We’ve got a problem. The South Carolina Angel Investor tax credit, more formally known as The High Growth Small Business Job Creation Act, expired at the end of 2019. Since its introduction in 2013, over 290 South Carolina companies from 21 counties qualified for the credit. Those companies attracted more than $100 million of qualified investments, which helped created or sustain more than 1,200 high-paying jobs. The tax credit has proven to be a significant contributor to the growth of entrepreneurship and job creation in South Carolina.
Last year alone, investors deployed more than $30 million into credit-eligible startups in the state. And nearly 20 percent of that capital was drawn in from outside our state borders, attracted in part by the transferability of the credits, which allows out-of-state investors to sell their credits.
Those home-grown and out-of-state angel investors fill a critical funding gap for early stage ventures in South Carolina where traditional venture capital is scarce. In order to entice individual investors to make risky investments in startups, at least 25 other states have passed angel investment tax credit programs. These tax credits, like The High Growth Small Business Job Creation Act, have been proven to generate healthy returns on investment for the state while bolstering the entrepreneurial ecosystem, leading to more jobs and stronger economic growth.
Let’s take a few steps back. Angel investors are private individuals who invest their own capital in early-stage, high-growth potential companies. South Carolina is home to more than 250,000 accredited investors. Not bad for a state the size of Atlanta, but South Carolina continues to lag behind its neighboring states in venture capital funding. The South Carolina angel investor tax credit was a state income tax credit of up to 35 percent of the amount invested in an eligible S.C.-based company.
So, if you invested $10,000 in a qualified business, you could take up to $3,500 off your future S.C. income tax liability. I underlined “up to” deliberately. A maximum of five million dollars of credits were available, for all applicants in aggregate, each year. If less than five million dollars in total is claimed, the investor gets the full 35 percent credit (the $3,500 above, up to a maximum of $100k of credit); if more than five million dollars is claimed, each investor receives their pro-rated share of the available five million dollars pool of credits. In 2017, the credits were oversubscribed for the first time. In 2019, the credits were oversubscribed by more than 2x, which meant that investors received an effective credit of only 16 percent. But the great news is that it means over $30 million was invested into eligible startups in South Carolina.
Unfortunately, instead of our state seeking an expansion of this successful program, our legislature has allowed the angel tax credits to expire. After observing the impact of the bill over the last six years, we at VentureSouth believe the program should be extended and improved. The state should expand the available credit pool and clarify language in the bill related to eligibility and administration of the credit. There are active companion bills (H.3210 and S.185) up for consideration in the state legislature that would extend the program for six years. The bills would continue to allow residents and non-residents to receive a tax credit for investing in high-growth, high-impact South Carolina startups.
If you take nothing else away from this editorial, know this:
1. H3505, The High Growth Small Business Access to Capital Act has been effective in its stated purpose to encourage early-stage investments in high growth companies creating jobs and wealth in our state.
2. Since 2013, 296 companies from 21 counties have been approved as qualified businesses, creating over 1,200 high-paying jobs and raising more than $100 million in private capital.
3. Demand for the credits has increased steadily across the state, with the cap of five million dollars being met in three of the last five years, and demand exceeding available credits by more than 2x for 2019.
4. Entrepreneurs have overwhelmingly cited the importance of the tax credit in helping to raise critical but scarce resources for their ventures, while continuing to face a severe shortage of traditional venture capital.
This year, VentureSouth members invested in eligible companies from A to Z (literally: Atlas Organics to Zylö Therapeutics), several in between (like Punchlist) and even one outside the alphabet (6AM City). The angel tax credit helped attract the capital those companies are now using to grow and innovate – more evidence that the credit program has proven to be effective. South Carolina should remain committed and competitive in supporting entrepreneurs across the state by extending and expanding the angel tax credits. This is true now more than ever with unprecedented market pressures and capital challenges companies are facing due to the coronavirus pandemic. By extending this proven program, our state’s leaders have an opportunity to take a proactive approach to helping South Carolina entrepreneurs drive our economic recovery, growth and innovation.
There are several ways to learn more. You can watch our VentureSouth chat with Ben Glenn at Bauknight Pietras & Stormer, check out our recent series on the VentureSouth blog, or feel free to contact me directly, charlie@venturesouth.vc.
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