and disadvantaged businesses. The 49SAF was created through a $13,168,350 allocation from the federal government called the State Small Business Credit Initiative (SSBCI). The 49SAF is intended to help high-growth, early-stage businesses with the potential to produce significant economic impact, including jobs, find funding. Because banks usually loan based on assets, a startup business’s initial capital is often produced through individual equity investment or angel networks. By building the 49SAF, the Municipality of Anchorage (MOA) is helping to ensure the availability of critical capital for qualified entrepreneurs to help them create value. The 49SAF accomplishes its mission by making two kinds of investments: 1. Direct investments in companies early in their business lifecycle. Note: All direct investments made by 49SAF must be matched by co-investors in a business at a minimum ratio of 1 to 1. Direct investments are classified according to one of three investment types: – PreSeed (49SAF invests $30,000 to $100,000): Targets entrepreneurs with a need for funding to take preliminary steps to launch new Anchorage-based businesses. Often involves technology or other high-growth industries, or leverages discoveries and talent at Anchorage’s public and private universities and other research organizations. See description of PreSeed Investment for details. – Seed (49SAF invests $100,000 to $500,000): Targets entrepreneurs with a higher need for funding, often seeking to make initial hires, purchases, or commercialization efforts. See description of Seed Investment for details. – Expansion (49SAF invests $500,000 to $3 million): Targets the following: a. Early-stage entrepreneurs with a viable business that is ready to expand at scale. b. Older-lifecycle businesses needing an injection of capital to operate more efficiently (expansion). See description of Expansion Investment for details. 2. Indirect investments (49SAF invests $100,000 to $5 million) in third-party angel/venture capital funds (also known as “fund to fund” investments), which in turn make direct investments into companies that benefit Anchorage and comply with SSBCI guidelines. Note: All indirect investments made by 49SAF into third-party funds must be matched by other partners in the fund at a minimum ratio of 3 to 1; 49SAF targets 1 49th State Angel Fund Policies and Procedures DRAFT indirect investments at a ratio of 10 to 1. Indirect investments are the preferred method of deploying 49SAF capital, because they offer the added benefits of: – decreasing risk due to diversification. – adding the efficiencies of the private sector into investment decisions. – increasing available capital for early-stage companies through leverage. – helping build a long-term network of angel/venture capital investors in Anchorage. Program policies and procedures contained in this document are established to ensure the MOA manages and allocates the funds committed to it under the SSBCI Act of 2010 to establish the 49SAF. The policies and procedures conform to SSBCI guidelines (www.treasury.gov/ssbci); the MOA’s agreement with the State Small Business Credit Initiative Allocated Agreement of February 14, 2012; and the standards for financial management systems, including internal control requirements as specified in the grants management common rule at § 85.20. The 49SAF is managed by the MOA Finance Department as directed by the SSBCI Act of 2010 (title III of the Small Business Jobs Act of 2010, Public Law 111-240, 124 Stat. 2568, 2582). 2. 49SAF Program 2.1 Overview 1. Eligible applicants: – Direct investment: Small businesses based in Anchorage, or which provide the city with significant economic benefit (i.e., job creation), that have an average business size of 500 or less employees and will not exceed a maximum business size of 750 employees. – Indirect investment: Experienced accredited investors and third-party angel or venture capital funds that agree to adhere to 49SAF policies, procedures, and SSBCI guidelines. 2. Investment focus: – Early-stage, high-growth businesses that can manage the scale necessary to succeed and create an exit strategy for the equity investors. – Disadvantaged, minority-owned, or business turn-around and/or consolidation opportunities. – Applicants able to demonstrate the ability to achieve a leverage ratio of 10 to 1 over the lifespan of 49SAF (concludes March 31, 2017). 3. Allowable project cost/uses: Any “business purpose” that accelerates the business's achievement of key milestones and increases its value. Such business purposes include start-up costs, working capital, franchise fees, equipment, inventory, research and product development, sales and marketing infrastructure development, and hiring of key executives. Limitations apply. See Exhibit 1, item 1. 2 49th State Angel Fund Policies and Procedures DRAFT 4. Available funding: From $30,000 to $5 million, depending on the type of investment requested. 5. Terms: Negotiated between the business owner or third-party venture capital/angel fund and the 49SAF. 6. Anchorage economic impact resulting from 49SAF investment: Requires a commitment to make a substantial and positive economic impact to the city of Anchorage, such as creating or retaining jobs in the city. While 49SAF has not specified a dollar per job ratio, the economic impact, number of jobs committed, and the annual payroll amount are considered in the investment criteria (see Exhibit 5: Scorecard Guidance). 7. Applicant contribution: 49SAF funding requires the applicant to match the 49SAF funding at a minimum ratio of 1 to 1 in allowable project costs/uses. Higher levels of funding may be required, depending on the individual investment opportunity. In-kind contributions of labor, equipment, or similar items are not acceptable as the applicant’s contribution. 8. Target and limitations: The 49SAF targets investments with an average invested amount of $5 million or less. 9. Type of investment: – Direct investments will be in the form of any of the following: a. a straight equity investment b. convertible debt c. a blend of equity investment and subordinated debt – Indirect investments: the 49SAF will take a membership or partnership interest in a third-party entity (equity investment). 10. Security and collateral: Funding may require that 49SAF receives preferred position and/or stock, or securitizes intellectual property or other assets. All such details will be outlined in the term sheet provided by 49SAF and corresponding legal documents. Other forms of collateral or credit enhancements, such as personal or corporate guarantees, letters of credit, etc., will be considered during applicant evaluation. 11. Transparency: Receiving investment from the 49SAF will require the investee to open its financial records to the MOA for as long as the 49SAF holds an investment in the firm. For indirect investments, angel/venture capital funds are required to open their books to the United States Department of Treasury (Treasury), if needed. The 49SAF will disclose to the public that it has invested in a given business or fund. While the 49SAF will continue to comply with disclosure laws (Municipal code 3.90), it recognizes that investees prefer to keep much competitive information confidential and will endeavor to do so within the confines of the law. 12. Modification: The 49SAF Advisory Committee or program manager may initiate changes to the policies and procedures of the 49SAF, subject to final approval by the MOA’s chief fiscal officer. After approval, the amended Policy and Procedure document will be uploaded to the 49SAF website (www.49saf.com) within 1 week. 3 49th State Angel Fund Policies and Procedures 2.2 DRAFT Management The Mayor has designated the MOA Finance Department as the agency responsible for managing the 49SAF program and funding. The CFO oversees all management and implementation of the 49SAF and its funds. The 49SAF responsibilities are designated as follows: MOA Program Manager: – Educate Anchorage entrepreneurs about the SSBCI program though seminars, presentations, advertisements, websites, and via the Business Plan Competition. – Assist program applicants to understand program guidelines and SSBCI compliance requirements, and answer questions related to application submission. – Supervise and manage preliminary review, analysis, and due diligence of all timely applications to establish compliance with SSBCI requirements; evaluate the economic viability of investment; and perform financial statement and market analyses. – Ensure that the 49SAF program remains within its stated budget. – Ensure compliance with all local, state, and federal guidelines. – Track investment performance through reports from 49SAF investments and provide timely reports to the SSBCI as required (see SSBCI Reporting and Record Retention). – Assist the 49SAF Advisory Committee as needed. – Implement ongoing monitoring of companies receiving direct investment, which may involve the use of third-party mentors and advisors. Anchorage Economic Development Corporation (AEDC): Assist the MOA Finance Department in the preliminary review and analysis of applications. Consultant/Financial Analyst: Participate in final due diligence of all timely applications to evaluate the economic viability of investment, ensure the investee has matching funds as declared, assist in structuring the deal, and provide financial statement and market analyses. MOA Public Finance: Assist with establishing deal structures and loan schedules, and advise on interest rates and exit strategies. MOA Treasurer: Assist with monitoring and collecting loan payments and defaults. Advisory Committee: Review and evaluate applicants; and recommend who receives funding, the funding amount, and whether additional due diligence is needed prior to funding. The Advisory Committee will assess applicants using scorecard guidelines that focus on business strategy, team qualifications, anticipated economic impact to Anchorage, intended market, product/services, project budget, and finance plan. The Advisory Committee will rank successful applicants and provide award recommendations to the Mayor and the CFO. 4 49th State Angel Fund Policies and Procedures 2.3 DRAFT Municipal Attorney’s Office: – Complete legal documentation and other actions necessary for each approved investment. Determine whether liability issues exist within a potential investment that offset potential returns. – Provide ongoing review of SSBCI for existing/new guidelines. – Oversee internal control reviews of the administering entity, MOA Finance. Mayor and CFO: Review recommendations of the Advisory Committee and the potential economic benefits to the community before authorizing 49SAF monies to an applicant. The Mayor and CFO may – approve funding as proposed in the application. – modify the funding amount requested. – request additional due diligence be conducted. – reject the proposal. Composition of the Advisory Committee The committee, composed of a group of leaders from Alaska, includes individuals with track records of success in their respective industries and functions. The committee may include bankers, leaders within Anchorage business or the community at large, and entrepreneurs. Committee guidelines follow: Committee size: 11 members. Committee member selection: The Mayor appoints members. Term: 3 years. Meetings: Various meetings will be conducted to prepare committee members for the evaluation and award process. – Committee training: Members will be briefed about 49SAF policies, procedures, evaluation process, and award. – Committee evaluation of applicants: a. Members will be provided with applications in advance of the applicant’s oral presentation. Preferred delivery method will be using an online database of applications. b. Members will be required to attend meetings to listen to applicant presentations. c. Members will evaluate applicants, rank awards, and make recommendations to the Mayor and the CFO. 5 49th State Angel Fund Policies and Procedures DRAFT d. Number of meetings: 2012 – As needed to distribute first tranche. 2013 – As needed to distribute second and third tranches. e. Meeting structure: Meetings will follow Robert’s Rules of Order. f. Quorum: Six members. 2.4 Committee officers: to include president/chairperson, vice president, secretary, and treasurer. The Mayor will appoint the committee chairperson. Conflict of Interest/Use of Funds All individuals involved in administering 49SAF—whether participating in the initial review, advisory committee, due diligence, or final approval—will adhere to the MOA’s established conflict of interest guidelines. Members who are related to an applicant or who could benefit from an investment decision will excuse themselves from the applicant review and decision processes. The MOA will not use any SSBCI funds to pay any person to influence or attempt to influence any agency, elected official, officer, or employee of a state or local government in connection with the making, award, extension, continuation, renewal, amendment, or modification of any state or local government contract, grant, loan, or cooperative agreement as such terms are defined in 31 U.S.C. § 1352. No member of or delegate to the United States Congress or resident United States Commissioner will be admitted to any share or part of funds allocated under the SSBCI agreement with the MOA or to any benefit that may arise there from. The MOA will not use any SSBCI funds to pay any costs incurred in connection with: – any defense against any claim or appeal of the United States Government, any agency or instrumentality thereof (including Treasury), against the MOA. – any prosecution of any claim or appeal against the United States Government, any agency or instrumentality thereof (including Treasury), which the MOA instituted or in which the MOA has joined as a claimant. The MOA will not use any SSBCI funds for loans used to finance, in whole or in part, business activities prohibited by Treasury regulations, including Treasury regulations promulgated after the date of the SSBCI agreement with the MOA (February 14, 2012) and the SSBCI Policy Guidelines as published by Treasury on its website at www.treasury.gov/ssbci. The MOA will not use SSBCI funds outside the geographic borders of the MOA unless the Mayor or CFO of the MOA warrants, in writing, that the loan or investment will result in significant economic benefit to Anchorage. Before such investment is made, the 49SAF program manager will obtain confirmation from the Treasury to ensure the investment complies with SSBCI guidelines. 