New legislation aims to encourage more investors to get involved in supporting Michigan-based startup companies.
Lawmakers last week introduced legislation to restore a state angel investment tax credit. Two bills sponsored by state Rep. Jeff Farrington, a term-limited Republican from Macomb County, would allow an investor to receive a 20-percent tax credit against the state’s personal income tax for qualified angel investments.
Farrington’s bills comes five years after Michigan’s previous angel investment credit of 25 percent on the personal income tax was eliminated as part of a broad rewrite of the state’s business tax code that ended most credits for business.
The legislation has the backing of the Michigan Venture Capital Association that views the credit’s restoration as needed to further grow the number of angel investors in the state who put money into startup companies and provide support and mentorship to entrepreneurs.
MVCA Executive Director Maureen Miller Brosnan also would like to see the state support angel investing beyond the tax credit by focusing as well on investor education and network development.
“We’re going to spend quite a bit of time working with legislators trying to build an angel investment program,” Miller Brosnan said. “We still have a job to do. Michigan is one of the fastest-growing states in terms of angel investment, but we still have people of individual wealth that don’t understand it and that this is an opportunity that they could be taking advantage of.”
A recent study commissioned by the Michigan Economic Development Corp. to look at the effectiveness of the 21st Century Jobs Fund that was formed a decade ago to diversify Michigan’s economy recommended that the state “foster angel networks and investments.”
“Access to early-stage risk capital is a critical factor in building an innovation economy. One characteristic shared by leading states is that they are home to a network of successful entrepreneurs who act as angel investors, willing to invest in very early-stage start-up companies,” according to the study, which was conducted for the MEDC by Columbus, Ohio-based TEConomy Partners LLC. “Building a base of angel investors able and willing to invest in emerging companies is a challenge for many states.”
TEConomy noted that 20 states offer tax credits to angel investors who invest in technology companies and 12 states provide tax credits to individuals who invest in early-stage venture funds, adding that “Michigan is not one of them.”
“To help overcome the risk capital shortage,” the research firm recommended that “Michigan should enact legislation to create an angel investor tax credit and/or a tax credit that could be provided to investors in early-stage venture funds.”
“There are ongoing efforts in Michigan to encourage angel investments. However, this activity could be spurred with financial incentives provided by the state,” according to the TEConomy study. “In discussions with some of the individual private-equity investors in Michigan, many mentioned that it is difficult to organize angel investors and to catalyze investments in what are perceived to be riskier ventures due to the lack of a state angel investment tax credit.”
The state also should “encourage more formally organized angel networks to aid with coordination, management, due diligence, syndication, etc.”
Under Farrington’s legislation, angel investors could get a maximum nonrefundable credit of up to $200,000 per qualified investment that they could carry forward over five years.
Angel investors could receive a credit on investments in a company that’s in the early stage of development, headquartered in Michigan, has a pre-investment valuation of less than $10 million, employs fewer than 100 full-time equivalent workers, and has been in existence less than five years. The legislation would exclude retail businesses from the program.
Farrington, who chairs the House Tax Policy Committee, told MiBiz last month that he hopes to hold hearings on the legislation in September.
Michigan at the end of 2015 had 10 angel investing groups that last year put $16 million into startup and early-stage companies. Those groups had about 300 active angel investors, a 59-percent increase from five years earlier, according to an annual research report published by the Michigan Venture Capital Association. The 128 startup companies based in Michigan that are backed with angel funds represent a 42-percent increase over five years ago.
Despite that growth, there remains a feeling that Michigan has a lack of organized angel networks, according to TEConomy. That’s because of “the relatively conservative nature of Michigan investors and the lack of state programs and/or initiatives to catalyze such investments,” according to the study.