Can the Virginia Center for Innovative Technology use state funds to buy stock in private startups without violating the Virginia Constitution?

Plain-English summary

Secretary of Commerce and Trade Brian Ball asked the AG a constitutional question that affects how Virginia's startup ecosystem gets seeded with public capital. The Center for Innovative Technology (CIT), an auxiliary of the Innovation and Entrepreneurship Investment Authority, runs the Growth Accelerator Program (GAP). GAP makes equity investments (buys stock) in early-stage Virginia technology, life science, and energy companies. The money comes from General Assembly appropriations. Does this violate Article X, § 10 of the Virginia Constitution, which forbids the Commonwealth from "subscrib[ing] to or becom[ing] interested in the stock or obligations of any company, association, or corporation for the purpose of aiding in the construction or maintenance of its work"?

AG Mark Herring's answer was no. The Virginia Supreme Court has long held that Article X, § 10 doesn't prohibit public investment that incidentally benefits private entities, as long as the primary purpose of the transaction is a public one. City of Charlottesville v. DeHaan (1984), quoting Almond v. Day (1956), set the test: "[t]he moving consideration and motivating cause of a transaction are the chief factors by which to determine if it is prohibited." Fairfax County Industrial Development Authority v. Coyner (1966) applied the same animating-purpose test to bond financing of industrial development. (These are all Virginia Supreme Court decisions; the "Va." reporter indicates Virginia state high court, not the U.S. Supreme Court.)

Promoting Virginia's economy through attracting high-tech jobs and businesses is a recognized public purpose. The Innovation and Entrepreneurship Investment Authority Act expressly declares the Authority's exercise of powers "to be the performance of an essential governmental function and matters of public necessity for which public moneys may be spent and private property acquired." CIT's GAP investments serve that purpose. Even though they take the form of stock purchases (which look like the constitutional prohibition), the "animating purpose" test controls.

The opinion also leaned on the presumption of constitutionality that attaches to General Assembly enactments, including appropriation acts, under Vesilind v. Virginia State Board of Elections (2018) and Pulliam v. Coastal Emergency Services (1999).

Currency note

This opinion was issued in 2019. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

Article X, § 10 of the Virginia Constitution sets up four prohibitions on state involvement in private enterprise:

1. The "credit clause": neither the Commonwealth nor any unit of local government may extend credit "directly or indirectly, under any device or pretense whatsoever, granted to or in aid of any person, association, or corporation."
2. The "stock or obligations clause": the Commonwealth may not "subscribe to or become interested in the stock or obligations of any company, association, or corporation for the purpose of aiding in the construction or maintenance of its work."
3. The "internal improvement clause": the Commonwealth may not "become a party to or become interested in any work of internal improvement, except public roads and public parks."
4. The "debt-assumption clause": the Commonwealth may not assume local indebtedness or lend its credit to localities.

A carve-out (the second-to-last sentence of § 10) lets the General Assembly establish an authority to insure and guarantee loans for industrial development and to fund such an authority.

The Innovation and Entrepreneurship Investment Authority Act, §§ 2.2-2218 to -2233.1, creates the Authority as a political subdivision with broad powers to acquire and use property, contract, accept public and private contributions, and form separate legal entities to manage assets. The Center for Innovative Technology, a 501(c)(3) nonstock Virginia corporation formed in 1984, operates as an auxiliary of the Authority. CIT is not deemed a state agency for many purposes (§ 2.2-2232(A)), but its public purpose is fixed by statute and its public funding is closely accounted for, including annual audits by the Auditor of Public Accounts, quarterly President's reports, and reports to the Joint Commission on Technology and Science (§ 2.2-2221.1).

The Growth Accelerator Program (GAP) is one CIT initiative. The 2018-2020 budget directed GAP funding to "foster the development of Virginia-based technology, biosciences, and energy companies" and to "underwrite early stage financing for new companies with the goal of achieving an average 11:1 private to public investment ratio." Since GAP's inception (per the CIT FY2017 report), it had considered over 4,500 companies and invested $22.9 million in 181 seed and early-stage companies across Virginia.