6 49th State Angel Fund Policies and Procedures 2.5 DRAFT Allocated Funding from the United States Department of Treasury Program funding is obtained from the Treasury and disbursed in thirds as follows: Allocated Required Paperwork Maximum Amount Available to Pay for Direct/Indirect Administrative Costs First One-third (33%) or $4,345,556 Counsel for MOA must complete Five Percent (5%) or $217,277 certification per Annex 2, Exhibit 2-1 of the SSBCI Agreement with the MOA. Second One-third (33%) or $4,345,555 MOA must certify it has expended, transferred, or obligated 80 percent of the last disbursement for 49SAF. Three Percent (3%) or $130,366 Third One-third (34%) or $4,477,239 MOA must certify it has expended, transferred, or obligated 80 percent of the last disbursement for 49SAF. Three Percent (3%) or $134,317 Disbursements are subject to control objectives and controls as detailed in the 49SAF Risk Matrix for the risk: Improper Use and Accounting of SSBCI Funds. The 49SAF is required to provide performance reports to the Treasury on a quarterly and annual basis (see SSBCI Reporting and Record Retention Requirements). The final annual report is due on March 31, 2017. It will summarize the performance results of SSBCI funds, to include a narrative of how or the extent to which the purpose of the funds, as described in Annex 1 of the SSBCI agreement with the MOA, was accomplished using SSBCI funds. 2.6 49SAF Program Income Program income is defined as gross income received by the MOA that is directly generated by an activity supported by SSBCI funds or earned as a result of SSBCI funding during the program time period. Program income includes, but is not limited to, income from: Fees for services performed that were funded or supported with SSBCI funds. Interest earned on loans made using SSBCI funds. Program income does not include interest on SSBCI funds; the receipt of principal on loans made using SSBCI funds; or rebates, credits, discounts, refunds, or interest earned on any of them. Program income is to be added to the SSBCI funds and used for the same purposes. Use and accounting of program income are subject to control objectives and controls detailed in the 49SAF Risk Matrix. 7 49th State Angel Fund Policies and Procedures 2.7 DRAFT 49SAF Program Eligible Expenses The MOA will use the SSBCI funds only for the purposes and activities specified in the SSBCI agreement with the MOA including, but not limited to, the schedule contained in Annex 3, and for paying allowable costs of those purposes and activities in accordance with the cost principles set forth in OMB Circular A-87 (Cost Principles for State, Local, and Indian Tribal Governments) and codified in 2 C.F.R. Part 225. Accounting of program expenses is subject to control objectives and controls detailed in the 49SAF Risk Matrix. 3. Investment Management 3.1 Business Model of Angel Investing and Venture Capital The 49SAF plans to invest 67 percent of its portfolio as indirect investments in third-party venture capital or angel funds, and 33 percent in direct investments in entrepreneurial companies. These percentages serve as a guide. Ultimately, the opportunities present and available in the Anchorage market will determine the types of investments the 49SAF makes. The 49SAF may directly and indirectly fund businesses that underperform, fail, or make drastic changes from plan to remain competitive and operational. Taking a “patient capital” approach and being able to withstand such failures is integral to the business model of angel investment. Note on Expected Returns In Expected Returns to Stock Investments by Angel Investors in Groups, the authors note that angel investment as a business model is one characterized by returns that have “a large variance and are heavily skewed, with many losses and occasional extraordinarily high returns.” 1 In addition, they note the following from the study of 588 angel-funded projects in their Angel Investor Performance Project (AIPP): that “complete failures (returning nothing) comprise 29.6 percent of the AIPP sample and 51.8 percent return less than the invested capital after adjusting for the time value of money (50.4 percent without the adjustment).”2 Other studies of angel investing, such as Returns to Angel Investors in Groups, view the business model as containing more volatility. 3 The authors note that: Fifty-two percent of all of the exits returned less than the capital the angel had invested in the venture. Seven percent of the exits achieved returns of more than ten times the money invested, accounting for 75 percent of the total investment dollar returns. 1 R. DeGennaro and G.Dwyer. 2010-2014. Working Paper, Federal Reserve Bank of Atlanta, p 34. Ibid., p 34. 3 R. Wiltbank and W. Boeker. 2007. Kauffman and Angel Capital Education Foundations, p 1. 2 8 49th State Angel Fund Policies and Procedures 3.2 DRAFT Risk Tolerance The 49SAF expects to maintain strong risk tolerance for underperforming, failed, and off-plan businesses. Accordingly, these risks are expected to be offset by the correspondingly more rare, high-performing direct investments; therefore, 49SAF fund risk tolerance will be built to withstand up to a 50 percent failure rate during operation of the fund. 3.3 49SAF Intended Lifespan, Return on Investment, and Averages Through its allocation from the SSBCI, the 49SAF will invest in businesses that make a positive economic impact within Anchorage. The 49SAF’s anticipated primary period for investing is the first 2 years of its existence, but not longer than 5 years, ending concurrently with the SSBCI allocation period scheduled to expire on May 14, 2017, when the final report is due to the Treasury. The principal of the 49SAF fund will be dispersed within 2 years (see Applicant Funding Amounts and Timeframes). At that time or earlier, the 49SAF may be extended or have its assets sold, per the decision of the MOA. The return from 49SAF is projected to be between 10 and 20 percent, based on analysis performed by the Center for Venture Research in The Angel Investor Market in 2011: The Recovery Continues. 4 The 49SAF expects to realize gains on individual investments in 3 to 5 years (expected years to exit). The true measures of performance of the 49SAF are less its return on investment and more its total economic impact on Anchorage: jobs created, new companies founded or turned around, and creation of a more permanent and visible network of angel investors in the city (see Performance Metrics). 3.4 Investment Strategy The 49SAF plans to keep 67 percent of its portfolio as indirect investments in third-party venture capital or angel funds, and 33 percent in direct investments in entrepreneurial companies. These percentages serve as a guide. Ultimately, the opportunities present and available in the Anchorage market will determine the types of investments the 49SAF makes. While indirect investments are the 49SAF’s preferred investment strategy—diversifying risk, requiring less direct management, adding the benefit of increasing the skill of early-stage investment within the private sector, and helping create more such permanent structures outside government—at 49SAF program launch (May 14, 2012), third-party angel structures within Anchorage are few. As such, most initial 49SAF investments are likely to be direct. 4 Jeffrey Sohl. 2012. Center for Venture Research. http://wsbe.unh.edu/sites/default/files/2011_analysis_report.pdf. April 3. Sohl notes: “Returns from mergers and acquisitions represented 54% of the angel exits, and bankruptcies accounted for 24% of the exits in 2011. Slightly more than half of the angel exits were at a profit and annual returns for angel’s exits (mergers and acquisitions, notes and IPOs) were between 18% and 28%; however, these returns were quite variable.” 9 49th State Angel Fund Policies and Procedures DRAFT The 49SAF guidelines have no preference for investing in a particular industry. However, angel investment necessitates making returns in high-growth industries. In 2011 the most popular sectors for angel investments were software, healthcare, industrial/energy, biotech, IT services, and media.5. But the Alaska market is different, and diversion from these sectors is likely. Alaska investments may require higher capital outlays due to the types of industry that flourish locally and higher operating expenses. 3.5 Invested Funds Policy The 49th State Angel Fund cash will be managed and accounted for in compliance with the Anchorage, Alaska, Code of Ordinances, Chapter 6.50.030 - Investment guidelines for Municipal Funds (see Appendix A); and Municipality of Anchorage Operating Policy/Procedure, P&P 2411 Dated September 1, 2007 (see Appendix B). 4. Application and Investment Process 4.1 Overview of Application and Investment Processes for Entrepreneurs 1. Application: – Potential applicants access application and background information about 49SAF through the MOA website. – Potential applicants may contact the 49SAF program manager for additional information/clarification about 49SAF program guidelines and SSBCI compliance requirements. – Applicants complete 49SAF application and provide all documentation and certifications and submit the total application package online by established deadline. – Forms available to applicants online include: 49SAF policies and procedures, program description and eligibility requirements, and application. 2. Initial review: The 49SAF program manager, along with one representative from the AEDC, will perform a preliminary review of applications to include: – Review for application completeness and submission of all required certifications. – Due diligence for compliance to SSBCI requirements and economic viability of applicant. – Short assessment of quality of application, business plan, and financial statements. Applications that fail to pass these preliminary requirements or overcome a baseline quality hurdle (which varies according to the number and quality of applications in a given round) will be rejected and the applicants notified of such. Rejected applicants may reapply in a future funding period. 5 Jeffrey Sohl. 2012. Center for Venture Research. http://wsbe.unh.edu/sites/default/files/2011_analysis_report.pdf. April 3. 10 49th State Angel Fund Policies and Procedures DRAFT 3. Advisory Committee review: – Applications that pass the preliminary review are forwarded to the Advisory Committee along with notes from the preliminary analysis team. – 2nd screening (optional): Should too many applicants pass the preliminary review during a given investment round, the Advisory Committee may elect to filter out a set of applications online, prior to applicant presentation stage, using a ranking system based on scorecard elements. – Presentation: Applicants will be scheduled to present to the Advisory Committee. The Mayor and CFO may elect to attend such presentations. Applicants should expect to be questioned about the specifics of their applications and proposals to enable the committee to fully understand and evaluate the merits of the investment proposal. The committee will also take this opportunity to assess the applicant’s character, experience, business plan, and financial statements. – The committee will use a scorecard to help analyze applicants for 49SAF funds. The scorecard has elements common to most business plan evaluations, specifically the following: business strategy, management team, economic impact to Anchorage, market, product/services, project budget, and finance plan. The scorecard is subject to change per the Advisory Committee’s recommendations. – Each Advisory Committee member will use scorecard guidance to rank investment opportunities. Use of the scorecard will enable determining an average rank per deal, resulting in a summary of investment opportunities for the entire committee to consider. From the summary, each opportunity will be discussed and funding recommended within the investment budget for the round. Funds within a given round may be completely or partially expended and carried over, or possibly accelerated—depending on the investment opportunity—with approval from the CFO. – The Advisory Committee may also a. guide 49SAF program staff on steps to be taken during the due diligence process to further assess the quality of an opportunity. b. ask for assistance from the program manager or the Municipal Finance Department for help in deal structuring and valuation, if needed. – The 49SAF program manager will notify all applicants of whether they passed this stage in the review process. 4. Final due diligence: – Final due diligence is provided by the MOA or contracted third parties. Within 90 days or sooner of the Advisory Committee’s investment proposal, all of the following will be documented for applicants receiving an investment proposal: a. That no significant liability issues exist with the business or fund receiving investment (legal). 11 49th State Angel Fund Policies and Procedures DRAFT b. That the deal structure/valuation presents no structural issues in recouping investment (finance). c. That the applicant demonstrates at least a 1 to 1 match of the 49SAF investment (or greater, if required) from an external source (finance). d. That any areas of concern identified during the Advisory Committee review stage have been resolved (program manager/consultant). e. That the applicant is in compliance with all SSBCI guidelines, including but not limited to, all principals (program manager) having no presence on any government registry of sex offenders. not operating in businesses prohibited by guidelines or the Treasury. having no delinquent property taxes owed to the MOA. having the ability to pass a standard background check. 5. Offer and closing: – After passing final due diligence, the applicant will be made an offer. If the applicant rejects the offer, the 49SAF program manager will have authority to negotiate a counteroffer. Should the program manager and applicant agree to the counteroffer, the 49SAF project manager will notify the Advisory Committee of the approved counteroffer and pass it to the Mayor and CFO for final approval. – Final approval: the Mayor and CFO will use their best judgment to provide recommended funding to an applicant. In addition to considering the recommendations of the Advisory Committee, the Mayor and CFO will consider the economic needs of and benefits to the community in making the final decision. – Closing documents: After final approval is granted, closing documents (see Exhibit 1 through Exhibit 3) are generated and provided to the applicant. In signing and closing with the 49SAF program manager at the MOA, applicants a. agree to the specified investment offer and structure. b. receive notice of the requirements of their investment, which includes ongoing compliance with the principles of the 49SAF and quarterly and annual reporting related to business performance. 