A Web site for college students subsidized with millions of dollars in state income tax credits is now an adult-oriented Internet portal.

HotU Inc. once was one of Hawai'i's emerging high-tech stars. Between 2000 and 2002 the company grew from three employees to 34 and moved from the state-run Manoa Innovation Center incubator facility to the Downtown high-rise Harbor Court.

HotU, which was liquidated in 2004, was developing an online scheduler and communications platform for college students. It was essentially a forerunner of social networking Web sites such as MySpace and Facebook.

Today, www.hotu.com is geared toward networking of a more adult-oriented nature. The site, which now appears to have no affiliation with the former HotU business, features a picture of a scantily clad woman and links to dating and romance sites.

HotU was among the first companies to benefit from the state's technology investment tax credit program. However, it's unlikely state lawmakers that created the tax credits were looking to create a Web site geared to adult singles, said Lowell Kalapa, head of the Tax Foundation of Hawaii.

"Would something like that have gotten approval if it was asked to be in an appropriation?" Kalapa asked. "With the tax credits yeah, you're buying technology, but what is it going to be used for? You don't know what you're buying when you pass a backdoor expenditure like that."

The technology tax credit program is among the most generous credits nationally and has come in for criticism because of its estimated $747 million cost from 1999 to 2007 and questions about the number of jobs created. Proponents have argued that the credits helped diversify the economy, created thousands of jobs and attracted $1.2 billion in investments in companies that spent $1.4 billion locally.

However, the credits have been criticized as being too generous, failing to produce tangible economic benefits, being shrouded in secrecy and, in some cases, creating only temporary movie industry jobs.

TOP OF THE BUBBLE

In the case of HotU, millions in state tax subsidies weren't enough to keep the business from failing in 2004.

HotU was formed in early 2000 at the peak of the high-tech investment bubble. Founder Walter Roth, a Punahou School graduate, created the software for HotU while attending the University of Wisconsin at Madison. Roth left the company as a director and chief executive officer early in 2002 shortly before the resignation of Laurie Foster, another Punahou graduate who had been HotU president.

HotU raised more than $10 million from venture capitalists, including Allegis Capital, Invencor, HMS Hawaii, PacifiCap Group and others such as Ron Higgins, a Punahou alumnus who founded local high-tech startup success Digital Island. About $4 million of that money was raised via matching state income tax credits created under Act 221 of 2001, according to Barry Weinman, managing director of HotU investor Allegis Capital.

The tax credit program allowed some HotU investors to receive a dollar or more in state tax credits for each dollar invested. Other state subsidies for HotU include $400,000 in state research tax credits, Weinman said.

Separately, the state owned a small piece of HotU via $750,000 invested by a state-backed venture capital fund.

DISPUTED CREDITS

The state adopted Act 221 in 2001. The credits were updated in 2004 as Act 215. This year, lawmakers reduced the level of tax credits investors can get and ended the ability of Mainland investors to transfer their tax credits to local investors. The moves were part of an effort to rein in costs and balance the state's budget.

Though Act 221 helped HotU attract needed investment capital, it also led to friction between HotU investors such as Weinman and Jeff Au, managing director for PacifiCap. That spilled over into a prolonged debate on changing Act 221, with Weinman and others seeking to tighten the act and Au looking to preserve the credits as they were.

HotU's failure ultimately was caused by poor execution and a lack of follow on investment funds, said Weinman. However, Weinman also pins the blame on the state tax credits, which he said caused divisiveness among investors with some focusing on preserving their tax credits rather than on an opportunity to expand the company.

Although HotU the business no longer exists, HotU the Web site endures. The Internet site uses the keywords "adult singles chat, adult singles, online dating and singles chat" to generate search engine Internet traffic.

However, just who owns the Web site today is unclear because hotu.com is registered via a service that allows the owner to remain anonymous.

For some HotU investors the whole episode remains a sore point.

"I think HotU could have been a success if it could have been allowed to do the sort of things that normal start-ups do," Weinman said. "I'm not sure if it would have been a success, but you never know.

"It was in the right space — social networking — five years ahead of MySpace and Facebook."

NO REIMBURSEMENTS

PacifiCap's Au was unavailable for comment. However Au has previously said that HotU's failure is not a reflection on the effectiveness of state tax credits. Rather, he said, HotU's failure reflects the long odds start-up technology companies face.

Following the failure of HotU, investors could have faced repaying up to 10 percent of the tax credits that they claimed. That's because Act 221 allowed the state to recover some of the tax credits if a business failed within five years of granting credits.

According to the state Department of Taxation, such repayments are made on a voluntary basis and the amounts of those reimbursements is not tracked.

Weinman said he's not aware of any investors repaying the state for tax credits received from HotU investments.

State Rep. Isaac Choy, D-24th (Manoa), said he wasn't familiar with the circumstances surrounding HotU's collapse. However, he said the tax shelter benefits of Act 221 investments may have caused some companies to lose focus. Rather than take risks, some companies may have played it safe to preserve their investors' tax credits.

"It's the tax shelter aspect that attracts the capital, not the venture itself," said Choy, chairman of a 2006 Tax Review Commission that criticized the credit program as costly and for lacking accountability.

"So if the professionals are trying to preserve the tax shelter aspect of the credit, are they really wrong? Do you blame the guys who took the credit and took the money or do you blame the lawmakers that made the law?"