Common questions

Q: Doesn't Article X, § 10 say the Commonwealth can't "become interested in the stock" of a company?
A: It does, for the purpose of aiding in the construction or maintenance of its work. The Virginia Supreme Court has read the prohibition narrowly: if the animating purpose of the transaction is public (here, economic development), incidental private benefit doesn't violate the clause.

Q: What's the "animating purpose" test?
A: From DeHaan (1984), quoting Almond v. Day (1956): "[t]he moving consideration and motivating cause of a transaction are the chief factors by which to determine if it is prohibited." If the transaction's main goal is a public purpose, the clause isn't triggered.

Q: Is economic development really a recognized public purpose?
A: Yes. Coyner (1966) explicitly so held in upholding industrial development authority bonds. Prior AG opinions from 1990, 1991, 1992, and 2000 collected by this opinion confirm the same.

Q: Can CIT just give a startup company a no-strings grant?
A: Different question. The opinion addressed equity investments specifically, where CIT takes ownership in exchange for capital. Grants raise separate analysis, and the credit clause would need its own animating-purpose review.

Q: Who decides if a transaction's animating purpose is genuinely public?
A: Ultimately the courts, on review. The opinion observes that General Assembly enactments and appropriation acts enjoy a strong presumption of constitutional validity (Vesilind; Pulliam), so a challenger has the burden to show clear repugnance to the Constitution.

Q: What about reporting and accountability?
A: Section 2.2-2221.1 requires CIT to report annually on initiatives, projects, work plans, and achievements. It must also provide annual expenditure reports including "projected economic impact on the Commonwealth and recoveries of previous grants or investments and sales of equity positions." The President of CIT reports quarterly on gains and losses. CIT is audited annually by the Auditor of Public Accounts.

Q: What about losses on bad investments?
A: That's an investment-management question, not a constitutional one. The reporting requirements force visibility on losses, but the opinion does not address fiduciary duties or how the Authority Board manages investment risk.

Q: Does this opinion bless any specific transaction?
A: No. The opinion analyzes the general structure (CIT making equity investments through GAP with appropriated funds for the Act's stated purposes). Individual transactions still have to fit the animating-purpose test, and the opinion assumes CIT was properly formed and operates within the Act.

Citations

The opinion rests on Va. Const. art. X, § 10 and art. IV, § 13; the Innovation and Entrepreneurship Investment Authority Act at §§ 2.2-2218 to -2233.1; the Virginia Supreme Court's animating-purpose cases (City of Charlottesville v. DeHaan; Almond v. Day; Fairfax County IDA v. Coyner); and the constitutional-presumption cases Vesilind v. Virginia State Board of Elections, 295 Va. 427 (2018), and Pulliam v. Coastal Emergency Services, 257 Va. 1 (1999). It also relies on prior Virginia AG opinions from 1990, 1991, 1992, and 2000 on the credit and stock clauses.

Source

• Landing page: https://www.oag.state.va.us/annual-reports-opinions/official-opinions
• Original PDF: https://www.oag.state.va.us/files/Opinions/2019/19-009-Ball-issued.pdf

Original opinion text

COMMONWEALTH of VIRGINIA
Office of the Attorney General
Mark R. Herring

202 North Ninth Street
Richmond, Virginia 23219
804-786-2071
Fax 804-786-1991
Virginia Relay Services
800-828-1120
7-1-1

Attorney General

Cynthia E. Hudson
Chief Deputy Attorney General

August 16, 2019

The Honorable Brian Ball
Secretary of Commerce and Trade
Commonwealth of Virginia
1111 East Broad Street
Richmond, Virginia 23219

VIA HAND DELIVERY
Dear Secretary Ball:

I am responding to your request for an official advisory opinion in accordance with § 2.2-505 of the Code of Virginia.