4.2 Applicant Eligibility Criteria All 49SAF investments—direct or indirect—require applicants to demonstrate the following: Positive, substantial economic impact to Anchorage via immediate or follow-on job creation, or other economic benefit to the city. Successful applicants will show the sound assumptions driving this assertion. Commitment of matching funds of 1 to 1: An actual, conditional, or anticipated marketbased third-party investment commitment that equals at least 100 percent of the total 12 49th State Angel Fund Policies and Procedures DRAFT requested 49SAF funding, or the ability to secure such funding within 90 days of the accepted application. Matching investor will close and transfer the proceeds of the investment to the company in tandem with 49SAF funding. Likelihood of the 49SAF investment to be leveraged by 10 to 1 with new debt or equity financing within ten years. Applicants must demonstrate how they intend to achieve this metric within their application. In addition, the firm or fund plan to secure follow-on financing (as appropriate by business stage) should carry the business to selfsustainability. Fewer than 750 employees. Will not use 49SAF funding for any prohibited purpose, as set forth in the program application or by Treasury. Eligible applicants are those early stage companies that show potential economic benefit (as described in Conflict of Interest/Use of Funds) and that generally meet the following guidelines specific to each of the three 49SAF investment types, as detailed below. PreSeed Investment: – Has at least one principal or a committed collaborator and/or mentor with unique industry experience or knowledge related to the product, or with experience launching a business, which may include a relationship with an innovation center, entrepreneurial support organization, or advisor that can provide expertise appropriate to the project. – Is committed to commercializing a discovery or product, or building a business that has strong growth potential (at least 10 times leverage), but that may not be easily financed through traditional commercial means. – Demonstrates a viable plan to secure follow-on seed capital financing needed to successfully grow the startup company or to successfully sustain itself on completion of pre-seed financing. – Has not exceeded total debt and equity financing of $500,000 (excluding the requested PreSeed funding; required matching funding; sponsored research; and related awards). Exceptions may occur. Seed Investment: – Has a committed leadership team and committed collaborators/mentors with significant industry experience related to the product to be commercialized. – Is committed to commercializing a discovery or building a product that has strong growth potential (at least 10 times leverage), but which may not be easily financed through traditional commercial means. – Demonstrates a viable plan to secure follow-on seed capital financing needed to successfully grow the startup company or to successfully sustain itself on completion of seed financing. 13 49th State Angel Fund Policies and Procedures – DRAFT The startup company has not exceeded total debt and equity financing of $3 million (excluding the requested 49SAF pre-seed funding; required matching funding; sponsored research; and related awards). Exceptions may occur. Expansion Investment: – Has a management team of high-quality entrepreneurs with a track record of leadership and performance—either in the company's specific industry or in prior entrepreneurial ventures. 49SAF will also look at the team's passion for and commitment to the new business idea, and the team’s ability to inspire confidence among future stakeholders, including employees, potential customers, and investors. The team must be open to and comfortable with receiving input provided by angel investors. – Demonstrates an investment strategy that understands and capitalizes on its market. Applicants demonstrate a clear understanding of their target consumers and potential market size. – Is one of the following: a. breakthrough product or solution, not product enhancement. b. underperforming business that can grow aggressively given the injection of requested capital. c. significant research or capital investment in technology. d. creator of a successful research or intellectual property licensing relationship with an Anchorage-based university or similar research institution. – If a technology-centered business, the concept behind the technology must be proven and verifiable, and demonstrate a clear path to commercialization via a strong business plan. – Has an actionable plan to reach milestones. Funds must be used to accelerate the company's achievement of key milestones that increase the company's value. The 49SAF will fund activities that include pursuing research and product development, building a sales and marketing infrastructure, and hiring key executives; or that fund a turn-around or mid-expansion in an existing business through the purchase of key assets. – Demonstrates growth potential of 10 times the 49SAF investment and more in 5 years. Management of the 49SAF will look for companies that can grow quickly and manage the scale necessary to succeed. The applicant must demonstrate a plan to generate significant profits beyond the initial product idea. The 49SAF will also require well-conceived financial projections that demonstrate consistent profits and cash flow growth based on sound assumptions. – Demonstrates competitive advantage. The applicant company has proprietary features that distinguish it from potential competitors or provide barriers to entry that prevent other companies from competing with a similar offering that captures the applicant’s target market. Attributes that convey competitive advantage include intellectual 14 49th State Angel Fund Policies and Procedures DRAFT property protection, exclusive licenses, exclusive marketing and distribution relationships, strong brands, scarce human resources (i.e., specialized knowledge and skills), and access to scarce raw material. 4.3 Applicant Evaluation Criteria Submissions by eligible applicants will be evaluated based on the quality of the submission and a demonstrated likelihood to achieve the following outcomes in Anchorage: Best fit businesses for 49th State Angel Fund investment are those which: • Can demonstrate 10x leverage within five years, • Create significant economic impact within Anchorage (jobs being a key component) • Scale quickly and communicate an investor exit strategy The MOA has established formal investment criteria for the Advisory Committee and CFO/Mayor to consider when selecting applicants for funding (see Exhibit 5: Scorecard Guidance).Exhibit 5: Scorecard Guidance While the merits of each investment will vary, the investment evaluation will include an analysis of the following: Management team with a business track record and balanced functional skills. 49SAF funding will target teams of high-quality entrepreneurs with a track record of leadership and performance, either in the company's specific industry or in prior entrepreneurial ventures. 49SAF funding decisions will also consider the team's passion for and commitment to the new business idea, and the team’s ability to inspire confidence among future stakeholders, including employees, potential customers, and investors. The team's credibility is essential. In addition, the team must be open to and comfortable with receiving input provided by angel investors. Market opportunity. The investment plan must demonstrate a strategy that understands and capitalizes on its market. Clear understanding of the user and the customer is required. Disadvantaged business capitalization. There is an opportunity and need to provide equity capital and expertise for the turn-around and/or consolidation of some small disadvantaged businesses. In addition, the presence of minority owners and/or a physical location in an Underutilized Business Zone (HUBZone) are factors that will be considered. Use of proceeds. Funds must be used for a “business purpose” that accelerates the business's achievement of key milestones that increase its value. Examples include research and product development, sales and marketing infrastructure development, and hiring of key executives. Limitations apply. See Exhibit 1, item 1. Growth potential: 10 times leverage. The 49SAF will look for companies that can grow quickly and manage the scale necessary to succeed. The applicant must demonstrate a 15 49th State Angel Fund Policies and Procedures DRAFT plan to generate significant profits beyond the initial product idea. The 49SAF will also require well-conceived financial projections that are based on sound assumptions and demonstrate consistent profit and cash flow growth potential. Target companies are those with the potential to generate 10 times the 49SAF investment and more in 5 years. In addition, 49SAF applicant screening will evaluate the number of jobs created and the benefit to our community. 4.4 Competitive advantage: patents, exclusive licenses, or channels. The company should have proprietary features that distinguish it from potential competitors or provide barriers to entry that prevent other companies from capturing its customers with a similar offering. Attributes that convey competitive advantage include intellectual property protection, exclusive licenses, exclusive marketing and distribution relationships, strong brands, scarce human resources (i.e. knowledge and skills), and access to scarce raw material. Applicant Funding Amounts and Timeframes PreSeed: Individual investments will not be less than $30,000 and will not generally exceed $100,000. Awards will be in the form of equity or convertible debt. Seed: Individual investments will not generally be less than $100,000 or exceed $500,000. Awards will be in the form of equity or convertible debt. Expansion: Individual investments will not generally be less than $500,000 or exceed $3 million. Awards will be in the form of equity or convertible debt. Indirect: Individual investments will not be less than $100,000 or exceed $5 million. Awards will be in the form of equity or partnership interest. The 49SAF intends to invest its total allocated funds by May 14, 2014. The following schedule will be used for 2012: Period Activity May 14 – August 5 Application Period August 6 – September 30, Advisory Review October 1 – December 31, 2012 Due Diligence, Final Approval Investment Round 1: $4,128,279 The following tentative schedule applies for 2013: Period Activity January 7 – March 31 Application Period April 1 – May 5 Advisory Review May 6 – June 30 Due Diligence, Final Approval July 1 – September 29 Application Period 16 Investment Round 2: $4,215,189 Round 3: $4,342,922 49th State Angel Fund Policies and Procedures September 30 – October 27 Advisory Review October 28 – December 31 Due Diligence, Final Approval DRAFT Funds will be considered dispersed when at least 80 percent of the funds have been declared for investment in a given round. 4.5 Required Documentation Before providing any investment using 49SAF funds to any applicant, the following is required: 5. Application: Timely and complete borrower application appropriate to type of investment being applied for. No late or incomplete applications will be considered. Term sheet and corresponding investment documents: A summary of the investment offer will be signed by both the investee and 49SAF staff. In addition, other documents (e.g., note for convertible/subordinated debt, investor rights agreement) will be signed. Investee certification: Small business investees must make a certification regarding the use of investment proceeds for each SSBCI-supported transaction. See Exhibit 1: Small Business Borrower/Investee Certification for Use of Proceeds. Sex offender certification: Certification from the private entity, including any financial institution, that the principals of such entity have not been convicted of a sex offense against a minor (as such terms are defined in section 111 of the Sex Offender Registration and Notification Act [42 U.S.C. 16911]). See Exhibit 2: Sex Offender Certification Form. Investor certifications: – Exhibit 3: Lender/Investor Certification for Use of Proceeds. – The binding written agreement of the investee to make available to the Treasury Inspector General all books and records related to the use of 49SAF funds, subject to the Right to Financial Privacy Act (12 U.S.C. § 3401 et seq.), including detailed loan records, as applicable. – Certification from the financial institution that the financial institution is in compliance with the requirements of 31 C.F.R. § 103.121. Indirect Investments The 49SAF has adopted an indirect investment strategy whereby it seeks to invest in venture capital partnerships that in turn will make direct investments into Anchorage-based companies. All fund-to-fund investments by 49SAF will comply with SSBCI and Treasury guidelines. The general partners of the venture capital partnerships, or fund managers, are private sector investors or other institutions that pool funds from a number of investors, identify and invest in promising businesses, and manage the investments until an exit from the investment is achieved. In this manner, the 49SAF is able to leverage public funds with additional capital and utilize the 17 49th State Angel Fund Policies and Procedures DRAFT investment acumen of the private sector in selecting suitable investments. The 49SAF has a preference for indirect investments as the method of deploying early stage capital. Investing in third-party angel and venture capital funds is intended to: Enable existing angel investment networks in the Municipality to increase their capacity to evaluate new investments. Enable new angel investment entities to recruit new members, establish processes for evaluating new investments, and provide significant training to their members. Attract external sources of private, angel, and venture capital investment. Recruit and develop more professionals working within this industry within Anchorage. Provide more opportunities for entrepreneurs to find the funding they need to grow their businesses in Anchorage. 5.1 Limitations The 49SAF may not invest less than $100,000 or more than $5 million in any third-party angel fund. 5.2 Process The process is the same as for entrepreneur applications: initial review, advisory committee review, due diligence, and final approval/funding. 