UNH prof calls for angel investor tax credit
Federal legislation that would provide a tax credit to angel investors could substantially help entrepreneurs secure much-needed seed capital for their ventures and stimulate growth in moving ideas from the laboratory to the marketplace, according to University of New Hampshire Professor and venture capital researcher Jeffrey Sohl.
Sohl, professor of entrepreneurship and decision sciences and director of the Center for Venture Research at UNH, recently testified in support of HR 5198, The Access to Capital for Entrepreneurs Act of 2006, authored by U.S. House Small Business Committee Chairman Don Manzullo, R-Ill., and U.S. Rep Earl Pomeroy, D-N.D. The legislation would create a 25 percent tax credit for individuals and groups that make equity investments in small early-stage companies.
“The tax credit proposed in HR 5198 is a judicious use of public policy since it targets the incentive at exactly the time it is needed by both the entrepreneur and the angel investor,” Sohl said in his testimony. “For the entrepreneur, HR 5198 increases the potential for securing seed capital and for the investor, the act indirectly provides a slight reduction in the risk of seed stage investing. For the entrepreneurial economy, HR 5198 mitigates, in part, the primary seed stage capital gap.”
According to Sohl, a tax credit at the time of the seed investment provides the entrepreneur with capital exactly when it is needed, during product and firm development – the “front end” of the start-up stage. Previous research conducted by Sohl and the center indicates that reducing the capital gains tax as an incentive for investors is ineffective, since the tax savings is realized at the time of exit.
“In essence, the venture needs to survive the critical seed stage and expand into a viable business with reasonable market share before an exit (merger, acquisition or initial public offering) can take place. As such, a capital gains reduction, which occurs at the exit event, is only realized if the venture survives the seed stage. Thus, the proper tax incentive program is one that is targeted at the ‘front end’ during the start-up stage, when the risk of failure is the greatest and the capital gap is the most severe,” Sohl said.
He said that “high-growth entrepreneurial ventures hold the greatest potential for innovation, commercialization of technology and sustainable economic development. However, entrepreneurial ventures face significant financial hurdles in the early stage of their development. Unable to attract debt capital in the early stage, and the mismatch between the need for growth capital and the short-term financial requirements of debt financing, contributes to the importance of equity financing,” Sohl said. -JEFF FEINGOLD