PROVIDENCE, R.I. (WPRI) – The R.I. Economic Development Corporation “may have repeatedly committed serious violations” of federal regulations in the way it allocated $2 million through the Rhode Island Small Business Loan Fund in 2011, according to an audit obtained by the Target 12 Investigators.
But state officials are strongly contesting the findings of the critical audit, which they ordered, calling its conclusions “fundamentally flawed” and defending the way EDC used the money as above board.
The $2 million was part of Rhode Island’s $13.2-million allocation from the State Small Business Credit Initiative, a $1.5-billion program created by Congress in 2010 to spur the economy. The Economic Development Corporation (EDC) – now known as the Commerce Corporation – invested $2 million of the money in the local startup incubator Betaspring in September 2011.
Betaspring, which has been widely praised in Rhode Island since it was founded in 2009, is a so-called startup accelerator. It brings young companies to Providence for an intensive 13-week training process, providing them with financing and mentoring to help them get off the ground.
The independent assessment of how the EDC infused $2 million into Betaspring Fund 100 LLC, a fund created by the company, was completed last August by Lyon Park Associates, an Arlington, Va.-based firm whose principal is a formal U.S. Treasury official. Target 12 obtained a copy after filing a request under the state’s public-records law.
The audit criticizes state officials for allowing 71% of the money invested in Betaspring to be “used to pay the Betaspring [a]ccelerator’s operating expenses,” compared with only $394,000 that was directly invested in the companies.
“Congress never intended for the program to fund business incubators or any other type of program with significant personnel expenses,” Lyon Park argued.
The assessment also found Betaspring used the money to invest in three out-of-state companies, including one located in Israel. Another was located in Michigan, and “records even indicated that this company subsequently received funding from the state of Michigan,” Lyon Park said.
Programs that received money from the State Small Business Credit Initiative (SSBCI) were also required by Congress to “demonstrate that, at a minimum, $1 of public investment by the State program will cause and result in $1 of new private credit,” Lyon Park said.
“Rhode Island’s 2012 SSBCI Annual Report indicated that several of Betaspring’s SSBCI-supported investments had attracted subsequent private financing,” the audit states. “However, there was no documentation to support this claim.”
U.S. Treasury officials are now conducting a required audit of the EDC’s Betaspring investment. Those findings are expected in April, according to state officials.
R.I. Department of Administration Director Richard Licht signed off on the use of the funds and pledged to monitor it. In an extensive interview with Target 12, Licht said he recently flew to Washington, D.C., to meet with Treasury officials regarding the Lyon Park findings.
“We self-reported this to the Treasury. We are working with the Treasury. We view them literally as a partner,” Licht said. “We think that Lyon Park didn’t understand the way an accelerator program works.”
The Lyon Park “report was wrong,” he said. “I stated that to Treasury.” But, he added, “We’ll abide by whatever Treasury says.”
Licht would not say what kind of fines Rhode Island could face if the federal government upholds any of Lyon Park’s findings. He said he is “confident” Rhode Island won’t have to pay back the $2 million.
Licht said Lyon Park had elevated “form over substance” in its assessment by focusing on the fact that money went directly from the EDC program to Betaspring’s operating expenses.
“If Betaspring had given a check to these companies that came to this accelerator program, and then they paid Betaspring back, there would be no issue here,” Licht said, adding: “If they had just done their paperwork slightly differently it might have worked.”
He also defended the fact that money earmarked for Rhode Island went to companies formed in other states, though he acknowledged money should not have gone to the Israeli firm as a foreign entity.
“The money was spent so that these people could attend Betaspring’s program … they came and spent that money in Rhode Island,” Licht said. “Many of these companies that come to Betaspring end up staying in Rhode Island – not all of them, but many of them do, and they do then create jobs.”
Licht’s office subsequently reported that of the 29 companies Betaspring funded with the $2 million from the State Small Business Credit Initiative, 27 are still in existence.
In a statement, Betaspring spokesperson Melissa Withers echoed Licht’s assessment of the Lyon Park report, saying it contains “inaccuracies and misinterpretations of our startup accelerator program.”
“The U.S. Treasury process is ongoing and we are working with the U.S. Treasury and [the Small Business Loan Fund] to support their review,” Withers said in an email.
Lyon Park CEO Maureen Klovers said her firm has been in business since October 2012 and before that she was a compliance manager at the U.S. Treasury Department for the State Small Business Credit Initiative.
Klover declined to comment further about her findings, but she lauded state officials for conducting an independent review in the first place.
“While obviously my report raised some serious questions about some of the parties involved, I do think the individuals at RIEDC/SBLF acted in good faith and undertook appropriate due diligence efforts,” Klover told Target 12 in an email.
In addition to the questions about the Betaspring investment, the Lyon Park audit also looked at the other two places Rhode Island’s $13.2-million State Small Business Credit Initiative allocation went: $9 million to the taxpayer-backed Slater Technology Fund, a venture-capital firm, and another $2.2 million to the Small Business Loan Fund that wasn’t invested in Betaspring.
The audit found “isolated compliance issues” with the $9 million allocated to the Slater Fund, suggesting that half of Slater’s investments failed to have an adequate private match and that two of the investments weren’t properly reported.
Licht dismissed comparisons between the EDC’s failed $75-million investment in Curt Schilling’s 38 Studios and the questions raised by Lyon Park about its $2-million investment in Betaspring. For one thing, he said, the $2 million was spread among many different companies.
“We commissioned Lyon Park,” Licht said. “We wanted to make sure we were in compliance, we wanted to make sure things were being done right, and that’s the difference. No one was watching 38 Studios.”
Records provided by the state show the Lyon Park assessment cost $17,320.