5.3 Criteria The initial review team and the advisory committee will evaluate indirect investment opportunities using the same criteria as for direct investments—business strategy, management team, economic impact to Anchorage, market, product/services, project budget, and finance plan—where appropriate. In addition, they will consider the following factors: 5.4 Management team: The strength, expertise, results, and certifications of the co-investors in the fund. The experience of the team should reflect the ability to carry out the focus of the proposed fund. Business strategy: Any fund competitive advantages (example: advantaged connections to deal flow, research, talent, intellectual property). Economic impact: The third-party fund’s likelihood of becoming a long-lasting, sustainable source of early stage capital for Anchorage. Eligibility The 49SAF will make investments in third-party funds organized by individuals or entities with experience in organizing angel and venture capital funds and investments, providing financial 18 49th State Angel Fund Policies and Procedures DRAFT services, and having valuable experience within the particular industry in which they intend to invest. To be eligible for indirect investment, on investment of funds a third-party fund must 6. Be a partnership, limited partnership, corporation, limited liability company, limited liability partnership, trust, or estate. Be organized for the purpose of investing in a portfolio of non-publicly traded enterprises with strong growth potential (10 times leverage) that meets the objectives of the overall 49SAF program. Consist of at least three accredited or qualified investors as defined by Securities and Exchange Commission Regulation D, Rule 501. Be in compliance with the securities laws of this state. SSBCI Reporting and Record Retention Requirements The 49SAF is required to provide performance reports to the Treasury on a quarterly and annual basis. The final annual report is due on March 31, 2017. It will summarize performance results of the SSBCI funds, to include a narrative of how or the extent to which the purpose of the funds, as described in Annex 1 of the SSBCI agreement with the MOA, was accomplished using the funds. 6.1 Quarterly Report Schedule Quarterly Report for Period Covering: Due Date January 1, 2012 through March 31, 2012 April 30, 2012 April 1, 2012 through June 30, 2012 July 30, 2012 July 1, 2012 through September 30, 2012 October 30, 2012 October 1, 2012 through December 31, 2012 January 30, 2013 January 1, 2013 through March 31, 2013 April 30, 2013 April 1, 2013 through June 30, 2013 July 30, 2013 July 1, 2013 through September 30, 2013 October 30, 2013 October 1, 2013 through December 31, 2013 January 30, 2014 January 1, 2014 through March 31, 2014 April 30, 2014 April 1, 2014 through June 30, 2014 July 30, 2014 July 1, 2014 through September 30, 2014 October 30, 2014 October 1, 2014 through December 31, 2014 January 30, 2015 January 1, 2015 through March 31, 2015 April 30, 2015 19 49th State Angel Fund Policies and Procedures Quarterly Report for Period Covering: 6.2 DRAFT Due Date April 1, 2015 through June 30, 2015 July 30, 2015 July 1, 2015 through September 30, 2015 October 30, 2015 October 1, 2015 through December 31, 2015 January 30, 2016 January 1, 2016 through March 31, 2016 April 30, 2016 April 1, 2016 through June 30, 2016 July 30, 2016 July 1, 2016 through September 30, 2016 October 30, 2016 October 1, 2016 through December 31, 2016 January 30, 2017 Quarterly Report Requirements All reports will include: Description of use of funds quarterly and cumulative for direct and indirect costs. Program income generated. Signature by authorized MOA official. Certification per Annex 4 of the SSBCI agreement with the MOA (attached as Exhibit 4: Quarterly Certification Form 6.3 6.4 Treasury may, from time to time, prescribe the form of the report. Annual Report Schedule Annual Reporting Period Ending: Report Due Date December 31, 2012 March 31, 2013 December 31, 2013 March 31, 2014 December 31, 2014 March 31, 2015 December 31, 2015 March 31, 2016 December 31, 2016 March 31, 2017 Annual Report Requirements Generally, the MOA will include in each year’s annual report transaction-level data only for loans and investments closed in the reporting period year. Data will include the following: 1. A unique investment identifier number, the census tract, and zip code of the investee’s principal location. 20 49th State Angel Fund Policies and Procedures DRAFT 2. The SSBCI-approved program in which the venture capital investment is enrolled. 3. The total amount of venture capital and other financing invested or loaned, and of that amount, the portion that is from non-private support. 4. The amount of venture capital provided by the Approved Municipal venture capital fund program. 5. Date of initial disbursement. 6. The business’s annual revenues in the last fiscal year. 7. The business’s full time equivalent (FTE) employees. 8. The 6-digit North American Industry Classification System (NAICS) code for each business’s industry. 9. The year the business was incorporated. 10. The estimated number of jobs created and the estimated number of jobs retained as a result of the investment. 11. The amount of additional private financing occurring after the investment closing, if required under the provisions of Annex 7 in the SSBCI agreement with the MOA. The MOA must also include in its annual report data on private financing that occurs after the loan/investment closing. Reporting this data for subsequent years allows the SSBCI to determine program effectiveness in achieving the MOA’s projected 10 to 1 private leveraging expectation across all approved municipal programs. Subsequent financing may be considered to be caused by, or resulting from, the initial SSBCI-supported other credit support program (OCSP) financing when the initial SSBCI-supported OCSP financing increases the current and future creditworthiness of a company. If the MOA is required to report subsequent private financing, either for all OCSP programs or for a particular OCSP program, the MOA should record an amount greater than $0 only when the subsequent private financing is caused by, or resulting from, the initial SSBCI-supported OCSP financing, based on the guidance provided below. For example, some loans or investments made under venture capital programs, or direct loan or loan participation programs, satisfy this condition. By investing equity, convertible, or subordinated debt, their financing can directly strengthen a company’s balance sheet and allow it to (a) acquire assets that can collateralize a bank loan or (b) increase the cash available to service bank debt. The direct nexus between the initial SSBCI–supported loan/investment and subsequent private financing occurs only when the initial loan/investment is a form of subordinate, mezzanine, or equity financing—in other words, a form of financing that actually strengthens the company’s balance sheet or that can be used to secure or repay debt. Therefore, the MOA should record subsequent private financing for venture capital investments, direct loans, or loans enrolled in loan participation programs only when the initial loan/investment involves subordinate, mezzanine, or equity financing. The MOA has the option to report subsequent financing for previously closed OCSP loans or investments if its total cumulative private financing generated by all approved municipal programs has already exceeded 10 to 1. Under these circumstances, reporting is not mandatory. 21 49th State Angel Fund Policies and Procedures DRAFT The MOA should record subsequent private financing for venture capital investments when the initial loan/investment involves subordinate, mezzanine, or equity financing. Cumulative Private Leverage Ratio for All Approved Municipal Programs The cumulative private leverage ratio is the result of dividing the total cumulative private financing generated by all approved municipal programs by the total SSBCI funds used by all approved municipal programs. The resulting weighted average is outlined below and reflects the MOA’s ability to meet its reasonable expectation of 10 to 1 leveraging to date. Calculating 10 to 1 Expectation The MOA should calculate its leveraging for purposes of demonstrating a 10 to 1 ratio across all of its approved municipal programs according to the following formula: Cumulative Private Leverage Ratio for all Approved Municipal Programs = [Total Cumulative Private Financing Generated by all Approved Municipal Programs]/[Total Cumulative SSBCI Funds Used by all Approved Municipal Programs] 6.5 Final Report The final annual report is due on March 31, 2017. It will summarize performance results of the SSBCI funds, to include a narrative of how or the extent to which the purpose of the funds, as described in Annex 1 of the SSBCI agreement with the MOA, was accomplished using the funds. In addition, the authorized MOA official will attach to the annual report a completed and executed Federal Financial Report, SF-425. 6.6 Reporting of Certain Material Events The MOA will promptly notify the Treasury in writing in reasonable detail of any of the following events: Any proceeding instituted against the MOA in, by or before any court, governmental or administrative body or agency, which proceeding or its outcome could have a material adverse effect upon the operations, assets, or properties of the MOA. Any material adverse change in the condition, financial or otherwise, or operations of the MOA. General events of default, to include: – Any representation, warranty, certification, assurance or any other statement of fact contained in the SSBCI agreement with the MOA or the application of the MOA including, but not limited to, the assurances (non-construction) contained as part of the application, or any representation or warranty set forth in any document, report, certificate, financial statement or instrument now or hereafter delivered to the 22 49th State Angel Fund Policies and Procedures DRAFT Treasury in connection with the agreement, is found to be inaccurate, false, incomplete or misleading when made, in any material respect. – 6.7 The MOA materially fails to observe, comply with, meet or perform any term, covenant, agreement, or other provision contained in the agreement including, but not limited to, the MOA’s failure to submit complete and timely quarterly reports or annual reports, or the MOA ceases to use the SSBCI funds to undertake authorized activities as detailed in Annex 1 of the SSBCI agreement with the MOA. Record Retention and Audit Rights The MOA will retain all financial records, supporting documents, statistical records, and all other records pertinent to the SSBCI funds for a period of 3 years from the date of submission of the final quarterly report. Financial records and supporting documents include, but are not limited to: All investment agreements. Investment commitment letters. All sex offender and use of proceeds certifications. Any transaction enrollment forms. All general ledger entries pertaining to SSBCI funds. All statements for accounts containing SSBCI funds, including bank statements if applicable. Any contracts or memoranda of agreement with administering entities. Any records of all transfers of funds to administering entities. All invoices and receipts for administrative expenses. Documentation of private leverage and subsequent private financing. If lenders and investors, or an administering entity, are required to retain any records rather than submitting these records to the MOA, the MOA must have a written agreement in place requiring the maintenance of these records until at least January 30, 2020, and must exercise oversight to verify compliance. Treasury, the Treasury Inspector General, the Comptroller General of the United States, or any of their duly authorized representatives have the right of timely and unrestricted access to any books, documents, papers, or other records of the MOA that are pertinent to the SSBCI funds and to make audits, investigations, examinations, excerpts, transcripts, and copies of such documents. This right also includes timely and reasonable access to the MOA’s personnel for the purpose of interview and discussion related to such documents. This right of access will last as long as records are retained, except that Treasury’s right of access expires on September 27, 2017. 23 49th State Angel Fund Policies and Procedures 7. DRAFT Performance Metrics The 49SAF’s performance will be measured by the following: 8. 49SAF investments awarded 49SAF funds expended Leveraged dollars Leverage ratio (goal 10 to 1) Direct jobs created Businesses created, attracted, capitalized Risk Management Risks associated with management of the 49SAF have been identified along with associated controls and control objectives. All 49SAF activity will comply with the 49SAF Risk Matrix. The program manager is the central administrative control for all 49SAF activities. Administrative controls will be tested once annually, internally, at the offices of the 49SAF by the Municipal attorney. The program manager will review test results. The MOA’s CFO is responsible for the oversight of 49SAF, control of funding, investment management, and application of risk controls and remedies. 24 49th State Angel Fund Policies and Procedures 9. DRAFT Glossary Term Definition 10 times leverage The overall aim of the 49SAF and the allocation from the federal government is that investments in small businesses made with the funds will result in a multiplier of 10 times (new debt or equity) on the balance sheet. EIN Employer identification number. Investor Private venture capital, seed stage, mezzanine, or angel fund participating in 49SAF program. This term does not refer to individual investors in a fund. Principal If a sole proprietorship, the proprietor; if a partnership, each managing partner and each partner who is a natural person and holds a 20 percent or more ownership interest in the partnership; and if a corporation, limited liability company, association or a development company, each director, each of the five most highly compensated executives or officers of the entity, and each natural person who is a direct or indirect holder of 20 percent or more of the ownership stock or stock equivalent of the entity. Program income Gross income received by the MOA that is directly generated by an SSBCI fund-supported activity or earned as a result of the SSBCI funds during the allocation time period. Program income includes, but is not limited to, income from: fees for services performed that were funded or supported with SSBCI funds; and interest earned on loans made using SSBCI funds. Program income does not include interest on SSBCI funds, the receipt of principal on loans made using SSBCI funds, rebates, credits, discounts, refunds, or interest earned on any of them. SSBCI State Small Business Credit Initiative . 