June 3, 2023

The Nerve

Where Government Gets Exposed

Tax Breaks for Wealthy ‘Angel’ Investors Set for Senate Hearing

Angel InvestorNew examples of investment capital available to startup South Carolina companies call into question an argument for state government to get more involved in the venture capital business.

As the examples have come to light, a bill to provide state tax credits for a high-risk, high-dollar form of early-stage venture capital known as “angel” investing could begin moving closer to passing.

A panel of the S.C. Senate Finance Committee is scheduled to take up the bill in a hearing slated for 2 p.m. today.

The House overwhelmingly passed the bill last year.

If the Senate doesn’t approve the measure it will die at the end of this year’s legislative session. But roughly eight weeks remain in the session. And Senate Finance Chairman Hugh Leatherman, R-Florence, is a big champion of economic development incentives.

Rep. Joan Brady, R-Richland, is chief sponsor of the bill, H. 3779. House Speaker Bobby Harrell, R-Charleston, and House Majority Leader Kenny Bingham, R-Lexington, are among four co-sponsors of it.

The bill would provide up to $5 million annually in state tax credits for so-called angel investing.

Angel investors accredited by the Securities and Exchange Commission each would be able to claim a 35 percent state income tax credit of up to $100,000 per year against money they put into new, small, South Carolina-based companies in certain sectors. The qualifying industries include software development and information technology.

Brady’s bill would reduce state tax collections by $5 million per year if it’s enacted, according to a revenue impact assessment by the S.C. Board of Economic Advisors.

With deep pockets, angel investors target seemingly promising companies that are too new to attract traditional venture capital. The returns can be bountiful. But it’s an inherently riskier proposition – investing, as it were, where angels fear to tread.

Many economic development experts – in government as well as the private sector – contend that South Carolina suffers from a lack of investment capital to grow its businesses.

It all goes to Silicon Valley in California, or Austin or Boston or other big markets, the experts say.

However, some recent developments, coupled with existing opportunities, suggest that any venture capital shortage in the Palmetto State might not be so severe after all.

In February, the North Charleston-based firm PeopleMatter announced that it had secured a $14 million investment from Morgenthaler Ventures, a venture capital outfit headquartered in the heart of Silicon Valley.

PeopleMatter, which was launched in 2009, provides scheduling and other human resources software to the hospitality service industry. The company has grown rapidly and now has offices in the Atlanta area and San Francisco.

“We are incredibly proud of what we’ve been able to achieve in such a short amount of time and driven by our momentum,” PeopleMatter CEO and President Nate DaPore said in a statement announcing the $14 million investment.

On a much bigger scale, AOL co-founder and former CEO Steve Case announced in December the formation of a venture capital firm that focuses on startups in the Eastern part of the country.

The Revolution Growth fund commands $450 million in potential investments, Case and his two partners in the firm, former AOL colleagues Ted Leonsis and Donn Davis, wrote in a posting on the fund’s website.

“While our visibility and reach is national, we will generally focus on investments in the Eastern United States,” the trio said. “We believe there are great entrepreneurs building great companies all over the country, so we will focus our attention outside of Silicon Valley.”

Meanwhile, South Carolina already has its own state-run venture capital firm – SC Launch.

An affiliate of the S.C. Research Authority, SC Launch receives $6 million per year from corporate and individual donors through a fund established under state legislation. The donations are 100 percent deductible against state taxes, equating to an annual $6 million loss to the state treasury.

Per the legislation, the Research Authority, which controls SC Launch, takes that $6 million per year and parcels much of it out to startup tech companies as loans or other equity investments. The SCRA also uses part of the money to promote a “knowledge-based economy” in South Carolina.

The Research Authority is a state-created and state-controlled technology and real estate company.

Another example of the state helping small firms get off the ground is the Business Development Corporation of South Carolina and its sibling, the Certified Development Corporation of South Carolina.

“Both BDC and CDC serve a unique role in South Carolina’s economic picture, primarily by providing promising businesses a source for commercial loans not usually undertaken by traditional lending institutions,” the entities’ website says.

So, with SC Launch and the development corporations – and other state efforts to help startup companies too exhaustive to detail here – is there really a need for millions in state tax breaks for wealthy angel investors?

The vast majority of House members certainly think so.

It remains to be seen where members of the Senate stand on the matter. But taxpayers might start to find out today.

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

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The Nerve