South Carolina's small, fast-growing businesses received a much-needed boost recently with the passage of an "angel investor" tax credit program. South Carolina has now joined approximately twenty-five other states which have similar investor programs.
The South Carolina High Growth Small Business Job Creation Act of 2013 is intended to create a big boost in "angel" investment activity in South Carolina. An angel is generally described as a wealthy individual who makes an investment in young companies, hoping for an outsized investment return if the company succeeds.
As of December 11, 2013, twenty-four companies have applied in the first six months of the new Act to become "qualified" to receive angel investments, which would provide tax credits to their "angels". Twelve of these company applicants have been approved by the Secretary of State and several of those initially rejected merely needed minor application corrections.
With little chance of obtaining a traditional bank loan, entrepreneurs often have to convince friends and family to invest before finding an angel to invest the remaining capital needed for a company's growth.
With no venture capital firms headquartered in South Carolina and with a somewhat reluctant angel investor population in the State, the Act might just be the investor-incentivizing piece of legislation that has been long overdue. A focus on starting and funding companies in certain industries with the potential for fast growth is critical because these "high-impact" companies have created almost all of the net new-job growth in the United States over the past decade.
The Act provides a 35% income tax credit for a "qualified" investment made in a "qualified" business. A "qualified" investment means a cash investment by an investor in exchange for equity ownership in, or a subordinated debt loan to, a qualified business. An investment will not be eligible for the tax credit if a broker fee or commission is paid, directly or indirectly, for soliciting the investment.
A "qualified" business is one primarily engaged in the following industries:
- Software development
- Information Technology
- Research and development
Companies excluded include retail sales, real estate, construction, professional services, gambling, financial and entertainment businesses.
A business must also be headquartered in South Carolina, have twenty-five or fewer employees, have revenues of $2 million or less, and have been in existence no more than five years.
An investor must be an individual who is an "accredited investor" as defined by the Securities and Exchange Commission—someone with income of over $200,000 for the past two years (over $300,000 with a spouse) or a net worth of at least $1 million excluding his or her home (a few entities may also qualify).
After making an investment in a qualified business, an investor must submit an application to the South Carolina Department of Revenue for approval by December 31 of the investment year before any tax credit is actually granted. The approval of a credit by the Department of Revenue may be impacted by the Act's yearly caps—$100,000 in tax credits per investor and $5 million in aggregate credits allowed by the State.
The aggregate cap may result in unwanted uncertainty among investors because tax credits will be granted on a prorata basis if more than $5 million in tax credits are claimed in any given year. The DOR has until January 31 of the year after an angel's investment year to finalize the tax credit the investor will receive. So, if the aggregate of $5 million has been exceeded, some investors may receive a tax credit amount lower than expected.
There are other areas of interest in the Act, including a unique "recapturing" provision, which qualified investors and qualified companies must carefully analyze.
Small, fast-growth businesses around the Palmetto State are undoubtedly welcoming this new investment-incentivizing Act and hoping that it will in fact bring a new, higher level of angel investing to life in our State.