Legislators Back Breaks For ‘Angel’ Investors

February 9, 2011

Investigative Reports

Print Friendly, PDF & Email

The NerveSeveral South Carolina lawmakers are supporting legislation to provide state income tax credits to incentivize a high-dollar, high-risk form of venture capital known as “angel” investing.

At least three bills to that effect are pending in the General Assembly.

The legislation coincides with an idea the S.C. Retirement System Investment Commission has been contemplating: infusing $100 million or more of the state retirement system’s private equity into South Carolina companies.

The commission manages a multibillion-dollar investment portfolio for state and local government retirees.

Meanwhile, a mostly publicly funded study by the University of South Carolina’s Moore School of Business to identify the top job-creating companies in the Palmetto State continues.

It is a story featuring a number of dots. Hence, inquiring minds want to know: Are the angel investing bills, the retirement system investment idea and the jobs study connected in some way?

“Only in the sense that whatever we find [in the study] may or may not support those initiatives,” says George Fletcher, director of New Carolina – South Carolina’s Council on Competitiveness.

New Carolina, a public-private economic development nonprofit based in Columbia, received a $27,000 federal matching grant to help pay for the study, according to Fletcher.

New Carolina devotes its energies chiefly to promoting a knowledge-based economy and economic clusters, or groups of businesses focused on the same industry, in South Carolina. Since its inception in 2004, New Carolina has received upward of $1 million in public funding for those efforts, The Nerve reported in a February 2010 story.

The vast majority of New Carolina’s tax dollars have come from the S.C. Department of Commerce.

Totaling $28,000, the matching money for the jobs study federal grant came from SC Launch ($13,000) and AdvanceSC ($15,000), according to Fletcher. Combined with the $27,000 from the feds, that makes the total grant amount $55,000.

SC Launch is an affiliate of the S.C. Research Authority, a state-created and controlled technology and real estate company. Fletcher is a member of the Research Authority board.

Under the 2006 S.C. Industry Partners Act, SC Launch receives up to $6 million per year in state support to invest as seed or venture capital in start-up technology firms.

That $6 million comes in the form of dollar-for-dollar tax credits for contributions, up to $2 million per contributor, to a set-aside fund established under the Industry Partners Act. The $6 million would otherwise go into the state’s general coffers to pay for basics such as education and law enforcement.

Thus, nearly half of the matching money for the jobs study federal grant – the $13,000 from SC Launch – also was public funding, but indirectly courtesy of state tax credits.

New Carolina is using part of the grant funding to pay USC’s Moore School to build a database detailing the characteristics of the fastest-growing companies in the state, the top 2 percent – so-called “gazelles.”

“Everybody thinks the high-growth companies are technie companies,” Fletcher says. “My guess is they may not be. They may be companies like Sticky Fingers.”

New Carolina plans to use the rest of the grant money to survey about 200 of the gazelles in conjunction with the database study, and then hold a conference to unveil all of the findings, according to Fletcher.

“It’s our intention to have a conference in April where we can roll out the results of the study and what we found out about the high-impact entrepreneurs,” he says.

AdvanceSC, meanwhile, is a limited liability company (LLC) Duke Energy created in 2004 to provide grants “for public assistance and economic development programs” in Duke’s South Carolina service area, according to the AdvanceSC website.

Except for AdvanceSC, all of these moving parts have at least one thing in common: They are all part of an economic development blueprint for the state dubbed the “South Carolina Knowledge Economy Strategic Framework.”

S.C. House Speaker Bobby Harrell, R-Charleston, and other legislative leaders along with business executives debuted the plan in a July 2008 news conference in Columbia.

The framework depicts a layered pyramid featuring higher education institutions, economic development entities and state agencies. Its nickname derives from its design: “the pyramid.” The executive committee of the Research Authority board sits atop the pyramid underneath “Ultimate Outcome: High-Paying Jobs.”

To recap the pyramid players in this story, they are: the proposed angel investing incentives; the state retirement system; USC; New Carolina; the Department of Commerce; SC Launch; the Research Authority; and the Industry Partners Act.

The three angel investing bills are: H. 3044 (sponsored by Rep. Joan Brady, R-Richland); H. 3270 (sponsored by Rep. Dwight Loftis, R-Greenville); and S. 460 (sponsored by Sen. David Thomas, R-Greenville).

