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'Angel' Tax Credits Would Cost $5 Million a Year

A bill to give tax breaks to wealthy “angel” investors would exact a $5 million toll on the state’s coffers every year, according to a revenue impact statement for the legislation.

That’s $5 million annually deprived from the general fund, which provides the mainstay of state dollars for basic services such as education and public safety, and instead into the pockets of well-to-do investors in the form of specially tailored tax favors.

The legislation would lessen exposure to losses for those who bankroll a high-risk form of investing, guaranteeing that they would recoup more than one-third of their money, up to $100,000 per year each, via tax credits.

That guarantee would apply no matter how the investments performed.

The bill, H. 3779, could be headed for swift passage.

It was introduced and sent to the budget-writing House Ways and Means Committee on March 2. Just six days later, a Ways and Means subcommittee speedily forwarded the bill with no amendments to the full committee by unanimous voice vote.

Now, the bill is on the agenda of a Ways and Means meeting scheduled for 90 minutes after the House adjourns today.

If the committee approves the bill it will likely then go to the full House.

The chamber’s Republican majority has made the legislation a priority, according to a Feb. 10 Associated Press story. It was published in some South Carolina newspapers one day after The Nerve initially reported on three bills filed previously to give tax breaks to angel investors, or “angels.”

So, exactly who are these entrepreneurial impresarios?

First of all, angels have lots of money.

The Securities and Exchange Commission accredits angels and defines them as investors with either a net worth of at least $1 million, not including their primary residence; an individual income of $200,000 or more per year; or, for married angels, combined incomes of $300,000 or more yearly, according to Andrea Marshall, executive administrator of Charleston Angel Partners.

But more than how much they invest, what distinguishes angels is when they invest – in the very early stages of companies, well before new firms have an established track record that could lure traditional venture capital.

In the industry, that in-between stage for start-up businesses is known as “the valley of death.”

The term “refers to the fact that it is very difficult to get this [investment] money” during that time, says Jim Jaffe, president and CEO of the National Association of Seed and Venture Funds, a nonprofit based in Philadelphia.

The association, whose membership consists largely of angels, and similar groups such as Charleston Angel Partners advocate tax incentives for their investments. “Because we think that that will help this investment process,” Jaffe says.

Marianne Hudson directs the national Angel Capital Association headquartered in Overland Park, Kan. “There’s probably a 10-to-one ratio of people who could be angels compared to people who are angels,” Hudson says.

By definition, however, angel financing can be significantly more risky than other types of investing, because new companies do not have historical benchmarks by which to assess their future prospects.

The legislation introduced earlier this month and the three bills filed previously in the General Assembly would lessen that risk, courtesy of the state treasury.

Two of the earlier measures are in the House – one (H. 3044) sponsored by Rep. Joan Brady, R-Richland; the other (H. 3270) by Rep. Dwight Loftis, R-Greenville – and the third is a proposal (S. 460) introduced by Sen. David Thomas, R-Greenville.

All three of those bills are named the “South Carolina Angel Investment Act of 2011.”

Brady is the chief sponsor of the latest legislation, H. 3779. Loftis is co-sponsoring it and his name is listed second on the bill.

The legislation borrows heavily from the two earlier House bills. But it has a different title – the “Bill Wylie Entrepreneurship Act of 2011,” after the late S.C. Rep. Bill Wylie, a Republican from Greenville who died in September.

The latest bill also has picked up a heavy hitter co-sponsor who had not signed on to the other two House proposals – House Speaker Bobby Harrell, R-Charleston.

House Majority Leader Kenny Bingham, R-Lexington, is co-sponsoring all three angel investing bills in the chamber.

Brady’s bill would allow angels to claim a 35 percent state income tax credit of up to $100,000 per year each for qualified investments. One-half of the write-off could be obtained in the year an investment is made; the other half over the following 10 years.

The incentives would kick in this year if the bill becomes law.

Put another way, the legislation would have state coffers serve as a partial backstop for angels, ensuring that the investors would recoup more than one-third of their money through tax credits, up to $100,000 each annually, regardless of how their investments panned out.

The total amount of credits would be capped at $5 million annually.

“This bill is expected to reduce General Fund individual income tax revenue by an estimated $5 million in FY2011-12 and each fiscal year thereafter,” says the revenue impact statement.

It is dated March 6, four days after the bill was introduced and two days before the Ways and Means subcommittee expedited it to the full committee.

Brady did not respond to a phone message and an email last week. In an interview for The Nerve’s first story, she said of her legislation, “Really it’s just an opportunity to help nurture and encourage economic development here in South Carolina.”

Loftis, returning a phone call last week, said in a message, “That is a bill to help draw private dollars into the marketplace to generate the economy and hopefully create some jobs for start-up businesses in the state.”

Bingham also did not return a voice message last week.

The same goes for Thomas and two phone calls to him. His bill was introduced and referred to the Senate Finance Committee on Jan. 27. The Legislature’s website indicates that nothing has happened with it since then.

The Thomas legislation features the same provisions as the Brady bill, but a more generous credits cap – $6 million.

“Similar tax credit incentive programs have been implemented in 23 states, including North Carolina and Georgia,” says the revenue impact statement.

Likewise, a proposed federal income tax credit for angel investing is pending in Congress, according to Jaffe and Hudson of the angel groups.

As with other types of high-risk investing, the rewards for angels can be plentiful, too.

In January, the Upstate Carolina Angel Network (UCAN) announced that it was cashing in on an investment the network of angels had made in Sabal Medical, a technology outfit in Charleston.

“In a deal valued at a total of $9 million, UCAN investors realized a return of more than three times their investment in less than six months, yielding a rate of return of more than 200%,” the network said in a news release.

Just think: If the legislation were on the books, those angels could have realized a profit of more than 235 percent.

Now, what were lawmakers and the media saying about the state facing a big budget deficit – something about public school teaching positions being eliminated and so forth?

Reach Ward at (803) 254-4411 or eric@thenerve.org

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