Issue Presented
You ask whether equity investments in businesses to be made by the Center for Innovative Technology, utilizing funds appropriated by the General Assembly for the purposes set forth in the Innovation and Entrepreneurship Investment Authority Act, would violate Article X, § 10 of the Constitution of Virginia.[1] Specifically, you ask whether the Center for Innovative Technology may invest funds appropriated by the General Assembly to the Growth Accelerator Program to underwrite early stage financing of new private companies.

Background
The Innovation and Entrepreneurship Investment Authority Act (the "Act")[2] sets forth the General Assembly's findings and determinations regarding the need to promote economic development throughout the Commonwealth by, among other things, attracting and retaining high technology jobs and businesses; increasing industry competitiveness through the application of innovative technologies; and enhancing scientific and technological research and development.[3] To achieve these objectives, the General Assembly created the Innovation and Entrepreneurship Investment Authority (the "Authority") as a political subdivision of the Commonwealth.[4] The Authority is governed by a board of directors ("the Authority Board"), which consists of several appointees of the Governor or the General Assembly, as well as cabinet members including the Secretary of Commerce and Trade. The cabinet members on the Board serve ex officio with full voting privileges.[5]

The General Assembly has granted the Authority all powers necessary or convenient to carry out its statutory purposes.[6] Its rights and powers include the ability to "[a]cquire, purchase, hold, [or] use ... any ... property, real, personal or mixed, tangible or intangible, or any interest therein" and to "[m]ake and enter into all contracts and agreements necessary or incidental to the performance of its duties, the furtherance of its purposes and the execution of its powers."[7] The Authority also has the express right to form, develop, and own separate legal entities to manage and administer assets disposed of by the Authority.[8]

The Authority also may receive and accept from the Commonwealth, the federal government, or from any other public source or private source, contributions of money, property, or other things of value to be used to accomplish the purposes of the Act.[9] Monies received by the Authority from the Commonwealth or the federal government shall be accepted and expended upon such terms and conditions as are prescribed by the funding entity.[10]

The Act provides that the exercise of the Authority's powers "shall be in all respects for the benefit of the people of the Commonwealth, for the increase of their commerce and prosperity, and for the improvement of their health and living conditions."[11] Moreover, the exercise of these powers expressly is deemed "to be the performance of an essential governmental function and matters of public necessity for which public moneys may be spent and private property acquired."[12]

The Center for Innovative Technology (CIT) is a nonstock Virginia corporation formed in 1984 pursuant to the Act to promote economic development in Virginia as an "auxiliary" to the Authority.[13] It is to be operated exclusively for scientific, educational, and charitable purposes, and "may engage only in activities that may be carried on by a corporation exempt from federal income taxation under Section 501(c)(3)" of the Internal Revenue Code and "to which contributions are deductible under Section 170(c)(2) of the [Internal Revenue] Code."[14] The Act provides that CIT shall not be deemed a state or governmental agency, advisory agency, public body, or agency or instrumentality for numerous provisions and requirements of the Code, as specified in § 2.2-2232(A).[15] CIT, nonetheless, is charged with fulfilling the public purpose of the Act,[16] is funded with public monies,[17] and is required by statute to ensure that economic benefits arising from transactions in which it is involved are allocated on a basis that is equitable, with due consideration given to the interests of the citizens of the Commonwealth and the needs of CIT.[18]

CIT is required to report annually to the Joint Commission on Technology and Science regarding its initiatives and projects, its work plan for the year and expected results, and its achievements to date.[19] It is also to provide to the Chairs of the House Appropriations and Senate Finance Committees, the Secretary of Technology, and the Director of the Department of Planning and Budget an annual detailed expenditure report for the prior fiscal year.[20] This report is to include the "projected economic impact on the Commonwealth and recoveries of previous grants or investments and sales of equity positions."[21] The President of CIT must also report quarterly to these same authorities, as well as its board of directors, on all gains and losses in investments and the "financial and programmatic performance of all operating entities owned by [CIT]."[22] In addition, CIT must undergo an annual audit by the Auditor of Public Accounts and is subject to external review under the provisions of the Legislative Program Review and Evaluation Act or by an entity appointed for such purpose by the Governor.[23]