All three bills are named the “South Carolina Angel Investment Act of 2011.” Likewise, the bills are virtually identical, but for a lesser amount of taxpayer money at stake in one of them.

That’s the Brady legislation. She filed hers first, on Dec. 7; and, of the three, it is the most austere.

But, first things first: What, precisely, is angel investing?

Think of it as betting big on Apple at a time when there was no such thing as mobile computing and the capabilities of home computing topped out somewhere around the level of Pong.

Angel investors have lots of money and a willingness to take greater risks with it than traditional mainline investors and lenders, says Andrea Marshall, executive administrator of Charleston Angel Partners. “They’re more willing to come in early when others fear to tread,” Marshall says.

In her bill, Brady proposes offering a 25 percent state income tax credit to qualified angel investors who put money into new or relatively new businesses in certain sectors. Those include manufacturing, processing, warehousing, wholesaling, research and development, software development and information technology services.

Such companies would have to register with the Department of Commerce to receive investments eligible for the angel incentives. And only firms that had $2 million or less in gross revenue in a single fiscal year before registering would qualify.

In addition, businesses engaged in real estate, construction, professional and financial services, entertainment and certain other activities would not count.

The income tax credits are capped at $100,000 per investor per year, and $3 million for all investors annually.

The Loftis and Thomas bills have the same individual dollar limit. But both of their proposed laws allow for a larger write-off – 35 percent – and twice as much in overall credits – $6 million.

The Brady and Loftis proposals both have picked up several co-sponsors and been referred to the House Ways and Means Committee. A subcommittee of that panel is scheduled to take up Brady’s bill tomorrow after the House adjourns.

Thomas’ measure, which does not have any co-sponsors, awaits action in the Senate Finance Committee.

All three bills are about employing the state tax code to try to create jobs. Each one says in part, “The General Assembly desires to support the economic development goals of this State by improving the availability of early stage capital for emerging high-growth enterprises in South Carolina.”

Brady says she filed her bill after some entrepreneurial groups, including Charleston Angel Partners and EngenuitySC, brought the idea to her attention. “Really it’s just an opportunity to help nurture and encourage economic development here in South Carolina,” she says.

EngenuitySC is another nonprofit public-private partnership advocating a knowledge-based economy with the help of significant public funding, but it focuses on Columbia. Brady is a member of the EngenuitySC board; and her daughter, Emily Brady, is listed on the organization’s website as a member of the EngenuitySC management team responsible for marketing and public relations.

In yet another example of pyramid-related connections, EngenuitySC director Neil McLean is described on the New Carolina website as that group’s “regional cluster expert” for the Midlands.

Rep. Brady says she was not aware of Loftis’ bill but plans to speak with him about their joint proposals. The House Republican Caucus “had discussed this just in terms of a piece of economic development legislation,” she says, “and I think it has bipartisan support as well.”

Asked about proposing new tax breaks when the state faces a projected shortfall in next fiscal year’s budget of more than $800 million, Brady notes that her legislation spreads angel investing credits out over 10 years.

In fact, all three bills do. Investors could claim 50 percent of their credit in the first year and the other half over the next decade. “So it’s not going to be an immediate impact,” Brady says.

Acknowledging the estimated budget deficit, the lawmaker says, “But that should not prevent us from looking 10 years ahead. That’s how you grow business. That’s how you grow jobs.”

In a Jan. 11 article in the Columbia Regional Business Report, Republican Rep. Dan Hamilton of Greenville, one of the co-sponsors of the Loftis bill, sounds a different note about the budget picture. “I think we’ll see a look for more comprehensive tax reform, versus let’s give a tax credit here or a tax credit there,” Hamilton is quoted in the story.

Asked about that comment and the fact that he has signed onto the idea of new tax breaks for angel investing, Hamilton told The Nerve that what he said was taken out of context. “I think it’s, frankly, a really good idea,” he says of the proposed incentives.

Hamilton says he would like to see comprehensive tax reform. But, in the meantime, he contends that such sweeteners would help small businesses obtain much-needed capital to grow.

Marshall, the Charleston Angel Partners administrator, says Georgia, North Carolina and many other states offer tax breaks for angel investing. “And most states have found that it actually does make a significant difference in terms of the amount of dollars flowing into early-stage investing.”

Government officials and private-sector professionals pursuing economic development in South Carolina often cite a need for venture capital. But whether subsidies from the state treasury is the right way to help meet the need for it, especially in this budget climate, is another matter altogether.

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