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Act 255 clean-up law makes incentives work for VC funds

Tax-credit legislation for venture and angel investors has been "cleaned up" to make it more closely follow the original intent.

Act 255 is an incentives package for investors in early-stage companies. Both venture and angel investors can apply for tax credits of 25 percent of their investments in pre-qualified Wisconsin companies. A clean-up bill, signed by the governor on Wednesday, allows groups of investors, some of which might be from out-of-state or have differing tax situations, to more easily split the incentive among themselves.

"If I wasn't able to do this, I would end up with some investors who could get tax credits, some who couldn't," said John Neis, a senior partner with Venture Investors. "[In that case] my fiduciary duty requires that I not cosider the tax credits because they don't benefit everybody."

Essentially, Wisconsin venture funds can now qualify for tax credits on the entire amount of investment, even if some of it comes from out-of-state or tax-exempt investors.

For angel investment, the clean-up bill makes only minor changes to simplify the administration of the tax credits for groups of investors.
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"[Most] angel gropus in the state are still operating under what I'll call the individual choice approach," said David Ward, president of NorthStar Economics and an angel investor. "Very few of them have formed funds, in which everyone's in or everyone's out."

Ward said he's observed a trend toward local angel investors forming a separate LLC for each investment they take on collectively. Under the revised Act 255, the LLC does not get the credit directly. Partners or investors in the LLC can claim credits in proportion to their ownership stake.

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