Among the initiatives managed by CIT is the Growth Accelerator Program (the "GAP"). Through this program, CIT makes equity investments in private companies to provide seed and early-stage capital funds for Virginia-based technology, life science, and energy companies.[24] For several years, the General Assembly has adopted budgets that contain appropriations for the GAP. The Commonwealth's 2018-2020 budget states that funding appropriated to the GAP is to be used to "foster the development of Virginia-based technology, biosciences, and energy companies" and to "underwrite early stage financing for new companies with the goal of achieving an average 11:1 private to public investment ratio."[25] The 2018-2020 Budget also authorizes the Authority to transfer appropriated funds to CIT "to expend said funds for realizing the statutory purposes of the Authority, by contracting with governmental and private entities."[26]

Applicable Law and Discussion
Article X of the Constitution of Virginia provides in pertinent part as follows:

Section 10. Lending of credit, stock subscriptions, and works of internal improvement.

Neither the credit of the Commonwealth nor of any county, city, town, or regional government shall be directly or indirectly, under any device or pretense whatsoever, granted to or in aid of any person, association, or corporation; nor shall the Commonwealth or any such unit of government subscribe to or become interested in the stock or obligations of any company, association, or corporation for the purpose of aiding in the construction or maintenance of its work; nor shall the Commonwealth become a party to or become interested in any work of internal improvement, except public roads and public parks, or engage in carrying on any such work; nor shall the Commonwealth assume any indebtedness of any county, city, town, or regional government, nor lend its credit to the same. This section shall not be construed to prohibit the General Assembly from establishing an authority with power to insure and guarantee loans to finance industrial development and industrial expansion and from making appropriations to such authority.[27]

This section prohibits the Commonwealth from (i) granting credit to any person, association, or corporation by any device ("credit clause"), (ii) subscribing to or becoming interested in the stock or obligations of any company, association, or corporation for the purpose of aiding in the construction or maintenance of its work ("stock or obligations clause"), (iii) becoming a party to or becoming interested in any work of internal improvement, except public roads and public parks ("internal improvement clause"), and (iv) assuming the indebtedness of any county, city, town, or regional government, or lending its credit to the same.

The stocks and obligations clause is of primary concern here because CIT directly purchases stock in new companies as a means of providing start-up funds. As commonly used, a "subscription" in stock is a written agreement to take and pay for stock.[28] An "interest" in the stock or obligations of an entity generally refers to a direct right or claim as to the stock, bond obligations, or debt instruments of the entity.[29] Examples include options to purchase equity, status as a beneficiary on a bond, or status as the payee on a note. Thus, by investing in new private companies, CIT engages in activities in the nature of a purchasing a subscription or interest in stock.

It is well settled that Article X, § 10 does not prohibit the extension of public credit or the investment of public funds to the incidental benefit of private entities where the primary purpose of the transaction is to achieve one or more specified public purposes.[30] In such instances, the Supreme Court of Virginia has stated that "'[t]he moving consideration and motivating cause of a transaction are the chief factors by which to determine if it is prohibited ....'"[31] Where transactions are motivated by a clearly defined public purpose, extensions of public credit or expenditures of public funds to the incidental benefit of private enterprises do not violate Article X, § 10.[32] "It is the animating purpose of the transaction, and not its form or the extent to which it may benefit the private business involved, that determines its constitutionality."[33] Promoting the economy of the state has been found to constitute a sufficient public purpose under Article X, § 10.[34]

Based on these principles, a prior Attorney General concluded that the Commonwealth's acquisition of a private corporation's stock did not violate Article X, § 10 because the purchase was intended to benefit the state retirement system rather than aid the private corporation.[35] Similarly, an industrial development authority may acquire an industrial park through the purchase of stock of certain private development corporations to accomplish transfer of the ownership of the park from the corporation to a city, for the purpose of attracting industrial clients to the area.[36]

In this instance, the Authority was created with the express public purposes of attracting and retaining high technology jobs and businesses, as well as promoting scientific and technological research and development.[37] The Authority's exercise of its powers is in "performance of an essential governmental function and matters of public necessity for which public moneys may be spent and private property acquired."[38] CIT is an auxiliary of the Authority that is authorized by statute to carry out the purposes of the Act.[39] The Act's reporting requirements, which include the obligation to report on the sales of equity positions, expressly recognize that CIT may acquire equity in, or ownership of, companies.[40] Because CIT's equity investments are made to effectuate a clearly defined governmental purpose, it is my view that such investments would not violate the stock or obligations clause of Article X, § 10.

