Startup Bills in the Alabama Legislature

"Alabama Senate moves to help small businesses raise startup money through crowd funding:
MONTGOMERY (AP) — The Alabama Senate is trying to give people a new way to raise money to start small businesses.
Enlarge |Arthur Orr
FILE -- In this photo taken Feb. 4, 2013, State Sen. Arthur Orr, R-Decatur, talks with reporters in Montgomery, Ala. Alabamians trying to start small businesses in a tough credit market may soon have a new method that will allow them to raise small amounts of capital from many Alabama investors. Known as “crowd funding,” the process has been used for years to generate money for political campaigns, artistic projects and charities. It will become a legal way to raise capital for small businesses in Alabama if the Legislature approves a bill in the next session starting Jan. 14. Orr, the bill's sponsor, said the Alabama Securities Commission asked him to introduce the bill because small business people need a different way to raise money. “It's difficult for start-ups to get bank loans and other traditional financing,” he said. (AP Photo/Phillip Rawls, file)
APThe Senate voted 31-0 Thursday for a "crowd funding" bill sponsored by Republican Sen. Arthur Orr of Decatur.
The legislation is backed by the Alabama Securities Commission. It would allow someone trying to start a small business in Alabama to use social media and advertising to find small investors who live in the state. It is limited to raising $1 million, and it is restricted to Alabama businesses and investors because of federal regulations.
The proposed legislation is an option for people trying to start small businesses in a tough credit market, Orr said.
His bill now goes to the House for consideration. House Speaker Mike Hubbard, R-Auburn, said Thursday he favors the bill because Alabama needs innovative ways to give small businesses access to capital. But he said he has not had a chance to gauge support in the House."

(link) http://www.tuscaloosanews.com/article/20140123/NEWS/140129867

OPINION:

This is one of two bills I know of that could help startups.  The other has been pushed along for a couple of years and would provide an investment tax credit for investments in small/startup enterprises.

I, for one, hope both can pass this year.

Code Section 1202: Let’s Hope It Doesn’t Expire | Startup Company Law Blog | Davis Wright Tremaine LLP

Code Section 1202: Let’s Hope It Doesn’t Expire | Startup Company Law Blog | Davis Wright Tremaine LLP (LINK)

'via Blog this'

Joe makes some great points, but another reason is that many investors are just beginning to learn about Section 1202 and make plans that allow them to take advantage of it.

Let's face it, people don't usually live and breathe the tax code and many people didn't immediately realize (and many probably still don't) that the 100% exclusion even existed, so it is necessary to leave it in place for a reasonable length of time in order for it to have the intended effect.

Gov. Haslam: TN to co-invest via INCITEinnovation and jobs-formation campaign on Venture Nashville

Although I'm thrilled to hear about these kind of initiatives in the Southeast, I would really love to see some in my home state for a change.

CAPCO all by itself, although great, is just not enough.

Gov. Haslam: TN to co-invest via INCITEinnovation and jobs-formation campaign on Venture Nashville

GOVERNOR Bill Haslam's new $50 million INCITE economic-innovation program will include co-investment for Tennessee ventures, new incubators, a push on both tech transfer and entrepreneurship, and a continuing role for Tennessee Technology Development Corporation (TTDC) and other allies, the governor said today.

Misguided Nebraska Senators question angel tax credit benefit due to business risk

The legislative debate over the Nebraska Angel tax credit is instructive for Alabama because we will probably have some of these same issues raised when the (hopefully soon to be introduced) Alabama angel tax credit is debated.

Nebraska Senators question 'Angel' tax benefit - Omaha.com

Lincoln Sen. Danielle Conrad, who led a legislative study last year on how to improve the “economic ecosystem” for entrepreneurs, said Nebraska has done well attracting larger businesses but needs to be just as aggressive helping innovators capitalize on a good idea or a new invention.

But Schuyler Sen. Chris Langemeier questioned whether the state should spend $3 million on such tax benefits when it is cutting spending elsewhere.

He called LB 389 “a slot machine.” Research shows that up to 75 percent of such projects fail.

“I’m not against this. I just don’t think today is the day to make this investment,” said Langemeier, who drafted an amendment to kill the bill.