25 49th State Angel Fund Policies and Procedures DRAFT Appendix A: 6.50.030 - Investment guidelines for Municipal Funds A. Definitions. For the purposes of this section, the following definitions shall apply: Asset Backed Commercial Paper (ABCP) means a short-term investment vehicle with a maturity that is typically between 30 and 270 days. The security itself is typically issued by a bank or other financial institution. Unlike commercial paper, the notes are backed by physical assets such as trade receivables, and are generally used for short-term financing needs. Bank means a state or federally chartered commercial or mutual bank, savings and loan association or credit union located in the United States and having insurance of accounts through the appropriate federal insuring agency of the United States. Broker/Dealer means a qualified institution including depository banks, any Federal Reserve Bank, government securities dealers, or broker dealer registered in compliance with the Securities Exchange Act of 1934. Certificate of deposit means a nonnegotiable certificate of deposit or other depository agreement issued or to be issued to the Municipality by a Bank. Collateralized Debt Obligation (CDO) means an investment-grade security backed by a pool of bonds, loans and other assets. CDOs do not specialize in one type of debt but are often nonmortgage loans or bonds. Similar in structure to a collateralized mortgage obligation (CMO) or collateralized bond obligation (CBO), CDOs are unique in that they represent different types of debt and credit risk. In the case of CDOs, these different types of debt are often referred to as 'tranches' or "slices." Each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays. Commodities means bulk goods such as grains, metals, and foods traded on a commodities exchange or on the spot market. Contingency Reserve Portfolio means that portion of the Portfolio used as a defensive fixed income portfolio, with an average duration within half a year of its benchmark. The Contingency Reserve Portfiolio is intended as a buffer between the Working Capital Portfolio and the Strategic Reserve Portfolio. The objective of this fixed income portfolio is to provide a high level of current income consistent with low volatility of principal. The Contingency Reserve Portfolio is not designed to provide daily liquidity yet seeks higher returns with some preservation of principal by employing a broader range of sectors and tactically managing duration. Derivatives means a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying A-1 49th State Angel Fund Policies and Procedures DRAFT asset. Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. Equity Investments means investments in foreign or domestic stocks or mutual funds that have investments in foreign or domestic stocks. FDIC means the Federal Deposit Insurance Corporation. FHLMC or Freddie Mac means Federal Home Loan Mortgage Corporation. FNMA or Fannie Mae means Federal National Mortgage Association. Forward Contract means a cash market transaction in which delivery of the commodity is deferred until after the contract has been made. Although the delivery is made in the future, the price is determined on the initial trade date. (Most forward contracts don't have standards and aren't traded on exchanges. A farmer would use a forward contract to "lock-in" a price for his grain for the upcoming fall harvest.) Futures Contract or Futures means a contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a predetermined price in the future. Futures contracts detail the quality and quality of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. GNMA or Ginnie Mae means Government National Mortgage Association. IBRD means the International Bank for Reconstruction and Development. Index Fund means a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. Interfund loan means a loan from a MCP to a Municipal Fund extending outside a fiscal year. Municipal Cash Pool means that portion of the Portfolio that is invested by external managers and represents the Duration/Risk Portfolio investment objective of this part of the Code. Mutual Fund means a diversified mutual fund, including index funds, registered under the Securities Act of 1933 and Investment Company Act of 1940. Non-Dollar Denominated Securities means a financial instrument that has its face value denominated in a currency other than the U.S. dollar. Operating Policy & Procedures means the Municipality's Policy & Procedures established and related to investments. A-2 49th State Angel Fund Policies and Procedures DRAFT Options means a contract between a buyer and a seller that gives the buyer the right—but not the obligation—to buy or to sell a particular asset (the underlying asset) at a later day at an agreed price. In return for granting the option, the seller collects a payment (the premium) from the buyer. Portfolio means aggregate balance of all Municipal funds currently under investment. It excludes real estate owned by the Municipality, including real estate owned by the Heritage Land Bank and any component unit of the Municipality. Portfolio excludes debt proceeds in escrow for defeased debt. Portfolio excludes assets invested within the MOA Trust Fund, the Police and Fire Pension, the Municipal Prefunding Trust, and the Police and Fire Medical Trust. Portfolio Benchmark means a blended benchmark consisting of the individual portfolios respective benchmarks, weighted at their beginning-of-period market values throughout budgetary and economic cycles, taking into account the Municipality's investment risk constraints and the cash flow characteristics of the Portfolio. Rated Bank means: 1. A bank whose short term debt issues are rated at least A-1 or P-1 or F-1, or whose long term debt issues are rated at least A by Standard and Poor's (S&P), Moody's Investors Service (Moody's), or Fitch Ratings (Fitch) or the equivalent by a nationally recognized rating service; or 2. A bank whose letters of credit secure third-party debt issues rated at least A by S&P or its equivalent by a nationally recognized rating service; or 3. A bank which is a subsidiary of a one-bank holding company, all of whose commercial paper is rated at least "A-1" by S&P or "P-1" by Moody's or "F-1" by Fitch or the equivalent by a nationally recognized rating service. Real Estate Investments means land and all physical property associated with it. This includes all investments that have an interest in land ownership including real estate investment trusts. Securities means any authorized investment listed in subsection D. Securities Lending means an investment strategy in which investors make short-term loans of their securities to generate incremental revenues from their portfolios. Loans are typically collateralized by at least 102 percent with cash or government backed securities. Short Sales or Selling Short means the sale of a security or contract related to a security not owned by the seller. Selling Short is a technique used to take advantage of an anticipated price decline in the security. Split Rated or Split Rating means when a debt security or a debt issuer has ratings from two or more nationally recognized rating agencies that are different. In this situation, the lowest rating applies for the purposes of this section of the Anchorage Municipal Code when determining if an investment is an Authorized Investment. A-3 49th State Angel Fund Policies and Procedures DRAFT Strategic Reserve Portfolio means that portion of the Portfolio that is analogous to an intermediate fixed income portfolio, managed with a maximum duration no greater than one-year in excess of its benchmark. The Strategic Reserve Portfolio is intended for residual cash balances for which the Municipality does not foresee utilizing over a rolling three-year forecast period. The objective of the Strategic Reserve Portfolio is to generate excess return through effective sector selection, issue selection, and duration management. Structured Investment Vehicles (SIVs) means a special kind of conduit or a special purpose vehicle or entity that is bankruptcy remote, which means that it is a separate business entity and is not rolled up into the sponsoring company's balance sheet. It is a type of structured vehicle that issues ABCP. Many SIVs are administered by large commercial banks or other asset managers such as investment banks or hedge funds. They issue ABCP as a way to fund purchases of investment grade securities and also to earn the spread based on the term to maturity differential. They usually invest the majority of their portfolios in "AAA" and "AA" assets, which include an allocation to residential mortgage backed securities. In contrast to a multi-seller or securities arbitrage conduit, a SIV does not employ credit enhancement, and the underlying SIV assets are marked to market at least weekly. Swap means a derivative in which two counterparties agree to exchange one stream of cash flow against another stream. These streams are called the legs of the swap. The cash flows are calculated over a notional principal amount, which is usually not exchanged between counterparties. Consequently, swaps can be used to create unfunded exposures to an underlying asset, since counterparties can earn the profit or loss from movements in price without having to post the notional amount in cash or collateral. Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices. TBA means a term used to describe a forward mortgage-backed securities trade. Pass-through securities issued by Freddie Mac, Fannie Mae and Ginnie Mae trade in the TBA market. The term TBA is derived from the fact that the actual mortgage-backed security that will be delivered to fulfill a TBA trade is not designated at the time the trade is made. The securities are "to be announced" 48 hours prior to the established trade settlement date. The settlement procedures of mortgage-backed securities TBA trades are established by the Bond Market Association. Variable Rate Demand Obligation (VRDO) means a debt security which bears interest at a floating (variable) rate adjusted at specified intervals (such as daily, weekly, or monthly) and can be redeemed at its holder's option when the rate changes. Also known as a low floater, variable rate demand note, or variable rate demand bond. Working Capital Portfolio means that portion of the Portfolio managed for very short-term liquidity, typically with a duration band of zero to 270 days. The Working Capital Portfolio is intended to provide for same-day liquidity for working capital management. In addition to providing liquidity, the objective of the Working Capital Portfolio is to preserve principal and generate current income by investing in a portfolio of high-quality, short-term instruments. A-4 49th State Angel Fund Policies and Procedures DRAFT B. Management of Municipal Funds. 1. It is the policy of the Municipality to invest public funds in a manner that provides the highest investment return consistent with preservation of capital while meeting the daily cash flow demands of the Municipality. 2. Investment decisions shall be guided by this section, and the Operating Policy & Procedures for investment of Municipal funds, as modified from time to time by the Chief Fiscal Officer. 3. The Chief Fiscal Officer shall obtain the services of such investment managers, advisors, custodians and other professionals as are reasonably prudent and necessary to manage and invest all Municipal Funds. 4. The Chief Fiscal Officer shall solicit input from the Investment Advisory Commission members prior to the final selection of any service providers. a. For an investment manager, advisor, custodian or other professionals contracted under the provisions of this section, assembly approval is not required; b. The Chief Fiscal Officer shall report within 90 days to the Assembly, by Assembly Informational Memorandum, on contracts entered into pursuant to the provisions of this section including, but not limited to, the duties of be performed by the contractor and the compensation paid. C. Investment Objective. The primary objectives, in priority order, of the Municipality's investment activities shall be: 1. Safety. Safety of principal is the foremost objective of the investment program. Investments of the Municipality shall be undertaken in a manner seeking to ensure the preservation of capital in the overall Portfolio. To attain this objective, diversification is required to reduce overall Portfolio risk while attaining market rates of return. 2. Liquidity. The Municipality's investment Portfolio shall remain sufficiently liquid to enable the Municipality to meet all reasonably anticipated operating requirements. 3. Return on Investment. The Municipality's investment Portfolio shall be designed with the objective of outperforming the total Portfolio Benchmark. 4. Duration/Risk Portfolio. The Municipality's investment Portfolio shall be structured into three duration portfolios, each designed to fulfill a specific liquidity requirement. Allocations into each portfolio shall consist of an absolute value derived from a rolling three-year forecast, re-evaluated on an annual basis. D. Authorized Investments. In order to provide maximum security for the investment of public funds and to provide the greatest interest revenue consistent with safety, only the following investments of the Municipality's funds are authorized (where the issue or issuer is Split Rated, the lower of the ratings shall apply): A-5 49th State Angel Fund Policies and Procedures DRAFT 1. Obligations issued or guaranteed by the U.S. government, U.S. agencies or U.S. government-sponsored corporations and agencies. 2. Corporate Debt Securities that are guaranteed by the U.S. government or the FDIC as to principal and interest. 3. Taxable and tax-exempt municipal securities having a long term rating of at least A- by a nationally recognized rating agency or a taxable or tax-exempt municipal security having a short term rating of at least "A-1" by S&P or "P-1" by Moody's or "F-1" by Fitch. 4. IBRD Debt Securities issued and guaranteed by the IBRD and rated AAA by a nationally recognized rating agency. 5. Commercial paper rated at least "A-1" by S&P or "P-1" by Moody's or "F-1" by Fitch. 6. Bank debt obligations, including unsecured certificates of deposit, notes, time deposits, and bankers' acceptances (with maturities of not more than 365 days), and deposits with any Bank, the short-term obligations of which are rated at least "A-1" by S&P or "P-1" by Moody's or "F-1" by Fitch and is either: a. Incorporated under the laws of the United States of America, or any state thereof, and subject to supervision and examination by federal or state banking authorities; or b. Issued through a foreign bank with a branch or agency licensed under the laws of the United States of America, or any state thereof, or under the laws of a country with a Moody's sovereign rating for bank deposits of "Aaa", or an S&P sovereign rating of "AAA", or a Fitch national rating of "AAA", and subject to supervision and examination by federal or state banking authorities. 7. Repurchase agreements secured by obligations of the U.S. government, U.S. agencies, or U.S. government-sponsored corporations and agencies. 8. Dollar denominated corporate debt instruments rated BBB- or better by S&P's Rating Service (investment grade) or the equivalent by another nationally recognized rating agency. 9. Dollar denominated corporate debt instruments, rated below BBB- by S&P's Rating Service or the equivalent by another nationally recognized rating agency, including emerging markets. 10. Dollar denominated debt instruments of foreign governments rated BBB- or better by S&P's Rating Service or the equivalent by another nationally recognized rating agency. 11. Asset Backed Securities (ABS), other than commercial paper, collateralized by: credit cards, automobile loans, leases and other receivables which must have a credit rating of AA- or above by S&P's Rating Service or the equivalent by another nationally recognized rating agency. 