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F I S C A L I M P A C T R E P O R T

SPONSOR Robinson

ORIGINAL DATE

LAST UPDATED

2/7/07

2/8/07 HB

SHORT TITLE Angel Investment Credit For Businesses

SB 864

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

($750.0)

($750.0) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates HB 600

SOURCES OF INFORMATION

LFC Files

Securities and Exchange Commission

Responses Received From

Taxation and Revenue Department (TRD)

State Investment Council

SUMMARY

Synopsis of Bill

Senate bill 864 creates a credit against personal income tax liability for qualified investments in

New Mexico companies engaged in high technology research or manufacturing. The credit is

only for qualified investors and is known as the angel investment credit. The maximum amount

of the credit is $25,000 per investment with a maximum of 3 investments per year per taxpayer.

The credits must be certified by the economic development department which can only certify an

aggregate of $750,000 per year. Any portion of the credit that exceeds tax liability can be

carried forward for three consecutive years.

The credit is allowed for tax year 2007 through tax year 2012 and is only good for investments

through December 31, 2011. There is a provision that allows the carry forward past 2012 but no

new credits.

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Senate Bill 864 – Page

FISCAL IMPLICATIONS

SB864 only allows the angel investment credit to accredited investors as defined by the

Securities and Exchange Commission (SEC). SEC definition of “accredited investor" (for

individuals):

a natural person who has individual net worth, or joint net worth with the person’s

spouse, that exceeds $1 million at the time of the purchase;

a natural person with income exceeding $200,000 in each of the two most recent years or

joint income with a spouse exceeding $300,000 for those years and a reasonable

expectation of the same income level in the current year; (Rule 501-D Securities Act of

1933)

According to 2005 tax return data, there are approximately 22,000 taxpayers in NM with

adjusted gross income greater than $200,000 but according to the US Census, there are only 18

individuals in NM with a net worth greater than $1 million in 2001. With the strong growth in

the last five years, that number is estimated to be 25 individuals in 2007. Given this number of

eligible investors, the $750 thousand cap on the credit is highly likely to be reached each year.

The fiscal impact recurs until FY2014 due to the delayed repeal provision and the three year

carry forward.

Table 1: Delayed repeal of angel investor credit

Timeline 2007 2008 2009 2010 2011 2012 2013 2014 2015

Investments

Credit

Carry

forward

SIGNIFICANT ISSUES

SB864 defines a qualified business as one that has fewer than 100 employees, has not issued

stocks publicly, and has less than $5 million in gross revenues. The company must also be

engaged in high technology research or manufacturing other than construction, farming, natural

resource processing or meal preparation. The investor also cannot be affiliated with the company

either through immediate family connection or business transactions within one year of the

investment.

Representatives from the venture capital industry have indicated that anything to encourage

investment in small areas is beneficial to New Mexico. In fact, angel investors are much more

likely to invest in rural areas than are venture capitalists that have much stricter criteria for

investments. Many venture capitalists will not consider an investment unless there is some level

of investment locally, primarily an angel investor. Angel investors tend to know the business

that they are investing in much more detail than venture capitalists. Also, angel investors have

historically invested similar amounts as venture capitalists but in ten times the number of

businesses, making this mode of investment much broader than what is typically the domain of

venture capitalists.

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Senate Bill 864 – Page

It should be noted that the personal income tax rate cuts since 2003 have benefited these high

income investors more than other New Mexicans. If you had $200,000 in adjusted gross income,

your New Mexico taxes decreased $4,000 from 2003 to 2007. This is in addition to cuts at the

federal level. This credit would allow high net worth taxpayers even more tax relief for

investments they may already be inclined to make without additional incentive. Investments are

also tax preferred income over other types of income. The federal government taxes capital

gains, for example, at 15 percent rather than the top rate of 35 percent.

Investment in start-up or struggling companies is a risky investment which is why the tax credit

is only meant to encourage those who have a higher risk tolerance than smaller investors. The

returns, if there are any, are usually much greater than lower risk investments. Investors with

high net worth tend to look for these investments without any tax incentives and it is unclear if a

tax incentive even of this size will induce investments that would not otherwise be made. In

other words, if it is a good investment, the investors will come but if it is a bad investment, no

tax incentive will help.

TRD:

An angel investor is generally defined as an individual who provides capital to one or more

startup companies. Angel investors are affluent and have a personal interest in the success of

businesses in which they invest. Unlike partners, angel investors rarely manage firms they

invest in. Angel investments are characterized by high levels of risk and potentially high

returns on investment. Venture capitalists are also investors that provide capital for start-up or

expansion and seek higher rates of return than would be given by more traditional

investments. The primary difference between venture capitalists and angel investors is that

venture capitalists are professional investors. Venture capitalists often have no business

experience in the industries they invest in. Angel investors, on the other hand, often have

business experience relevant to the companies they invest in and want to add value to the

firms in addition to making a return on the investment.

According to the Angel Capital Association, angel investors provided approximately $12.4

billion in financing to almost 28,000 entrepreneurial businesses in the first half of 2004, a

substantial increase over the $18.1 billion in all of 2003. A typical investor prefers to invest

locally and enjoys a net worth in excess of $1 million and an annual income of $250,000.

State Investment Council:

While the bill offers obvious tax benefits to New Mexico angel investors, the legislation

primarily benefits the state’s early and seed stage high tech companies. This sizeable and

growing entrepreneurial community currently has somewhat limited funding options when

developing new ideas or technology into a marketable product or company. Start-up

companies, which by definition lack a track record for their technology or service, rarely have

the ability to attract private equity funds or similar investors like the State Investment Council.

On the other end of the spectrum, start ups also often have difficulty securing significant lines

of credit or funding from standard banking entities, as their product/technology/company is

still in development or prototype stage, where profit does not yet exist.

The SIC believes this legislation would help fill an existing lending/funding “gap" in New

http://www.gmtoday.com/news/local_stories/2004/December_04/12152004_06.asp

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Senate Bill 864 – Page

Mexico by giving investors additional incentive to invest in young companies and early stage

technology. While these types of investments are high risk, they are also high reward, and can

have lasting and significant impact in creating jobs and growing NM’s economy.

ADMINISTRATIVE IMPLICATIONS

TRD:

Provisions of the proposal would probably require a new claim form to be developed and a

new line on the PIT-ADJ form. The proposal would also require changes to other forms,

instructions and publications. Manual review would be necessary to track credit applications

and carry forwards. Moreover, it would be difficult for the Department to determine whether

claims for the credits are consistent with the various conditions pertaining to the types of

businesses which would qualify for the investments and that the investors qualify within the

meaning of Rule 501 of the Federal Securities Act.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

House Bill 600 is a duplicate bill.

TECHNICAL ISSUES

TRD:

The proposal does not identify procedures by which a taxpayer can claim the credit. The

proposal does not make clear, for example, whether taxpayers must apply for the credit and

whether the Department, prior to a taxpayer’s taking the credit on their personal income tax

return, must approve the claim for credit.

The term “principal place of business" is not defined in the bill. The terms would be important

in determining which business investments are eligible for the credit.

The term “qualified investor" should be changed to “accredited investor" on page 2, line 18 of

the proposal.

OTHER SUBSTANTIVE ISSUES