Senator Langmeier is probably a very smart and hardworking individual, but his comments are laughable.  There are no doubt risks for the success of an angel investor tax credit, but the good Senator is missing them.  Calling an angel tax credit proposal a "slot machine" simply because many small businesses eventually fail completely misses the point...and the point IS that 25% of them succeed (by his statistics).  Of those succeeding, some are also going to succeed in a large way and that is exactly what makes the entire process profitable for entrepreneurs, investors and the State.   If the Senator's reasoning were followed then no one should ever start a new business.

Nonetheless, to a certain extent he is exactly right, because the law of large numbers is critical to angel investing just as in casinos*...only he has the parties wrong because in an angel tax credit the State is playing the role of casino, not player.  *(meaning, like individual bets, it takes investment in a lot of individual companies to normalize the overall portfolio return) In fact, based on some table napkin math, the State stands to create a tremendous capital multiplier by increasing the creation of high growth startups (see prior posts).   The only real limitation on the upside is the State's ability to keep supplying potential investors with high quality candidate companies able to appropriately use investment capital and that is a risk worth talking about and trying to mitigate, but that is for another post.

Entrepreneurship and Taxes (link)

Scott does a good job of not just stating his opinion, but also attempting to make sure that his opinion has a basis in verifiable fact and he has some great points about our current Congressional decisions on the Bush era tax cuts.

Entrepreneurship and Taxes by Scott Shane

"The United States has an enormous budget deficit, which may require tax increases to close the gap. But we need to carefully consider the law of unintended consequences when raising taxes. Much evidence shows that higher taxes discourage entrepreneurial activity, including investment and hiring by small business owners. If we let the Bush tax cuts expire, we risk shutting off already weak small business hiring and investment. Is that possibility really worth the relatively small reduction to the deficit that we might derive from a tax increase?"

As an aside, Scott also has a good book out on angel investing too...think Freakonomics for angel investors. Of course, my favorite quote being:

"Particularly promising are angel groups, which pool knowledge and money for wiser and more productive investments. In groups, angels can rely on each other's expertise, share the labor of performing due diligence, and generally insure that their money is being placed--and used--wisely. Fostering the formation of such groups may be the single most important thing that government can do to boost angel investing."

Capital gains tax exclusion in Small Business Jobs Act signed on Monday (27th)

The Small Business Jobs Tax Relief Act of 2010, signed into law on Monday Sept. 27th, increases the exclusion from gross income for the gain from the sale or exchange of "qualified small business" stock (aggregate gross assets not in excess of $50 million) acquired after enactment and before January 1, 2011 from 50% to 100% if held for 5 years.  


Admittedly that may sound like a bigger deal than it turns out to be because qualifying investments already had a fairly low tax rate, but it is still something to think about when considering a small business investment (or angel investment).

Citique/Analysis of Georgia Jobs Bill of 2010 (HB 1023)

I have had several people ask about the Georgia Angel Tax Credit bill since the BBJ article, so I thought this was as good of a place as any to cover it.

Georgia HB 1023 - Jobs, Opportunity, and Business Success Act of 2010 also known as the Jobs Bill of 2010 is designed to use tax credits, cuts and incentives to create, expand and attract new businesses. The bill has several parts, namely:

1. Creation of the “Year for Georgia Entrepreneurs”: Allows Georgians the opportunity to start a new business with no state fees.

2. “Angel Investor” Tax Credit: An income tax credit of up to 50% of an investment made in small or start up businesses with 20 or fewer employees. The income tax credit would be available 2 years from the date of investment. The total “Angel Investor” tax credit pool would be limited to $10 Million per year (adjusted for inflation) and dispensed on a first come-first served basis.

3. Quarterly Credit Towards Unemployment Insurance Tax: For each eligible employee hired who is receiving State Unemployment benefits, a company will receive a $25-125 quarterly credit towards their unemployment tax.

4. $2,400 Tax Credit for the Hiring of the Most Difficult to Employ: Any Georgia company which hires a person, in a net new job, who has been eligible to receive unemployment benefits for at least 13 weeks, can receive a tax credit of $2,400 after 24 months of consecutive employment.

5. Elimination of the Net Worth Tax: The net worth or intangible tax (held over from a 1930’s law and only retained by a handful of states) that taxes wealth accumulation is eliminated.

6. A Triggered 50 Percent Reduction of the Capital Gains Tax for all Georgia Taxpayers: Georgia currently has the 15th highest Capital Gains tax in the country and the 2nd highest in the Southeast, with two neighboring states at 0%.