Finally, laws enacted by the General Assembly enjoy a strong presumption of constitutional validity. As the Supreme Court of Virginia recently confirmed:

Established principles govern our determination whether the General Assembly has adhered to the Constitution in exercising its legislative power [....]The first such principle is that every law enacted by the General Assembly is entitled to a strong presumption of validity and will be invalidated by the courts only if it clearly violates a constitutional provision.

The party challenging an enactment has the burden of proving that the statute is unconstitutional, and every reasonable doubt regarding the constitutionality of a legislative enactment must be resolved in favor of its validity. Further, in determining the constitutionality of a General Assembly enactment, we must give the Constitution a liberal construction in favor of sustaining the enactment in question, if practicable.[41]

The Court has also explained that "[a]ny judgment as to the wisdom and propriety of a statute is within the legislative prerogative, and this Court will declare the legislative judgment null and void only when the statute is plainly repugnant to some provision of the state or federal constitution."[42] Acts of appropriation are also laws enacted by the General Assembly.[43] Thus, they are entitled to the same deference as to constitutional soundness.

Accordingly, the provisions of the Act and the budget appropriations discussed herein are entitled to a strong presumption of constitutional validity. The stated arrangements, whereby GAP appropriations to the Authority are transferred to CIT for investment consistent with the Act's purposes, including for equity investments, are presumed to be constitutionally sound. Absent activity plainly repugnant to the Constitution, I likewise presume that such arrangements are constitutionally sound.

Conclusion
Based on the foregoing, it is my opinion that equity investments made by CIT utilizing appropriated GAP funds for the purposes stated in the Act do not violate Article X, § 10 of the Constitution of Virginia.

With kindest regards, I am,
Very truly yours,

Mark R. Herring
Attorney General

1. This opinion is limited to analyzing the constitutionality of private equity investments of the Center for Innovative Technology under Article X, § 10, of the Constitution of Virginia. For purposes of this opinion, it is assumed that the Center for Innovative Technology was properly formed and operates in accord with the Innovation and Entrepreneurship Investment Authority Act, the Appropriation Act, and the Center's Articles of Incorporation.

2. VA. CODE ANN. § 2.2-2218-2233.1 (2017).

3. VA. CODE ANN. § 2.2-2219(A).

4. VA. CODE ANN. § 2.2-2219(B).

5. VA. CODE ANN. § 2.2-2220.

6. VA. CODE ANN. § 2.2-2221.

7. VA. CODE ANN. § 2.2-2221(3), (9).

8. VA. CODE ANN. § 2.2-2221(20).

9. VA. CODE ANN. § 2.2-2221(11).

10. VA. CODE ANN. § 2.2-2228. The Authority is to accept and expend funds from the federal government "upon such terms and conditions as are prescribed by the United States and as are consistent with state law."

11. VA. CODE ANN. § 2.2-2230.

12. VA. CODE ANN. § 2.2-2219(B).

13. VA. CODE ANN. § 2.2-2232(A). See also Articles of Incorporation of The Center for Innovative Technology (June 20, 1984); Restated Articles of Incorporation of The Center for Innovative Technology (July 15, 1993); SEN. Doc. No. 16, Report on the Performance and Potential of the Center for Innovative Technology (1993) at 1; INNOVATION AND ENTREPRENEURSHIP INVESTMENT AUTHORITY, Resolution to Designate President and Staff of the Center for Innovative Technology to Act on Behalf of the Authority at 1 (December 10, 2009).

14. Articles of Incorporation of The Center for Innovative Technology (June 20, 1984); Restated Articles of Incorporation of The Center for Innovative Technology (July 15, 1993).

