07 Dec Act 255 heats up angel investment in 2005, though VC involvement lags
Wisconsin’s decision to give tax credits to investors in early-stage companies has shown results in its first calendar year, especially for individual investors.
Angel investors have so far applied for $1.8 million of the $3 million in available tax credits for 2005, state Department of Commerce figures show. But of the $3.5 million in tax credits available to venture capitalists, almost none have been used.
“We knew there would be a lag on the venture capital side,” said John Neis, senior partner with Madison-based Venture Investors. “On the angel side, basically the legislation gets passed and immediately angels can take advantage of it. Venture capital firms raise their money … every three to five years.”
Because Act 255 requires VC funds to be certified separately, existing venture capital was not generally affected by the act this year. Additionally, VC deals tend to involve enough money that the credits don’t make as much of an impact as they do with angel investments. But Neis expects activity to heat up in 2006 as new funds are created.
As early as May angel investments were being completed under the new act. Investors and companies seeking financing told WTN at the time that the act was a general incentive to get involved in angel investing and to add more to deals that had already been decided.
• Read about early Act 255 investment and reactions
More recently, several companies are still seeking investments under the 2005 credits.
“Act 255 was a driving force behind us getting investment,” said Deven McGlenn, CEO of NeoClone in Madison. “It may even assist with [additional] funding in this calendar year”
McGlenn thinks the act isn’t necessarily going to draw investment in the first place, but can sweeten the pot for qualifying firms. “[The companies] had a good enough story already, but Act 255 just made it possible to attract larger dollars,” he said.
Like NeoClone, most of the qualifying companies so far are Madison-based, perhaps because of greater awareness.
“We’ve found that the companies in Milwaukee are certainly very interested in being listed as soon as an investor is interested in them being listed,” said Pehr Anderson, managing director of the Silicon Pastures angel investor group in Milwaukee.
But fewer Milwaukee companies seem to be signing up on their own. “Milwaukee has a thriving mergers and acquisitions scene … because most of the action is happening at that level, there’s more interest in that part of the deal,” Anderson said. “Act 255 really targets minority investors where we’re not taking over a company.”
Cleaning up the act
A bill, SB 290, is working through the state Legislature that would “clean up” some of the provisions of Act 255 and is intended to streamline the process. The Senate passed it unanimously, and trouble in the Assembly seems unlikely.
Among other things, the clean-up bill would allow groups of investors to claim the tax credit as a group, rather than individually. That’s good news for venture capitalists who need to work out a way to equally distribute Act 255’s tax benefits when some of the participants in a funding round are from out-of-state or are tax-exempt organizations.
“The last thing we want those investors to think is that we’re going to chase deals on the basis of tax credits that don’t benefit them,” Neis said. “In fact our fiduciary responsibility would be to ignore tax credits … unless we can equalize the benefit.”
• A panel in August discussed more concerns with Act 255. Did it go far enough? Read more here.
Act 255 background
Act 255 credits apply to investments in companies that are pre-qualified with the Department of Commerce. There are 39 now, the majority in Madison, and department spokesperson Tony Hozeny said the goal for processing a new application is two weeks. Unused tax credits in a year will roll over, he said.
The act provides $35 million in venture credits and $30 million in angel credits over 10 years. Beginning January 1, 2006, the credits will only apply to investments in companies that the investor has not already financed since their qualification.