My Thoughts -

I like the elimination of the state fees for creation of an entity, that is a small hurdle, but can be a big deal to small businesses and I think most businesses would be better served in a liability limiting entity rather than as a sole proprietorship.

I would like to see some narrowing of the "qualifying business" definition for purposes of the angel tax credit, mainly to include some version of a related party exclusion. Otherwise, I think it is at serious risk of being somewhat wasted and used in intra-family gifting/estate planning strategies.

Also, the new jobs creation/hiring credit is probably a bit ill conceived, since I doubt many small businesses will let a $2400 tax credit (or similar stipends) drive hiring decisions.

Overall though, Alabama could well use a similar bill and it takes guts to make a proposal (any proposal) because it is some much easier to sit on the sidelines and complain. We should support those that are trying to come up with good solutions and applaud those efforts.

The time may be NOW for Alabama to become a new economy leader

Interesting timing of my last post.  The 2010 Silicon Valley Index was just released and already national publications are pointing to it's rather shocking reference of Huntsville, Alabama as a potential competitor to Silicon Valley, due to Huntsville's strong position in Federal procurement.

See:  Business Week and Wall Street Journal Articles

Of course, that bold prediction can not come to significant fruition unless Alabama takes a more proactive role in understanding the oportunity that is available and providing appropriate resources and support.

Some of the challenges include:

1.  Shortage of seed/startup stage funding
2.  Lack of a large local biotech company to commercialize local medical university innovations
3.  Connecting the managerial and innovation talent to the opportunities
4.  National perception

There are certainly more challenges than those above, but those are some of the big ones.  But, they are not insurmountable if our local and state leaders (both public and private) really want to tackle the issues that can help drive Alabama forward.

Time for an Alabama Angel Investor Tax Credit and maybe more

Alabama's economy ranked dead last in Economic Dynamism according to the 2009 Astra report.   That rank was not much better in the other entreprenurial indicators.  This is despite ranking 21st in Federal R&D expenditures at colleges and universities.

To be sure Alabama has made some significant strides in economic development.  The auto industry has certainly been a good catch for Alabama's EDO.

Also, in February 2004, the Alabama Certified Capital Company Program (CAPCO) created six new private equity funds. As a result, Alabama had $100 Million in new private equity dollars spread between six funds which range in size from $11 to $20 million each. Then, in 2008, an additional $100 Million in private equity dollars spread between six funds became available. The result was $200 Million of new venture capital available to qualified businesses.

Why then, in a state that contains some leading science and technology universities, aren’t new innovative technology companies springing up at the pace of other states?   It’s because the new companies can’t find seed capital investors the way they can in other states.  Without seed capital for high growth startups, there are very few later stage high growth startups that can make use of the CAPCO investments.  The recent economic meltdown in the banking industry has only intensified this investment gap, as investment firms that used to look at earlier stage companies can now look at more established deals because traditional bank financing is not readily available.  
 
Some 20 or so states have already seen the need to encourage investors to fill this investment gap.  Those are many states where the government offers an Angel Investor Tax Credit — a tax credit that is given to people who invest in small but emerging companies.

• Minnesota is trying to pass a Angel Tax Credit (Link)
• ACA study on Investor Tax Credits  (Link)

If Alabama legislators want to really do something to encourage good organic economic growth in our state, they should look at what other forward looking state's are doing and provide some encouragement for our local investors to put their invesment dollars to work at home.

Don't forget Uncle Sam

After reading Jeff McIntire-Strasburg's recent post titled: "Ecopreneurist: How to Approach a Venture Capital Firm with a Cleantech Business Idea" I was struck by the thought of a company I am working with at the moment in the Green Technology world.

One of our early conversations centered around their financial projections and pro-forma statements in which the company president proudly said "our figures don't include any tax based income or incentives, these are straight numbers." Of course, I wanted to see the non-tax based numbers in an overall evaluation of the business, but one of the things that really makes the green industry potentially above average regarding investment returns is the proliferation of numerous tax and government incentives and our management team was really missing the boat on potential tax strategies that could have a dramatic effect on both capital requirements and overall returns of the business.

Thankfully, we have now begun an analysis of the available tax strategies and we have already uncovered federal benefits that will significantly add to our bottom line.

So the moral of the story is...don't forget Uncle Sam.