Two bills that would create an “angel-investor” law have advanced in the S.C. General Assembly after the late January release of a study on the difficulty of young, “high-growth” businesses statewide to gain access to capital.
The 49-page “Capital Market Study,” prepared by the University of South Carolina’s Faber Entrepreneurship Center and the Darla Moore School of Business, identified passing an angel-investing law as the top strategy to grow those types of businesses.
“High-growth companies in South Carolina are creating most of the new jobs and wealth in the state,” said the study. “Access to capital is cited as a primary concern of the top executives for these high-impact firms and is one of the top limitations in scaling up their companies.”
The Nerve reported in February that several senators opposed an angel-investor bill (S. 262), sponsored by Sen. Hugh Leatherman, R-Florence and the Senate Finance Committee chairman, when it was before Leatherman’s committee, contending it would force the state to pick winners and losers in the marketplace. The bill cleared the committee and full Senate, and is now before the House Ways and Means Committee.
The USC study was prepared for the “New Carolina Entrepreneurship Task Force.” The Nerve in 2010 first raised questions about the Columbia-based New Carolina, also known as the S.C. Council on Competitiveness, a nonprofit organization that had received $905,000 in government funding from fiscal 2006 through 2008, including at least $800,000 from the state Department of Commerce, according to federal tax records.
Angel investors typically invest no more than $100,000 in a company at the early stages of development, as opposed to venture capitalists who often invest larger amounts later on, according to online investment-consulting sites. Angel investors generally expect a good return on their investment, though they might not want an ownership stake in the company.
Dean Kress, the Faber Entrepreneurship Center’s associate director and one of the authors of the USC study, told The Nerve Monday that “high-growth” businesses typically are young companies that have a technology component and have generated strong sales and employment growth.
“This (angel investing) is something to put on the landscape to make it (investing) more palatable,” Kress said. “This is something that can be considered in the decision-making process.”
Kress said S.C. lawmakers were aware of the study as angel-investing bills emerged. Lawmakers and economic development officials in South Carolina desire the legislation to compete with neighboring states that already have such laws, including Georgia, North Carolina and Virginia, according to the study.
“One of the things where we have lagged behind other states is angel investing,” Rep. Garry Smith, R-Greenville and a co-sponsor of two of the three House angel-investing bills, told The Nerve Monday.
“When you look at economic development there is no silver bullet,” Smith said. “It (angel investing) is one of the tools in the toolbox.”
The study cited Matt Dunbar, managing director of the Greenville-based Upstate Carolina Angel Network (UCAN), noting that UCAN made 18 “angel” investments out of a total of 22 investments statewide over the past five years, creating more than 250 jobs.
“Our state is telling entrepreneurs and their companies to move to Georgia or North Carolina and telling investors to follow them,” said Rep. Dwight Loftis, R-Greenville and author of two angel-investing bills, including one that is now in the Senate, in a January 2011 UCAN press release about the effort to push previous angel-investor bills.
Either H. 3505, sponsored by Loftis, or Leatherman’s S. 262 could be the first bill this year to establish angel-investor tax credits in the Palmetto State. Both bills were passed before the May 1 crossover date and are now before the budget-writing committee in the other chamber.
Leatherman and Loftis did not respond to requests from The Nerve for comment.
Both bills would create a ceiling of $5 million a year in state tax credits for angel investors. The legislation also would:
- Allow a qualifying investor to claim up to $100,000 in credits per year;
- Entitle the investor to a state income tax credit of 35 percent of the investment; and
- Allow investors to apply 50 percent of the allowed credits to their net tax liability in the year the investment is made, and spread the other half over a period not to exceed 10 years.
The only difference between the bills is that S. 262 would require the S.C. Department of Commerce to post an annual report on its website that includes the number of jobs created at each company that received an angel investment and income data for five years after an investment is made. Commerce also would have to report the aggregate amounts of all credits from the previous year.
Compared to Georgia, North Carolina and Virginia, South Carolina would have the highest tax-credit cap per investor, would be tied with Georgia and behind Virginia as having the second-highest tax-credit rate, and would have the third-highest aggregate tax-credit rate per state, assuming angel-investor legislation became law in the Palmetto State, according to the USC study.
The study, which included interviews with leaders at a variety of businesses, said businesses with less than $10 million in gross earnings have experienced difficulty getting financing since the Great Recession.
Of the business owners surveyed, 60 percent employed 10 or fewer people; 40 percent had annual sales growth of more than 10 percent; and 57 percent had more than half their sales from outside the state, the study stated.
The study also revealed several key issues for South Carolina:
- A small number of high-impact firms drive job creation in the state, accounting for only 2.7 percent of the private-sector firms in South Carolina from 2004 to 2008, but contributing 66.8 percent of all net employment gains during that period;
- The state falls below the national average in creating well-compensated management, professional and technical jobs; and
- South Carolina appears to be outperforming other states in small-business job creation, though the state has been less successful than the national average in nurturing high-impact companies with annual sales of more than $25 million.
Olson can be reached at (803) 254-4411 or curt@thenerve.org. Follow him on Twitter @thenerve_curt and @olson_curt. Follow The Nerve on Facebook and on Twitter @thenervesc.