RI’s Betaspring Found to Have Intentionally Misused $800K of Federal Funds, RI Loses $2M
Thursday, September 21, 2017
A federal audit has found that Betaspring "intentionally misused" nearly $1 million in federal funds.
Now, the state stands to lose $2 million in additional funding it was supposed to receive from the program.
The report was conducted by the Office of Inspector General in the Department of Treasury.
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OIG is recommending that the Deputy Assistant Secretary for Small Business, Community Development, and Housing declare default in its allocation agreement with Rhode Island and recoup the $803,644 of SSBCI funds to be found intentionally misused but is “considering Treasury’s decision to withhold and not disburse Rhode Island’s remaining allocation of $2 million in lieu of recoupment to meet the intent of our recommendation.”
Entrepreneurs Allan Tear, Owen Johnson, and Jack Templin co-founded Betaspring in 2009 - give aspiring entrepreneurs "minimal capital and maximum guidance, and launch them fast."
"We determined that the Fund’s investments in seventeen beneficiary companies constituted a misuse of $803,644 in SSBCI funds because at the time the investments were made, there was no private capital at risk. The Act and The SSBCI Guidelines require venture capital funds receiving SSBCI funds to have a “meaningful amount” of private capital at risk. Treasury determined that this requirement is met when 'private lenders or investors bear 20 percent or more of the risk of loss in any transaction.' In this case, the misuse was intentional because Betaspring Managers about the 20 percent requirement but made the seventeen investments in question anyway," wrote OIG.
About the Investigation
In their report, OIG stated the following:
"As part of our ongoing oversight of the Department of the Treasury’s (Treasury) State Small Business Credit Initiative (SSBCI), authorized by the Small Business Jobs Act of 2010 (the Act), we conducted audits of awards made to select States, Territories, and eligible Municipalities (hereinafter referred to as States) to support their capital access and small business credit programs. The purpose of these audits was to assess States’ compliance with SSBCI program requirements and prohibitions to identify any reckless or intentional misuse of funds
In brief, we determined that the Fund’s investments in seventeen beneficiary companies constituted a misuse of $803,644 in SSBCI funds because at the time the investments were made, there was no private capital at risk. In this case, we determined that the misuse was intentional because Betaspring Managers knew that 20 percent private capital for each investment was required but made the seventeen investments anyway. As such, we question $803,644 of SSBCI funds intentionally misused as this was in violation of the Act and The SSBCI Guidelines.
We also found that Rhode Island did not seek and receive Treasury’s approval to invest all $2 million of SSBCI funds in Startup Investments, LLC (Startup) instead of directly into the Fund as required by its Allocation Agreement. Lastly, the Fund also used some SSBCI Funds to pay Betaspring, LLC (Betaspring) for accelerator program services rather than make direct cash investments in beneficiary companies, which was inconsistent with Rhode Island’s stated use of SSBCI Funds in its application, as referenced in the Allocation Agreement.
Accordingly, we recommend that the Deputy Assistant Secretary for Small Business, Community Development, and Housing do the following: (1) declare a specific event of default of its Allocation Agreement with Rhode Island and recoup the $803,644 of SSBCI funds found to be intentionally misused; (2) determine whether Rhode Island is in default of its Allocation Agreement due to the unapproved investment in Startup; and (3) determine whether Rhode Island is in default its Allocation Agreement due to the Fund’s use of SSBCI funds to pay Betaspring for accelerator program services rather than make direct cash investments in beneficiary companies. If management finds Rhode Island in default with respect to Startup and the failure to make direct cash investments in beneficiary companies, management should take action(s) as allowed by Section 6.2 of Rhode Island’s Allocation Agreement."
RI’s Participating in SSBCI
SSBCI is a $1.5 billion Treasury program that provides participating States funding to strengthen capital access programs and other credit support programs that provide financial assistance to small businesses and manufacturers. Capital access programs provide portfolio insurance for business loans based on a separate loan loss reserve fund for each participating financial institution. Other credit support programs include collateral support, loan participation, loan guarantee, direct lending, and state-sponsored venture capital programs.
As the OIG reported:
Rhode Island was awarded approximately $13.2 million of SSBCI funds upon Treasury’s approval of its participation in the program in September 2011. The Allocation Agreement, among other things, authorized the use of the SSBCI funds to support the Small Business Loan Fund (a loan participation program) and two venture capital programs. As of December 2016, Treasury disbursed approximately $8.7 million to Rhode Island, which in turn, obligated or spent approximately $8.3 million.
Of this amount, almost $2 million was invested in Startup, which was an investment vehicle that invested in the Fund. Also included in the $8.3 million was $231,024 that the State used for administrative expenses. In February 2017, Treasury disbursed the third tranche of SSBCI funds to Rhode Island, but withheld $2 million from the disbursement to account for potential non-compliance pending completion of our audit. The State designated the Rhode Island Economic Development Corporation (RIEDC) 11 and its subsidiary, SBLFC to administer its programs, on behalf of the Rhode Island Department of Administration.
Related Slideshow: U.S. Treasury Report on Betaspring
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