A bill that would provide tax credits to angel investors is being touted by sponsors as a “shot in the arm” to help new companies get the early financing they need.
House Bill 471 and Senate Bill 622, which were first introduced under different bill numbers in the 2015 session, were supported by business owners and pro-business groups at a hearing Tuesday before the House Ways and Means Committee.
“Last year, many of you joined me as sponsors,” said Del. Brooke Lierman, D-Baltimore, the bill’s House sponsor. “This year, we’re back to double down and make the case that this is a program that will be a game changer for startups and entrepreneurs all around the state of Maryland.”
“The state has yet to accrue the economic benefits” of federal research money to make Maryland an innovation hub like Silicon Valley or Boston, said Lierman.
The bill calls for a three-year pilot project that would create a tax credit against the state income tax for angel investors, wealthy individual investors who provide capital for startups. The credit would be equal to 50 percent of the qualified investment, not exceeding $50,000 for individuals and $100,000 for married couples. The amount of credits the Department of Economic Competitiveness and Commerce would be able to award each year would not go above the amount of money set aside in a reserve fund established by the bill.
“All over the state, this bill would help small businesses,” said Lierman.
Legislative analysts agree with that assessment, calling the bill’s small-business effect potentially meaningful in the fiscal and policy note. If the tax credit is funded at $5 million, state general fund expenditures will increase by $5 million from fiscal 2017 to 2019 while administrative costs will increase $91,500 in fiscal 2017, analysts said.
To qualify, the business must be a for-profit entity that is developing a technology, product or service that is legally owned by the business. Qualified businesses must also be headquartered and have base operations in Maryland, among other criteria.
Brian Razzaque, CEO of SocialToaster in Baltimore, testified that he had difficulty getting investors when he started the marketing firm, despite the presence of numerous state funding programs.
“We discovered that we were too early stage,” he said.
Their best option was to court angel investors. While some of the company’s startup money from the first funding round came from Baltimore area angel investors, the majority was from investors in Virginia. Even today, the majority of the company’s $6 million in investments is from angel investors in Virginia, he said.
Del. Frank S. Turner, D-Howard County, vice chairman of the House Ways and Means Committee, was concerned about having too many state programs for new businesses.
“We have a lot of programs in this state. I’m just really concerned that we want to put another one on top of all the other ones we already have.”
Bill supporters, including Greater Baltimore Committee CEO Donald Fry, responded that this bill applies to a specific class of businesses — ones that Fry categorized as “businesses of our future.”
“This is for funding at a very, very early stage,” said Lierman.
Deb Tillett, president of Baltimore tech incubator ETC, testified that she has seen the funding struggles new business face firsthand.
“What I do all day, every day, is help these people we’re talking about,” she said. “My companies when they first start out are too early for that money. They need someone willing to take the chance on them.”
Lee Beauchamp has experienced those challenges to raise $150,000 for his startup on the Eastern Shore. OPS LLC, is a software company that helps municipalities keep track of state and federal drinking water regulations.
“I can tell you that I’ve been clawing and scratching to get to that point,” he said.
Currently, a lot of funding opportunities are specific to certain industries and exclude others.
“What this bill does is break those silos,” he said.
Sen. Catherine Pugh, D-Baltimore, is the bill’s Senate sponsor. The bill’s hearing in front of the Senate Budget and Taxation Committee is scheduled for March 9.