15. VA. CODE ANN. § 2.2-2232(A).

16. Id.

17. VA. CODE ANN. § 2.2-2232(B); see infra, note 19 and accompanying text.

18. VA. CODE ANN. § 2.2-2232(A).

19. VA. CODE ANN. § 2.2-2221.1(A). The Joint Commission on Technology and Science is a permanent legislative agency of the Commonwealth, created to study and assist in the development of technology and science in Virginia. See VA. CODE ANN. § 30-85 (2018).

20. VA. CODE ANN. § 2.2-2221.1(B). A similar report is also required of the Authority.

21. VA. CODE ANN. § 2.2-2221.1(B)(4) (emphasis added).

22. VA. CODE ANN. § 2.2-2221.1(C)(2)-(3).

23. VA. CODE ANN. § 2.2-2232(A)-(B).

24. See CENTER FOR INNOVATIVE TECHNOLOGY, FY2017 Annual Report: Driving Innovation and Entrepreneurship to Create Virginia's New Economy, at 4 (Sept. 30, 2017) ("Since inception, the GAP Fund Program has considered investing in over 4,500 companies and has invested $22.9M in 181 seed and early stage technology, life science, and energy companies across the Commonwealth of Virginia."), available at https://rga.lis.virginia.gov/Published/2017/RD315/PDF.
    For purposes of this opinion, the term "equity investment" is used to mean the acquisition of shares of stock of a business entity, which represent an ownership interest.

25. Appropriation Act, Item 126.10 (I)(1) (2018), available at https://budget.lis.virginia.gov/bill/2018/2/HB5002/Chapter/.

26. Id., Item 126.10, at subsection B. Relevant to this opinion, this includes the authority to transfer GAP funds to CIT.

27. VA. CONST., art. X, § 10.

28. See BLACK'S LAW DICTIONARY 1727 (Bryan A. Garner et al. eds., 11th ed. 2019) (defining the term "subscription" in connection to stock).

29. See id. at 968 (defining the term "interest" generally).

30. See, e.g., 2000 Op. Va. Att'y Gen. 83, 87; 1992 Op. Va. Att'y Gen. 138, 141 and n. 2; 1991 Op. Va. Att'y Gen. 213, 216.

31. City of Charlottesville v. DeHaan, 228 Va. 578, 585, 323 S.E.2d 131, 134 (1984) (quoting Almond v. Day, 197 Va. 782, 790, 91 S.E.2d 660, 667 (1956)).

32. See, e.g., id. at 591-592, 323 S.E.2d at 137-38 (finding that under the animating purpose test, a city's appropriation of funds to redevelopment authority, which in turn lent the funds to private developer, served the purposes of the Housing Authorities Law and did not violate the credit clause).

33. 1992 Op. Va. Att'y Gen. 138, 141.

34. Fairfax Cty. Industrial Dev. Auth. v. Coyner, 207 Va. 351, 355-58, 150 S.E.2d 87, 91-94 (1966) (concluding that the issuance of revenue bonds by an industrial development authority for the financing and construction of an industrial facility to be leased to a private user did not violate Article X, § 10 because the issuance of such bonds served an essential public purpose of stimulating industrial development).

35. See 1992 Op. Va. Att'y Gen. 138, 141; 1991 Op. Va. Att'y Gen. 213, 216.

36. See 1990 Op. Va. Att'y Gen. 88, 88 & 90.

37. VA. CODE ANN. § 2.2-2219(A).

38. VA. CODE ANN. §§ 2.2-2219(B); 2.2-2230.

39. VA. CODE ANN. § 2.2-2232.

40. VA. CODE ANN. § 2.2-2221.1(B), (C).

41. Vesilind v. Va. State Bd. of Elections, 295 Va. 427, 444, 813 S.E.2d 739, 748 (2018) (internal quotation marks and citations omitted).

42. Pulliam v. Coastal Emergency Servs., 257 Va. 1, 9, 509 S.E.2d 307, 311 (1999).

43. See VA. CONST. art. IV, § 13.