Senator Rethinks ‘Angel’ Incentives Bill; Midlands Group in Works

September 22, 2011

Investigative Reports

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The NerveA leading state senator who is sponsoring a bill to provide state tax credits for a high-risk, high-reward form of venture capital known as “angel” investing says he is rethinking his bill – and incentives in general.

The senator, Republican David Thomas of Greenville, says he is seriously questioning “the advisability of doing incentives pieces of legislation.”

“I am to the point where I want to stop and really think about what these things are supposed to be doing,” says Thomas, who holds a leadership post in the Senate as chairman of its Banking and Insurance Committee.

Thomas is chief sponsor of S. 460, which would provide up to $6 million per year in state income tax credits for qualified angel investments.

The bill is pending in the Senate Finance Committee, and the committee can take it up after the General Assembly is scheduled to reconvene in January.

“But I’m not going to push my bill,” says Thomas, who also serves on the Finance Committee.

Thomas does not have to push his bill for angel incentives to pass, however, because another bill to provide the tax freebies is halfway through the Legislature.

Rep. Joan Brady, R-Richland, is sponsoring that bill, H. 3779. It has passed the House and likewise is pending before the Senate Finance Committee.

As Thomas publicly reconsiders his angel tax credits bill and the wisdom of incentives overall, meanwhile, some of the largest state government players in South Carolina’s economy are moving to create a Midlands Angel Investors Network.

Those parties include the University of South Carolina’s Innovista research campus, SC Launch and EngenuitySC.

An arm of the S.C. Research Authority, SC Launch receives up to $6 million per year in contributions that it distributes as grants, loans or equity to start-up companies as seed capital. The contributions qualify for a 100 percent credit against state income taxes.

EngenuitySC is a public-private partnership that works to build a “knowledge-based economy” in the Midlands.

Innovista, SC Launch and EngenuitySC have teamed with the Greater Columbia Chamber of Commerce to form an angel investing group in the Columbia area.

A scandal-plagued past notwithstanding, Innovista is spearheading the effort. And, with support from its three partners, the USC research campus also is planning to present an angel investing seminar. The event is scheduled for Oct. 13 at the Research Authority’s Columbia headquarters.

So, what is the connection, if any, between those efforts and the angel incentives legislation?

“I think the connection is the people that are involved, certainly,” says Grant Jackson, vice president of community development for the Columbia chamber.

Also asked that question by The Nerve, Innovista director Don Herriott described it as “complementary.”

Regardless, and despite the fact that Brady’s bill has cleared the House, it’s hardly a foregone conclusion that incentives for angel investing will become law in South Carolina.

Thomas’ newfound coolness to the idea is but one example in that regard.

Indeed, incentives have become an increasingly contentious issue in the Legislature in the past couple of years.

Lawmakers lit the issue on fire in 2009 when they hurriedly, unanimously – and with essentially no debate – passed one of the two largest corporate welfare deals in state history. It happened during a rare special legislative session in the fall – a session ostensibly held to address a problem in the state’s unemployment insurance system.

The deal, of course, was for the Boeing Co. It involved a package of freebies, conservatively valued byThe Nerve at a minimum of $500 million, to recruit the aerospace giant’s 787 assembly plant in North Charleston.

In 2010, taxpayer giveaways under the guise of economic development again took center stage at the State House. That time it was during a showdown over proposed state sales tax refunds for a ginormous, upscale shopping mall the Florida-based Sembler Co. was planning to build in the Lowcountry.

Sembler scuttled the project after its would-be subsides died under withering opposition from a broad-based coalition.

The incentives issue continued to burn this year, too, in the name of Amazon.com.

In what some observers perceived as extorting a tax favor in return for jobs, Amazon bent the Legislature to its will, convincing the House to reverse course and grant the global online retailer a five-year exemption from collecting state sales tax on in-state purchases from a new Amazon distribution facility in Lexington County.

In 2012, incentives once more could be a flashpoint in the Legislature, via the angel proposals.

The Securities and Exchange Commission accredits so-called angels. Such accredited investors must have a net worth of at least $1 million, not including their primary residence, or an annual income of $200,000 or more.

Brady’s legislation would provide up to $5 million annually in state income tax credits for angel investing, versus $6 million in the Thomas bill.

If enacted, then, the Brady proposal is expected to exact a $5 million toll on the state’s coffers every year, according to a revenue impact statement on the bill. The S.C. Board of Economic Advisors prepared the statement.

The legislation would allow an accredited angel investor 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 businesses in certain industries. Those include software development and information technology.

Angels invest in seemingly promising early-stage companies that are too young to attract traditional venture capital. The payoff can be significant. But, by definition, it’s risky business – investing, in a manner of speaking, where angels fear to tread.

Many public and private economic development experts say South Carolina suffers not only from a lack of angel investing, but venture capital in general.

“South Carolina has always been kind of toward the bottom” in those areas, says Jackson, who was the longtime business editor of The State newspaper before joining the Columbia chamber.

The angel incentives legislation is designed to help fill the void by encouraging more of this specialized investment activity, with the state treasury guaranteeing more than one-third of each investor’s first $100,000.

“If you’re already making a risky investment and you can get some tax incentive for that, that might loosen your pocketbook,” says Herriott, the Innovista director.

Herriott says a Midlands angels organization does not hinge on the proposed incentives passing. “We will have an angel investors network regardless of the act.”

Two such regional groups exist in the state: Charleston Angel Partners and the Upstate Carolina Angel Network.

Herriott says Innovista is presenting the angel investing seminar next month and leading the charge to create a Midlands angel investors alliance as strategies to spur entrepreneurialism and commercialize USC’s intellectual property. “It’s all part of our mission,” he says.

Jackson says a Midlands angels group could expand access to capital for start-up companies based in Columbia and elsewhere across the state, as well as boost the number of investment deals that get inked with such firms. “That’s one of the reasons Innovista would be part of this,” he says.

To some observers, though, that might be a scary thought given Innovista’s track record.

Billed as a vibrant live-work-play community with extensive private sector involvement, the research campus thus far has failed to live up to that vision. Instead it has consumed tens of millions of public dollars with little private-sector match to show for it.

In fact, Innovista’s most high-profile developments, as chronicled by the Columbia alternative newsweekly Free Times, centered on a scandal involving the former research campus developer and its previous director.

Thomas, noting that he voted against the Amazon sales tax collection waiver, says he began to think about scrutinizing incentives more closely during the Amazon debate. He says lawmakers must carefully weigh the costs and benefits of such subsidies, “because it’s taxpayer money ultimately.”

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