A bill that has moved another step closer to passing would have the state subsidize early-stage venture capital investing on top of three existing programs that do more or less the same thing.
One of the programs is largely untapped, with nearly $18 million in federal funding available to leverage small-business lending across South Carolina.
The state qualifies for the $18 million under the federal Small Business Jobs Act of 2010.
Virtually all of the money remains unused, according to Edwin Lesley, president of the Business Development Corporation of SC, a commercial lender administering the program.
Another similar initiative is the S.C. Venture Capital Investment Authority, which is overseeing $50 million in loans backed by state tax credits.
The third such program is SC Launch, funded by $6 million per year in corporate and individual contributions that are good for a 100 percent credit against state taxes.
A hefty portfolio of legislators want the state to get even more deeply involved in the venture capital game via the proposed legislation, H. 3779.
Sponsored by Rep. Joan Brady, R-Richland, the bill would provide up to $5 million per year in state tax credits for “angel” investing. It would reduce annual state tax collections by a like amount if enacted, according to the S.C. Board of Economic Advisors.
In the latest action on the bill, a panel of the Senate Finance Committee approved it and advanced it to the committee in mid-April. If the measure clears the Finance Committee, which could take it up in the next couple of weeks, the bill would then move to the full Senate.
The House already has passed it.
A senator who has been critical of incentives said last week that he was not familiar with the bill. “I need to take a look at that,” said Sen. Tom Davis, R-Beaufort.
In addition to opposing subsidies in general, Davis has advocated for more transparency in the risks and costs of incentives to taxpayers. Almost all of that information is shrouded in secrecy under confidentiality provisions of state law.
A bill Davis is sponsoring, S. 206, would change that. But the Senate Finance Committee, chaired by Republican and incentives champion Hugh Leatherman of Florence County, has sat on the proposal since Davis introduced it in January 2011.
The same is true of a similar proposal Davis authored in April 2011 – S. 832 – as well as a bill Sen. Shane Martin, R-Spartanburg, submitted in June 2011, S. 954.
As for angel investing, it is a high-risk, high-reward form of venture capital. It involves lending to ostensibly promising businesses too new to attract conventional credit.
While it might sound exotic, it’s nothing new to the state treasury.
Indeed, the House-passed bill would merely add another multimillion-dollar layer to the state’s already multifaceted involvement in providing taxpayer-financed capital to start-up companies.
And although many economic development executives – both in and out of government – say South Carolina lacks sufficient venture capital, the state’s federally funded small-business lending program has been so underutilized it is being reworked.
The state can snag about $18 million through the program, designed to leverage private financing.
“The state had to show that it could expect this investment would return at least $10 in new private lending for every $1 in federal funding,” Lloyd Hendricks, president and CEO of the South Carolina Bankers Association, said when it was announced.
The 10-to-one ratio would equal $180 million in private lending.
However, the state’s $18 million share of the program remains largely untapped closing in on two years after it was authorized, according to Lesley, the Business Development Corporation (BDC) president.
So, the BDC is seeking federal approval to reallocate $15 million of the state’s share toward loans in which the BDC would have a stake so as to lessen other private lenders’ risks
“My goal for that program is to encourage banks to make loans that they wouldn’t otherwise make,” Lesley says.
That’s essentially the same argument proponents of the angel incentives bill make.
Meanwhile, state taxpayers already are being used as guarantors of the $50 million S.C. Venture Capital Investment Authority.
It was created through legislation in 2005 “to promote the availability of capital for creating and building business ventures” in the state, says the 2010 annual report on the program.
In 2007, the authority secured a $50 million loan from Deutsche Bank.
The loan was “secured by state tax credits” and drawn down in four installments through June 2010, the report says.
“Semi-annual interest payments (at a fixed rate of 7.247 percent) of approximately $1.84 million are required each June and December,” the report says. “Annual principal payments of $12.5 million will begin in 2019 until the notes are paid off on June 22, 2022.”
The Venture Capital Investment Authority has divided most of the $50 million loan among four private equity firms to invest in South Carolina businesses: Noro-Moseley Partners ($10 million), Nexus Medical Partners ($20 million), Frontier Capital ($8 million), and Azalea Capital ($10 million).
Theoretically, their investments will make money; the state’s $50 million loan will be repaid from them; and the authority will become self-sustaining.
But if things don’t work out as planned, state taxpayers could be on the hook.
Not only are tax credits backing the program, such credits were used to make a $1.8 million interest payment in December 2010, according to the annual report for that year.
Last but not least in the state’s existing three-pronged approach to venture capital investing is SC Launch.
An affiliate of the S.C. Research Authority (SCRA), SC Launch receives $6 million annually from businesses and individuals who can claim all of their contributions against their state tax liabilities.
Translation: That’s $6 million less to the state treasury per year.
The Research Authority steers most of that money to technology companies as loans, grants or equity investments. The SCRA also uses part of the funding to promote a “knowledge-based” economy in the state.
Only four weeks remain in the legislative session. That’s not a lot of time for the Senate, in which one member can bottleneck a bill, to pass the angel incentives proposal.
But if it does become law, it wouldn’t be first time, after all, that the state has duplicated a program or service.
Reach Ward at (803) 254-4411 or eric@thenerve.org.