12. Mortgage Backed Securities, including generic mortgage-backed pass-through securities issued by GNMA, FHLMC, FNMA, Non-agency mortgage-backed securities, Collateralized Mortgage Obligations (CMOs), or Commercial mortgage-backed securities A-6 49th State Angel Fund Policies and Procedures DRAFT (CMBS), which must have a credit rating of AA- or better by S&P's Rating Service or the equivalent by another nationally recognized rating agency. 13. Debt issued by the Tennessee Valley Authority. 14. Money Market Mutual Funds rated "Am" or better by Standard & Poor's Rating Service, or the equivalent by another nationally recognized rating agency, and consisting of any or all of the securities authorized for investment in this section of the Code. 15. Alaska Municipal League Investment Pool (AMLIP), consistent with all other provisions of this section of the Code. 16. Mutual Fund Investments so long as the overall nature of the fund is generally consistent with this section of the Code. 17. Interfund Loans from a Municipal Cash Pool to a Municipal Fund. E. Prohibited Investments. Prohibited Investments for the Portfolio are those not listed under Authorized Investments and specifically include Equity Investments. Prohibited Investments also include the sale or purchase of futures or option contracts for any security. Other Prohibited Investments include: 1. SIVs; 2. ABCP; 3. The selling short of any security; 4. Non dollar denominated securities; 5. Commodities; and 6. Real estate investments. F. Use of Derivatives. Derivatives shall not be used as an investment in the Portfolio with the exception of: 1. TBAs; and 2. Derivative securities of which the ultimate payment of principal and or interest on the security is guaranteed by the U.S. government or an agency of the U.S. government. G. Securities Lending. This type of program is permissible only if recommended by the Chief Fiscal Officer and approved by the Municipal Assembly. A-7 49th State Angel Fund Policies and Procedures DRAFT H. Reporting. The Chief Fiscal Officer shall submit to the Assembly on an annual basis reports addressing Portfolio performance and compliance. The annual report shall address the use of investment consultants and external money managers, the use of derivatives, securities lending activities and bank lines of credit. The report shall also include compliance with the requirements regarding Portfolio diversification, maximum holdings by type of authorized investment, and Portfolio performance compared with Portfolio benchmarks. (AO No. 82-200(S); AO No. 97-60, § 1, 7-22-97; AO No. 2006-145, § 1, 10-31-06; AO No. 2009-80, §§ 1, 2, 7-21-09) A-8 49th State Angel Fund Policies and Procedures DRAFT Appendix B: Municipality of Anchorage Operating Policy/Procedure P&P 24-11 Dated September 1, 2007 1. PURPOSE To establish the policy for investment of Municipal Funds pursuant to Anchorage Municipal Code 6.50.030. 2. POLICY It is the policy of the Municipality of Anchorage (the “Municipality”) to invest public funds in a manner that will provide the highest investment return consistent with preservation of capital while meeting the daily cash flow demands of the Municipality and conforming to Anchorage Municipal Code (AMC) Title 6. a. The primary objectives, as outlined in AMC 6.50.030, in priority order, of the Municipality’s investment activities shall be: (1) Safety. Safety of principal is the foremost objective of the investment program. Investments of the Municipality shall be undertaken in a manner seeking to ensure the preservation of capital in the overall Portfolio. To attain this objective, diversification is required to reduce overall Portfolio risk while attaining market rates of return. (2) Liquidity. The Municipality’s investment Portfolio shall remain sufficiently liquid to enable the municipality to meet all reasonably anticipated operating requirements. (3) Return on investment. The Municipality’s investment Portfolio shall be designed with the objective of outperforming the total Portfolio benchmark. (4) Duration/Risk Bucketing. The Municipality’s investment Portfolio shall be structured into three duration buckets, each designed to fulfill a specific liquidity requirement. Allocations into each bucket shall consist of an absolute value derived from a rolling three-year forecast, re-evaluated on an annual basis. 3. ORGANIZATIONS AFFECTED This investment policy applies to the following financial assets of the Municipality. These funds are accounted for in the Municipality’s Comprehensive Annual Financial Report and include: B-1 49th State Angel Fund Policies and Procedures a. b. c. d. e. f. g. h. DRAFT General Funds Construction Funds All Enterprise Funds of the Municipality All Funds of Authorities Created by the Municipality Bond Debt Service Account Funds Bond Debt Service Reserve Account Funds Anchorage School District Funds Other Restricted and Unrestricted Funds This investment policy does not apply to the following Funds: a. MOA Trust Fund b. Police and Fire Retirement Fund c. Retiree Medical Prefunding Investment Fund 4. REFERENCES Anchorage Municipal Code Title 6, subsection 6.50.030 5. DEFINITIONS a. Approved Broker List is the List of qualified institutions further described in Section 7 d of this Policy. b. Bank is defined as a state or federally chartered commercial or mutual savings bank or credit union located in the United States and having insurance of accounts through the appropriate federal insuring agency of the United States. c. Broker/Dealer is defined as a qualified institution, including depository banks, any Federal Reserve Bank, primary government securities dealers, or a broker dealer registered in compliance with the Securities Exchange Act of 1934. d. Certificate of Deposit is defined as a nonnegotiable certificate of deposit, time certificate of deposit or other depository agreement issued or to be issued to the Municipality by a Bank. e. Duration Bucket or Duration Portfolio is defined as a portfolio of the Municipal Cash Pool, which has been invested, based on liability duration or cash need. Individual Duration Portfolios will generally target: Working Capital Portfolio (less than six months), Contingency Reserve Portfolio (plus or minus one-half year of the benchmark duration), or Strategic Reserve Portfolio (plus or minus 1-year of the benchmark duration). B-2 49th State Angel Fund Policies and Procedures DRAFT f. Interfund Loan is defined as a loan from the Municipal Cash Pool to a Municipal Organization that may extend outside of the fiscal year during which the loan was made. The Assembly will individually approve all such loans. g. Municipal Cash Pool (MCP) is defined as the Municipality’s investment portfolio that is structured into three Duration Portfolios, further described in Section 7 of this policy, and managed by external money managers on behalf of the Municipality and is a part of the Total Portfolio. h. Municipal Cash Pool Benchmark is defined as a blended benchmark consisting of the individual Duration Portfolio’s respective benchmarks, weighted at their beginning-of-period market values throughout budgetary and economic cycles, taking into account the Municipality’s investment risk constraints and the cash flow characteristics of the MCP. i. Total Portfolio is defined as the aggregate balance of all Municipal funds currently under investment by external money managers and internal staff members. j. Securities are defined as any Authorized Investment referred to in Section 7 of this policy. 6. RESPONSIBILITIES a. The Chief Fiscal Officer is responsible for this Operating Policy/Procedure and the investment of all Municipal Funds. b. In addition to the authority to manage the Municipality’s investment program derived from AMC Title 6 and various bond ordinances, management responsibility for the investment program is assigned to the Chief Fiscal Officer, who shall establish written procedures for the operation of the investment program consistent with this investment policy. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Chief Fiscal Officer. The Chief Fiscal Officer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. 7. PROCEDURES The Municipality may attempt to take advantage of conditions in the market by trading securities to further improve the overall rate of return on the Total B-3 49th State Angel Fund Policies and Procedures DRAFT Portfolio and the MCP. Losses may be realized on the sale of an individual security and shall be considered within the context of the overall Duration Portfolio return provided that adequate diversification is maintained and the sale of a security is in the best interest of the Municipality at the time of the transaction. Duration/Risk Bucketing: The Municipality’s MCP shall be structured into three Duration Buckets, each of which is designed to fulfill a specific liquidity requirement. The Chief Fiscal Officer shall determine the amount of the funds to be allocated to each Duration Bucket, based on aggregated forward-looking cash flow forecasts. Descriptions of the three Duration Buckets or Duration Portfolios are contained below: 1. “Working Capital Portfolio” is used for cash flows that occur throughout the year, and should be managed for very short-term liquidity, typically with a duration band of 0 – 180 days. The Working Capital Portfolio is intended to provide for same-day liquidity for working capital management. In addition to providing liquidity, the objective of the Working Capital Portfolio is to preserve principal and generate current income by investing in a portfolio of high-quality, short-term instruments. The benchmark for the Working Capital Portfolio shall be the Merrill Lynch 90 day U.S. T-Bill Index. 2. The “Contingency Reserve Portfolio” is a Defensive Fixed Income Portfolio, with an average duration within half a year on the Lehman 1-3 Year Government Bond Index. The Contingency Reserve Portfolio is intended as a buffer between the Working Capital Portfolio and the Strategic Reserve Portfolio. The overall duration of this Portfolio is sufficiently short enough that if it is required to support short-term liquidity needs it can likely do so with limited impact to the Portfolio return. The objective of this fixed income Portfolio is to provide a high level of current income consistent with low volatility of principal. The Contingency Reserve Portfolio is not designed to provide daily liquidity yet seeks higher returns with some preservation of principal by employing a broader range of sectors and tactically managing duration. The benchmark for the Contingency Reserve Portfolio shall be the Lehman 1-3 year Government Index. 3. The “Strategic Reserve Portfolio” is analogous to an Intermediate Fixed Income Portfolio, managed with a maximum duration no greater than 1-year in excess of the benchmark. The Strategic Reserve Portfolio is intended for residual cash balances for which B-4 49th State Angel Fund Policies and Procedures DRAFT the Municipality does not foresee utilizing over a rolling three-year forecast period. The objective of the Strategic Reserve Portfolio is to generate excess return through effective sector selection, issue selection, and duration management. Principal fluctuations can occur. The benchmark for the Strategic Reserve Portfolio shall be the Lehman Intermediate Government Credit Index. 1. Prudence All participants in the investment process shall act responsibly. The standard of prudence to be applied by the Chief Fiscal Officer, staff, and external service providers shall be the “prudent investor” rule, which states: “Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived.” 2. Investment Management The Chief Fiscal Officer may engage investment managers, both internal and external, to execute the investment strategy. Funds of the Municipality will be primarily invested by external investment managers. (1) External Managers Only: 1. Provide the Municipality with a written agreement to invest within the guidelines established in these policies and corresponding sub-policies or particular Investment Guidelines; 2. Provide the Municipality with proof of liability and fiduciary insurance coverage (minimum $5,000,000 each type); 3. Must be recognized as providing demonstrated expertise over a number of years in the management of institutional assets; 4. Maintain frequent and open communication with the Municipality, Municipality’s staff, on all significant matters pertaining to its firm’s ownership, investment style and philosophy, changes in personnel, significant client departures and periods of under performance; 5. Must be a registered investment advisor under the Investment Advisor’s Act of 1940 as amended. B-5 49th State Angel Fund Policies and Procedures (2) DRAFT External and Internal Managers: 1. Adhere to the investment management style, concepts and principles for which they were hired by the Municipality; 2. Execute all transactions for the benefit of the Municipality with brokers and dealers qualified to execute institutional orders on an ongoing basis seeking the best cost of execution for the Municipality and where appropriate, facilitate the recapture of commissions on behalf of the Municipality; 3. Reconcile monthly accounting, transaction and asset summary data with custodian valuations and communicate and resolve any significant discrepancies. 3. Authorized Financial Dealers and Institutions Investment transactions shall only be conducted with qualified institutions including depository banks, any Federal Reserve Bank, primary government securities dealers, or broker-dealers registered in compliance with the Securities Exchange Act of 1934. External managers shall be responsible for the selection of qualified entities to implement security transactions. Internal staff may only utilize institutions that are on an Approved Broker List that shall be maintained by the Chief Fiscal Officer. Only firms believed to have requisite experience, capabilities and credit worthiness shall be included on this List. The List shall be reviewed at least annually by the Chief Fiscal Officer or designee. 4. Authorized Investments Authorized Investments identified in AMC 6.50.030 are the only permitted investments of the Municipality. 5. Use of Derivatives Derivative instruments shall not be used to increase Total Portfolio or Duration Portfolio risk above the level that could be achieved in a particular Duration Portfolio using only traditional investment securities. Moreover, derivatives will not be used to acquire exposure to changes in the value of assets or indices that, by themselves, are not allowable investments. Under no circumstances will an investment in derivatives be made that is noncovered or leveraged to the extent that it would cause portfolio duration or maturity to exceed limits specified in this policy. Derivative instruments may only be used by external managers with the express written authority of the Municipality. B-6 49th State Angel Fund Policies and Procedures DRAFT 6. Safekeeping and Custody All Security transactions, including collateral for repurchase agreements (other than Certificates of Deposit and any overnight repurchase agreements), entered into by the Municipality shall be conducted on a delivery-versuspayment (DVP) basis. Certificates of Deposit, if delivered, shall be held at the Chief Fiscal Officer’s Offices or the Municipality’s custodian bank and all other Securities except shares of Money Market Mutual Funds and Mutual Fund Investments, including collateral for overnight repurchase agreements, will be held by a third-party custodian under a written agreement and evidenced by safekeeping receipts. 