Manzullo, Pomeroy Introduce Legislation to Provide Federal Tax Credits for Angel Investors who invest in U.S. Small Businesses. Your active support is important for this proposed legislation.

U.S. House Small Business Committee Chairman Don Manzullo (R-IL) and Ways and Means Committee member Rep. Earl Pomeroy (D-ND) today introduced job-creating legislation that would provide a tax credit for those who invest in qualified American small businesses.

The Access to Capital for Entrepreneurs (ACE) Act of 2006 (HR 5198) would create a 25-percent tax credit for accredited investors and certain partnerships (including angel investment pools if all are accredited investors) that invest cash or cash equivalents at an arm’s length in a qualified small business (as defined by the Small Business Act). An angel investment pool is a group of investors who come together to pursue common investments.

To qualify for the tax credit, an investor would have to hold onto the investment for at least three years. The maximum amount eligible for the credit is $250,000 per investment and a total of $500,000 per qualified individual investor.

“This legislation will provide an opportunity for entrepreneurship, inventiveness, and the creation and growth of American small businesses, the job creators of our economy,” Manzullo said “It will establish private sector incentives that will provide much-needed seed capital for a small business to grow and prosper beyond the start-up stage. By creating additional incentives, we expect more angels to invest more dollars and create more jobs.”

Pomeroy added, “North Dakota was built on the pioneer spirit, the same spirit driving small businesses. This bill will provide needed support to get new businesses to the next stage of growth.”

According to the Center for Venture Research, 227,000 angels invested more than $23 billion into new ventures last year, creating 198,000 new jobs, or 4 new jobs per angel investment. Twenty states currently offer some sort of income tax credit to encourage such private investments in early stage businesses, but this would be the first such credit at the federal level.

Contact:

Rich Carter (Manzullo): 202-225-5821

Stephanie Craig (Pomeroy): 202-225-2611

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Many thanks to Dan Loague for passing this along. He adds:

"I will appear to give testimony on the Act for the joint committee next week
here in DC. I think it’s an exciting opportunity to greatly expand seed
stage capital for new U.S. companies, particularly in "flyover" states.
Rep. Manzullo and Rep. Pomeroy, authors of the Act, have done a great job.

I’m attaching a walk-through summary of the Act, but here’s an even shorter
version: provides a 25% annual tax credit up to $500,000 each year for
accredited investors that make cash investments in qualified start-ups. Note
that there are exclusions in such areas as real estate and no more than
$250,000 in a single business is eligible for the credit.

If you don’t have time to write anything, just give me a call and let’s
discuss.

Thanks,

Dan"

_____________________________

Dan Loague

Executive Director

Capital Formation Institute

UB Office of Science, Technology Transfer
and Economic Outreach

1576 Sweet Home Road, Suite 105

Amherst, NY 14228

Ph: 405-824-5549

Fx: 800-420-8349

Web: http://www.cfi-institute.org

Washington DC Office:

11049B Villaridge Court

Reston, VA 20191

Ph: 703-860-8945

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HR 5198: Access to Capital for Entrepreneurs Act of 2006
Section By Section Analysis

Section 1. Short Title – Access to Capital for Entrepreneurs Act of 2006.

The ACE Act was developed to fill a gap in current equity funding. Generally, venture capitalists (VCs) invest a minimum of $6 to $7 million in mature companies. VCs have become much more risk adverse and tend to limit their investments to certain high growth sectors of the economy, such as life sciences and software. By contrast, angels investors take more risks and invest locally or regionally. However, the maximum amount invested by angels typically is between $500,000 and $1 million. Thus, there is currently a substantial gap in equity funding between angel investors and VCs. This bill addresses that gap by encouraging current accredited investors, along with a rapidly growing group of new high net worth individuals, to increase equity investments in certain qualified small businesses.

Section 2. Equity Investment in Small Business Tax Credit.

(a) General Rule – Limits the amount of the tax credit to 25% of the amount invested into a qualified small business.

(b) Credit Amount

(1) Limitation per Qualified Investor – The maximum investment amount eligible for the tax credit per qualified investor is $500,000 per taxable year.

(2) Limitation per Qualified Small Business – The maximum amount any qualified investor may invest into any single, qualified small business is $250,000 per taxable year.

(c) Definitions –

(d) Qualified Investor – any individual who qualifies as an accredited investor under SEC Rule 501 of Regulation D is considered a qualified investors. In general, to qualify, an individual must have a net worth that exceeds $1 million at the time of the purchase or have income exceeding $200,000 in the two most current years with a reasonable expectation of the same income level in the current investment year. A partnership made up solely of individuals who are all accredited investors also qualifies.

(1) Qualified Equity Investment – The transfer of cash or cash equivalents in exchange for stock or capital interest.

(2) Qualified Small Business – A privately-held business that meets the applicable size standards for being small within the meaning of section 3 of the Small Business Act and has its principal place of business here in the United States. The SBA’s size standards are found at 13 CFR.§121.201. Subsidiaries and companies deemed to be part of the same controlled group (based on a greater than 50 percent vote or value test) of companies shall be treated as one qualified small business.

(e) Active Business Requirement

(1) General – This provision requires investments to be made into ongoing concerns and prevents the abuse of creating mere shell companies for purposes of attempting to obtain the credit.

(2) Requirements –

(A) General – At least 80% of the value of the assets, notwithstanding activities related to start-up activities and research expenses, must be used in the conduct of the business.

(B) Special Rule for Certain Activities – This provision allows certain critical activities that may not meet the active trade or business requirement to qualify

(C) Qualified Trade or Business – This excludes certain lifestyle and services businesses from qualifying for the credit and is based on the exclusions in section 1202 of the IRC.

(D) Stock in Other Entities – For purposes of the provision, the asserts of a more than 50% owned subsidiary shall be attributed to the parent entity

(E) Working Capital – Clarifies that working capital and assets expected to be used within two years to conduct research and experimentation will be treated as being used in the active conduct of a qualified trade or business

(F) Maximum Real Estate Holdings – Limits real estate holdings that are not used in the active conduct of a qualified trade or business to 10% of the total value of the company’s assets.

(G) Computer Software Royalties – These are treated as an asset used in the active conduct of a trade or business.

(f) Certain Purchases by Qualified Investor of Its Own Stock – This anti-abuse provision prevents the revolving use of funds to repurchase or redeem shares. For example, an otherwise qualified investor will not be allowed to treat a purchase of stock as a qualified equity investment if the qualified small business purchased stock from the investor in a separate transaction that is close in time to the otherwise qualified equity investment.

(g) Special Rule for Related Parties –This requires arms-length investments into qualified small businesses. This bill seeks to encourage investors to take risks they would have avoided otherwise. Generally, friends and family will invest without such an incentive.

(h) Recapture of Credit in Certain Cases – A qualified investment must be held for three years or a recapture of the full amount of the tax credit will generally occur. An event that would trigger recapture includes the selling, transfer, or exchange of the investment by the qualified investor, unless there is a complete or partial liquidation of the business. This section also ensures that no additional tax liability will result from a recapture event unless the taxpayer utilized the tax credit under this section to reduce tax liability.

(i) Basis Reduction – The amount of the credit reduces the basis of the qualified equity investment

(j) Regulations – Gives the Secretary of the Treasury authority to prescribe necessary regulations to carry out the provisions of this legislation. It also requires the qualified investor to provide the taxpayer identification number of the small business in which qualified investment was made. This allows for effective tracking of who is taking the credit and which businesses are receiving investment.

Effective date: The bill will be effective January 1, 2007 and will sunset on December 31, 2011.