On June 14, the earth moved for S.C. entrepreneurs–and angel investors
Although you probably didn’t feel the ground quake on June 14, there was seismic activity in South Carolina that day. When Gov. Nikki Haley signed House Bill 3505, the “High Growth Small Business Access to Capital Act,” she set in motion a tectonic shift in the marketplace for early-stage capital for entrepreneurs in the Palmetto State.
With the enactment of the new law, South Carolina joined the ranks of more than two dozen states that have jump-started capital formation for startup companies through an income tax credit for angel investors (a moniker coined during the Depression for individuals who invest their own personal capital and expertise in fledgling private companies).
Why It Matters
According to the Kauffman Foundation, all net new job creation in the United States over the last 30 years has been generated by startup firms less than five years old. One key implication of that eye-opening finding is that in order to grow our way back to a healthy economy, we must cultivate ecosystems for supporting the entrepreneurs who drive economic growth.
Unfortunately, those entrepreneurs face a notoriously difficult task in attracting the funding they need to get to market and scale up their enterprises – especially in a state like South Carolina where organized venture capital funding has been exceedingly scarce. However, there’s an overlooked source of capital in our state that can help close the funding gap for entrepreneurs – and that’s the wealth that already exists right here in our own backyard.
According to a 2011 Deloitte study, South Carolina is home to over 115,000 households that have a net worth of $1 million or more (which means they qualify as accredited investors per the Securities and Exchange Commission and are therefore eligible to invest in private company offerings). If just one percent of those households were to invest 5 percent of their net worth in South Carolina startups (assuming just the minimum of $1 million in net worth), that could mean $57 million in available capital for job-creating entrepreneurs in our state (which is more than the venture capital dollars invested here in all but two years since 2000).
However, most of those individuals are not aware of opportunities to invest in startup companies, and even those who are may be reluctant to invest in admittedly high-risk ventures. Enter the new Angel Investor Credit for South Carolina (along with pending rules from the SEC that will allow startups to advertise their capital-raising efforts), and soon investors will not only be made aware of more startup investment opportunities, but they’ll also know their risk is mitigated in the form of a state income tax credit.
How It Works
The new tax credit will allow angel investors to claim a 35 percent income tax credit against the value of investments they make in qualified high-growth businesses in South Carolina, beginning retroactively with January 1, 2013.
In order for a company to be eligible to receive investments that qualify for the credit, the company must first apply to be a South Carolina Qualified Business with the Secretary of State. The Secretary’s office will ensure that the company is headquartered in South Carolina, is fewer than five years old, has no more than 25 employees, and generated less than $2 million in revenue in any previous fiscal year. The company must also conduct its business in high-growth sectors such as manufacturing, wholesaling, information technology, research and development, or business services. (Several industries are excluded, including real estate, retail, gambling, mining, professional services and brokerage and insurance services).
Once the business is qualified by the Secretary of State, an angel investor can then claim a tax credit for a qualified investment in the company by submitting an application to the Department of Revenue no later than December 31 of the year the investment is made.
The investor may claim up to $100,000 in credits for a given year, while the total credits available from the state is $5 million annually. Up to half of the credit may be taken in the year the investment was made, while the remaining portion may be used in a subsequent year. The credit may be carried forward up to 10 years and can be transferred, which means it can be sold if the investor does not have a South Carolina income tax liability. This feature is quite attractive as it creates an incentive for investors outside of South Carolina to co-invest with local dollars.
South Carolina’s legislation is similar to many other states with angel tax credits (including Georgia and North Carolina), with one important twist. Sen. Hugh Leatherman of Florence introduced a clever credit recovery provision in the bill that appears to be unique among other states. Under the Leatherman amendment, the state will recover the amount of the credit it provided the investor if and when the investor realizes a capital gain from the investment.
What Next?
First, the next time you speak with one of the following legislators, please thank them for their leadership and dedication to moving the earth for entrepreneurs in South Carolina: Sen. Hugh Leatherman (Florence) and Rep. Dwight Loftis (Greenville). There were many other elected officials who helped along the way, but Leatherman and Loftis carried the torch.
Second, if you, or someone you know is interested in learning more about how to take advantage of the new tax credit by supporting entrepreneurs, please get in touch with me at matt@upstateangels.org.
Third and finally, although this bill created a tax credit for investors, it is really all about entrepreneurs and their risk-taking efforts to create value and grow our economy. In that spirit, you might join me in thanking an entrepreneur with these words from Nassim Taleb from his recently published book “Antifragile”:
“Heroism and the respect it commands is a form of compensation by society for those who take risks for others. And entrepreneurship is a risky and heroic activity, necessary for the growth or even the mere survival of the economy.
“Most of you will fail … but we are grateful for the risks you are taking and the sacrifices you are making for the sake of the economic growth of the planet and pulling others out of poverty. You are at the source of our antifragility. Our nation thanks you.”
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Matt Dunbar is managing director of the Upstate Carolina Angel Network. He was recently appointed to the board of directors of the Angel Capital Association, a North American trade group of angel groups and private investors.