7. Securities Lending As part of this investment strategy, the Municipality may retain the services of a custodial bank or an independent securities lending agent to supervise a program of securities lending in exchange for a fee or other consideration. Supervision of the program shall include: (1) Procedures to review the creditworthiness of all borrowers. (2) Requirement for full collateralization of all loans. 8. Bank Line of Credit Short term lines of credit, as permitted under the Anchorage Municipal Code, may be utilized to temporarily meet short term operating cash demands. The Chief Fiscal Officer shall have the authority to arrange the terms and conditions of such lines of credit. 9. Diversification It is the policy of the Municipality to diversify Municipal investments and to ensure the safety and liquidity of the investments by observing the following sound investment practices. Diversification will be accomplished by adhering to the following schedule: Each Duration Portfolio and internally managed portfolio will have its own Investment Guidelines and limitations. Externally managed portfolios shall have greater flexibility with respect to issuer quality, maximum maturity and sector concentration than any funds managed internally. 10. Reporting The Chief Fiscal Officer shall submit to the Assembly on an annual basis reports addressing Total Portfolio and MCP performance and compliance. The annual report will address the use of investment consultants and external money B-7 49th State Angel Fund Policies and Procedures DRAFT managers, the use of derivatives, securities lending activities and bank lines of credit. The report shall also include compliance with the requirements regarding Duration Portfolio and internally managed funds diversification, maximum holdings by type of Authorized Investment, and Duration Portfolio performance compared with respective Duration Portfolio Benchmarks. 8. ANNUAL REVIEW DATE/LEAD REVIEW AGENCY The Public Finance & Investments Division will review this document in August each year for any needed revisions. 9. INVESTMENT GUIDELINES Internally Managed Funds (Limitations based on asset values at time of investment) 1. At least 50% of the portfolio shall be invested in U.S. Government securities. 2. In addition, the following shall limit concentration by security type to the indicated levels based on portfolio values at the time of purchase. Type of Securities Holdings Maximum U.S. Government Securities 100% Repurchase Agreements 50% Certificates of Deposit 50% Banker’s Acceptances 25% 5% issuer per Certificates of Deposit secured by other than U.S. Government Securities 20% Commercial Paper 15% 5% per 15% 5% per issuer Corporate Bonds, Rated Investment Grade issuer B-8 49th State Angel Fund Policies and Procedures DRAFT Alaska Municipal League Investment Pool (AMLIP) 25% Money Market Mutual Funds 25% Mutual Fund Investments 25% 3. Maximum Maturity to the extent possible, the Municipality will attempt to match its internally managed funds with anticipated cash flow requirements. 4. Bond Debt Service Reserve funds may be invested in Securities not exceeding the final maturity date of the bond issue for which they are invested. Investment of any funds that are subject to restrictive covenants contained in an Ordinance or Resolution must be invested in accordance with those covenants. B-9 49th State Angel Fund Policies and Procedures DRAFT Externally Managed Working Capital Portfolio Exhibit A MUNICIPALITY OF ANCHORAGE WORKING CAPITAL PORTFOLIO Investment Guidelines The Portfolio ............................................... The Municipality of Anchorage Working Capital Portfolio is a separate account managed by Alaska Permanent Capital Management Inc. (APCM) for the benefit of the Municipality of Anchorage’s (the Company’s) Municipal Cash Pool. Investment Objective .............................. The Portfolio's investment objective is to provide stability of principal, ready liquidity and a competitive money market instrument return that exceeds the total return of the Merrill Lynch 90-day Treasury Bill Index (the Index). Duration Guidelines................................. The Portfolio will be managed to have a targeted duration within a band of ± .25 years of the duration of the Index. Asset Guidelines ........................................ Following are the eligible investments: At least 50% of the portfolio shall be invested in U.S. Government securities. In addition, the following shall limit concentration by security type to the indicated levels based on portfolio values at the time of purchase. Type of Securities Maximum Holdings U.S. Government Securities 100% Repurchase Agreements 50% Time Certificates of Deposit 50% Banker’s Acceptances 25% 5% Time Certificates of Deposit secured by other than U.S. Government Securities Commercial Paper B-10 per issuer 20% 15% 5% per issuer 49th State Angel Fund Policies and Procedures DRAFT Corporate and other Investment Grade instruments that reset interest payments to a short-term interest rate at least semi-annually or have a final maturity within one year of purchase. Money Market Mutual Funds (excluding the Alaska Municipal League Investment Pool) 15% 5% per issuer 25% Asset Allocation ......................................... Except for obligations issued or guaranteed by the U.S. government, U.S. agencies, U.S. government-sponsored corporations or agencies, or collective investment vehicles with diversified portfolios used for short-term deposits of cash, no more than 5% of the Portfolio's assets may be invested in securities of a single issuer. Credit Criteria............................................. Securities must be rated investment grade or better by at least two nationally recognized credit rating agencies at the time of purchase. Split rated credits will be considered to have the lower credit rating. Money market instruments must also have at least two ratings by nationally recognized credit rating agencies and be rated A-1, F-1 or P-1 or better at the time of purchase. Other Investment Practices ................. Temporary cash balances may be invested in a money market instrument (A1/P1 or better, less than 365 days), in a client and NAIC approved commingled 2A-7 Money Market Fund, or in a commingled Stable Dollar NAV Fund. The Portfolio may purchase securities on a when-issued basis or for forward delivery. The Portfolio may enter into repurchase agreements collateralized 102% with U.S. Government securities or mortgage securities as defined above. The maximum term of these agreements will be 90 days, and the collateral must be marked-to-market daily. Reinvestment of Income........................ All investment income of the Portfolio and capital gains, if any, will be added to the assets of the Portfolio, unless otherwise directed by the Company. Derivative Instruments…………… Notwithstanding the language in section 3 of the Investment Manager Agreement, the Manager is precluded from using derivative instruments unless the Company and the Manager mutually agree in writing to a modification of the Account’s Investment Guidelines (this Exhibit A). B-11 49th State Angel Fund Policies and Procedures DRAFT Custodian………………………… As selected by the Company. Prohibited investments………… Dollar denominated obligations of foreign governments are prohibited until the Assembly agrees to modify the Code section that details allowable investments. Similarly, municipal securities are not presently permitted. The Anchorage Municipal Code (chapter 6.50) details currently permitted investments. APCMC Exhibit A 07-23-2007.doc B-12 49th State Angel Fund Policies and Procedures DRAFT Externally Managed Contingency Reserve Portfolio Exhibit A MUNICIPALITY OF ANCHORAGE CORE SHORT DURATION FIXED INCOME PORTFOLIO Investment Guidelines The Portfolio ............................................... The Municipality of Anchorage Core Short Duration (the Contingency Reserve) Portfolio is a separate account managed by Aberdeen Asset Management Inc. (AAM) for the benefit of the Municipality of Anchorage’s (the Company’s) Municipal Cash Pool. Investment Objective .............................. The Portfolio's investment objective is to provide a total return that exceeds the total return of the Lehman 1-3 Year Government Index (the Index). Duration Guidelines................................. The Portfolio will be managed to have a targeted duration within a band of ± .25 years of the duration of the Index. Asset Guidelines ........................................ Following are the eligible investments: (i) U.S. Treasury and agency securities; (ii) Agency and non-agency mortgage-backed securities backed by loans secured by residential, multifamily and commercial properties including, but not limited to pass-throughs, CMOs, REMICs, CMBS, project loans, construction loans, and adjustable rate mortgages; (iii) Dollar denominated obligations of domestic and foreign corporations; (iv) asset-backed securities; (v) cash equivalent investments defined as any security that has an average duration under one year, a weighted average life of less than one year, and spread duration less than one year; The Portfolio may purchase private placement or Rule 144A debt securities including issues in the corporate, mortgage and assetbacked sectors. Asset Allocation……………..……. Except for Treasury or Agency debentures, pass-throughs, REMICs, or collective investment vehicles with diversified portfolios used for short-term deposits of cash, no more than 5% of the Portfolio's assets may be invested in securities of a single issuer. Credit Criteria............................................. Securities must be rated investment grade or better by a nationally recognized credit rating agency at the time of purchase. Structured product, including mortgage-backed and asset-backed securities as B-13 49th State Angel Fund Policies and Procedures DRAFT defined in sections ii and iv above, must be rated AA- or better by a nationally recognized credit rating agency at the time of purchase. Split rated credits will be considered to have the lower credit rating. In the event that a Portfolio investment is downgraded below these credit quality guidelines, the Investment Manager shall notify the Company and provide an evaluation and a plan of action for their orderly liquidation. If bonds are downgraded below investment grade, the Manager is allowed to hold up to 2% in aggregate market value of these securities for a period of six months. At such time, the manager shall provide the Municipality with an updated plan of action. Money market instruments must be rated A-1 or P-1 or better at the time of purchase. Other Investment Practices ................. Temporary cash balances may be invested by AAM in a money market instrument (A1/P1 or better, less than 365 days), in a client and NAIC approved commingled 2A-7 Money Market Fund or in a commingled Stable Dollar NAV Fund. The Portfolio may purchase securities on a when-issued basis or for forward delivery. The Portfolio may enter into repurchase agreements collateralized 102% with U.S. Government securities or mortgage securities as defined above. The maximum term of these agreements will be 90 days, and the collateral must be marked-to-market daily. The Portfolio may enter into covered dollar roll on mortgage securities. Covered agreements will be defined as a sale and simultaneous purchase (for forward settlement) whereby the trade date cash balance must remain positive for the life of the roll (until the forward purchase settles). Cross trades are permitted at prevailing market levels, in accordance with “PTE 95-66”. Reinvestment of Income........................ All investment income of the Portfolio and capital gains, if any, will be added to the assets of the Portfolio, unless otherwise directed by the Company. Derivative Instruments……………. Notwithstanding the language in section 3 of the Investment Manager Agreement, the Manager is precluded from using derivative instruments unless the Company and the Manager mutually agree in writing to a modification of the Account’s Investment Guidelines (this Exhibit A). B-14 49th State Angel Fund Policies and Procedures DRAFT Custodian………………………… As selected by the Company. Prohibited investments…………… .......... Dollar denominated obligations of foreign governments are prohibited until the Assembly agrees to modify the Code section that details allowable investments. Similarly, municipal securities are not presently permitted. The Anchorage Municipal Code (chapter 6.50) details currently permitted investments. B-15 49th State Angel Fund Policies and Procedures DRAFT Externally Managed Strategic Reserve Portfolio Exhibit A MUNICIPALITY OF ANCHORAGE INTERMEDIATE DURATION PORTFOLIO Investment Guidelines The Portfolio ............................................... The Municipality of Anchorage Intermediate Duration Portfolio (the Portfolio) is a separate account managed by BlackRock Financial Management, Inc. for the benefit of the Municipality of Anchorage’s (the Company’s) Municipal Cash Pool. Investment Objective .............................. The Portfolio's investment objective is to provide a total return that exceeds the total return of the Lehman Intermediate Government/Corporate Index (the Index). Duration Guidelines................................. The Portfolio will be managed to have a targeted duration within a band of ± 20% around the duration of the Index. Asset Guidelines ........................................ Following are the eligible investments: (i) U.S. Treasury and agency securities; (ii) Agency and non-agency mortgage-backed securities backed by loans secured by residential, multifamily and commercial properties including, but not limited to passthroughs, CMOs, REMICs, CMBS, project loans, construction loans, and adjustable rate mortgages; (iii) Dollar denominated obligations of domestic and foreign corporations; (iv) asset-backed securities; (v) cash equivalent investments defined as any security that has an average duration under one year, a weighted average life of less than one year, and spread duration less than one year; The Portfolio may purchase private placement or Rule 144A debt securities including issues in the corporate, mortgage and asset-backed sectors. B-16 49th State Angel Fund Policies and Procedures DRAFT Asset Allocation ......................................... Except for Treasury or Agency debentures, passthroughs, REMICs, or collective investment vehicles with diversified portfolios used for short-term deposits of cash, no more than 5% of the Portfolio's assets may be invested in securities of a single issuer. Credit Criteria............................................. Securities must be rated investment grade or better by a nationally recognized credit rating agency at the time of purchase. Structured product, including mortgage-backed and asset-backed securities as defined in sections ii and iv above, must be rated AA- or better by a nationally recognized credit rating agency at the time of purchase. Except for dollar denominated corporate debt instruments, split rated credits will be considered to have the lower credit rating. In the event that a Portfolio investment is downgraded below these credit quality guidelines, the Investment Manager shall notify the Company and provide an evaluation and a plan of action for their orderly liquidation. If bonds are downgraded below investment grade, the Manager is allowed to hold up to 2% in aggregate market value of these securities for a period of six months. At such time, the manager shall provide the Municipality with an updated plan of action. Money market instruments must be rated A-1 or P1 or better at the time of purchase. Other Investment Practices ................. Temporary Cash balances may be invested by BlackRock in a money market instrument (A1/P1 or better, less than 365 days), in a client and NAIC approved commingled 2A-7 Money Market Fund or in a commingled Stable Dollar NAV Fund. The Portfolio may purchase securities on a when issued basis or for forward delivery. The Portfolio may enter into repurchase agreements collateralized 102% with U.S. Government securities or mortgage securities as defined above. The maximum term of these B-17 49th State Angel Fund Policies and Procedures DRAFT agreements will be 90 days, and the collateral must be marked-to-market daily. The Portfolio may enter into covered dollar roll on mortgage securities. Covered agreements will be defined as a sale and simultaneous purchase (for forward settlement) whereby the trade date cash balance must remain positive for the life of the roll (until the forward purchase settles). Cross trades are permitted at prevailing market levels, in accordance with “PTE 95-66”. Reinvestment of Income........................ All investment income of the Portfolio and capital gains, if any, will be added to the assets of the Portfolio, unless otherwise directed by the Company. Derivative Instruments……………. ...... Notwithstanding the language in section 3 of the Investment Manager Agreement, the Manager is precluded from using derivative instruments unless the Company and the Manager mutually agree in writing to a modification of the Account’s Investment Guidelines (this Exhibit A). Custodian ..................................................... As selected by the Company. Prohibited investments…………… Dollar denominated obligations of foreign governments are prohibited until the Assembly agrees to modify the Code section that details allowable investments. B-18 49th State Angel Fund Policies and Procedures DRAFT Exhibit 1: Small Business Borrower/Investee Certification for Use of Proceeds These assurances reference Section 3005(e)(7) and Section 3011(c)(2) of the Small Business Jobs Act of 2010. Legal name of borrower or investee: ________________________________________________________ The borrower or investee hereby certifies the following to the lender or investor: 1. The investment proceeds will be used for a “business purpose.” Business purpose includes, but is limited to, start up costs, working capital, business procurement, franchise fees, equipment, inventory, as well as the purchase, construction renovation or tenant improvements of an eligible place of business that is not for passive real estate investment purposes. The definition of business purpose excludes: activities that relate to acquiring or holding passive investments, such as commercial real estate ownership and the purchase of securities; and lobbying activities, as defined in Section 3(7) of the Lobbying Disclosure Act of 1995, P.L. 104-65, as amended. 2. The loan or investment proceeds will not be used to: – repay a delinquent federal or state income taxes unless the Borrower has a payment plan in place with the relevant taxing authority; or – repay taxes held in trust or escrow, e.g. payroll or sales taxes; or – reimburse funds owed to any owner, including any equity injection or injection of capital for the business’ continuance; or – to purchase any portion of the ownership interest of any owner of the business. 3. The borrower or investee is not: – an executive officer, director, or principal shareholder of the lender; or – a member of the immediate family of an executive officer, director, or principal shareholder of the lenders; or – a related interest of an such executive officer, director, principal shareholder, or member of the immediate family. For the purposes of these three restrictions, the terms “executive officer”, “director”, “principal shareholder”, “immediate family”, and “related interest” refer to the same relationship to a lender as the relationship described in part 215 of title 12 of the Code of Federal Regulations, or any successor to such part. 4. The borrower or investee is not: – a business engaged in speculative activities that develop profits from fluctuations in price rather than through normal course of trade, such as wildcatting for oil and dealing in commodities futures, unless those activities are incidental to the regular 1-1 49th State Angel Fund Policies and Procedures DRAFT activities of the business and part of a legitimate risk management strategy to guard against price fluctuations related to the regular activities of the business; or – a business that earns more than half of its annual net revenue from lending activities; unless the business is a non-bank or non-bank holding company Community Development Financial Institutions; or – a business engaged in pyramid sales, where a participant's primary incentive is based on the sales made by an ever-increasing number of participants; or – a business engaged in activities that are prohibited by federal law or applicable law in the jurisdiction where the business is located or conducted. (Included in these activities is the production, servicing, or distribution of otherwise legal products that are to be used in connection with an illegal activity, such as selling drug paraphernalia or operating a motel that knowingly permits illegal prostitution); or – a business engaged in gambling enterprises, unless the business earns less than 33% of its annual net revenue from lottery sales. Legal Name: ______________________________________________________ By: _____________________________________________________________ Authorized Signatory Name: ___________________________________________________________ Title: ___________________________________________________________ Date: ___________________________________________________________ 1-2 49th State Angel Fund Policies and Procedures DRAFT Exhibit 2: Sex Offender Certification Form (May be Used for Both Borrowers/Investees and Lenders/Investors) This certification is required by Section 3011(c)(2) of the Small Business Jobs Act of 2010 from any private entity that receives a loan, a loan guarantee, or other financial assistance using funds received by a participating State under the State Small Business Credit Initiative. Legal name of entity: ___________________________________________________________________ As required by Section 3011(c)(2) of the Small Business Jobs Act of 2010, the private entity hereby certifies to the participating State that the Principals of the private entity have not been convicted of a sex offense against a minor (as such terms are defined in section 111 of the Sex Offender Registration and Notification Act (42 U.S.C. 16911)). For the purposes of this Certification, Principal means the following: if a sole proprietorship, the proprietor; if a partnership, each managing partner and each partner who is a natural person and holds a 20% or more ownership interest in the partnership; and if a corporation, limited liability company, association or a development company, each director, each of the five most highly compensated executives or officers of the entity, and each natural person who is a dire indirect holder of 20% or more of the ownership stock or stock equivalent of the entity. The undersigned acknowledges its ongoing responsibility to provide notice to the Municipality of Anchorage should this certification lapse, for example in the case of a)a current principal being convicted of such a crime, or b)a new principal of the firm be so convicted. Legal Name: ______________________________________________________ By: _____________________________________________________________ Authorized Signatory Name: ___________________________________________________________ Title: ___________________________________________________________ 49th State Angel Fund Policies and Procedures DRAFT Exhibit 3: Lender/Investor Certification for Use of Proceeds This Assurance is referenced by Section 3005(e)(7) of the Small Business Jobs Act of 2010. Legal name of lender or investor: ___________________________________________________________________ The Lender/Investor hereby certifies to the Participating State the following: 1. The loan or investment has not been made in order to place under the protection of the approved state program prior debt that is not covered under the approved state program and that is or was owed by the borrower to the lender or to an affiliate of the lender. 2. The loan or investment is not a refinancing of a loan or investment previously made to that borrower by the lender or an affiliate of the lender. 3. The lender is not attempting to enroll the unguaranteed portions of SBA-guaranteed loans. Legal Name: _______________________________________________________ By: _______________________________________________________________ Authorized Signatory Name: ___________________________________________________________ Title: ___________________________________________________________ 49th State Angel Fund Policies and Procedures DRAFT Exhibit 4: Quarterly Certification Form CERTIFICATION ON USE-OF-ALLOCATED FUNDS United States Department of the Treasury Main Treasury Building, Room 1310 1500 Pennsylvania Avenue Washington, D.C. 20220 Reference is made to: The Allocated Agreement dated as of February 14, 2012 (the “Allocated Agreement”), between the United States Department of the Treasury (“Treasury”) and the Municipality of Anchorage (the “Participating Municipality”). Capitalized terms used herein and not defined herein will have the respective meanings ascribed to them in the Allocated Agreement. This certification is delivered to Treasury pursuant to Section 4.7 (“Quarterly Reports”) of the Allocated Agreement. The undersigned, on behalf of the Participating Municipality, hereby makes the following certifications as of the date of this certification: 1. The information provided by the MOA under Section 4.7 (“Quarterly Reports”) of the Allocated Agreement on the use of Allocated Funds is accurate. 2. Funds continue to be available and legally committed to contributions by the MOA to, or for the account of, Approved Municipal Programs, less any amount that has been contributed by the MOA to, or for the account of, Approved Municipal Programs subsequent to the MOA being approved for participation in the State Small Business Credit Initiative. 3. The MOA is implementing its Approved Municipal Program or Programs in accordance with the Act and the regulations or other guidance issued by Treasury under the Act. 4. The authority of the undersigned to execute and deliver this certification on behalf of the MOA is valid and in full force and effect. By: ___________________________________ Name: Title: Date: ____________________________ 49th State Angel Fund Policies and Procedures DRAFT Exhibit 5: Scorecard Guidance BUSINESS STRATEGY Clarity of purpose Business plan Marketing/Sales approach Commercialization, expansion, or scalability goals/potential Identification of critical milestones (as well as solutions to overcome) Assess the feasibility and clarity of the business strategy, including the underlying logical and factual support. TEAM Co-founders and Management Board of Directors Scientific and business advisors, collaborators, and mentors committed to the business Track records, education and functional expertise of team, and experience in a) managing growth and b) within targeted industry Assess the team’s overall strength: its commitment level, ability and likelihood of executing the business as envisioned, and ability to pivot when market forces act in unforeseen ways. ECONOMIC IMPACT to ANCHORAGE Quality/Quantity of Jobs Provided (now/in future) Possibility of related investment, or ability to strengthen a city key industry or diversify economy Disadvantaged Business (minority-owned/in a low income zone) Underperforming Business (turnaround or expansion opportunity) Assess the likelihood of achieving the projected economic impact within the context of the submitted proposal, and the clarity of and logical and factual support underlying the methodology used to project the economic impact. MARKET Opportunity size and scope Strength/quantity of competition Firm competitive advantage (including intellectual property) Current and future trends Consider the market dynamics of the industry in which it seeks to enter or expand and the logical and factual support presented for how the applicant has identified the market opportunity. 5-1 49th State Angel Fund Policies and Procedures DRAFT PRODUCT/SERVICES Value proposition Problem/solution dynamic—and is the firm product a true “painkiller?” Extra value in technology being developed Is the firm product found better, faster, or cheaper elsewhere? Consider whether crystal-clear value is offered to the customer and fills a need within the marketplace. PROJECT BUDGET Firm-provided internal financials—Profit & Loss Statement, Balance Sheet, Cash Flow Analysis Other factors: Burn rate, break even point, customer acquisition costs/lifetime value Assumptions surrounding inbound cash flows Consider past and current performance (if provided), and future forecasts The score should reflect the attractiveness of the total budget, planned use of funds, and forecast inbound cash flows/monetization—as well as assessing whether those assumptions are realistic. If the business is in operation, the firm’s internal historical financials should also be assessed. FINANCE PLAN (current needs, matching and follow-on) Return on investment Matching funds status Follow on financing Probability of payback Safety of principal versus income potential (Indirect Investments only) The score should reflect the attractiveness of the funding offer overall: An aggregate of the likelihood/current status of the items above. 5-2