Venture Capital Bill Sent to Wisconsin Governor

Before the close of the legislative session, the Wisconsin Assembly approved legislation to create investment tax credits and a technology commercialization grant and loan program. Governor Jim Doyle had called upon the Legislature to pass a venture capital bill in his state-of-the-state address on January 21. The intention of Senate Bill 261 is to encourage high-tech industry and entrepreneurship in the state, and is designed to create approximately $62 million in new funding for start-ups.

Contact: Sam Leiken
Social, Economic and Workforce Programs Division

http://www.nga.org/center/frontAndCenter/1,1188,C_FRONT_CENTER%5ED_6725,00.html

A recent study from Competitive Wisconsin, Inc. (a nonpolitical lobbying group of agriculture, business, education and labor leaders) reported that the state is losing ground on key economic indicators of financial, employment and knowledge-based strengths. The study shows that venture capital (VC) disbursements per worker in 2002 were down nearly 75 percent from their peak in 2000. To help give small businesses the tools they need to be successful and create jobs, S.B. 261 offers assistance in three areas:

* An angel investment tax credit of 25 percent over a two-year period for investments made directly in qualifying new businesses;

* An early-stage seed investment tax credit for investments of up to $500,000 in start-ups certified by the state Department of Commerce; and,

* $2.6 million for one year of grants and loans for the technology and commercialization program, which would provide early-stage planning, matching, bridge, venture capital, entrepreneurial, and technology transfer center grants and loans.

The bill is available in its entirety through the Wisconsin legislature website.

* Wisconsin Senate Bill 261 http://www.legis.state.wi.us/2003/data/SB261hst.html

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An analysis of Wisconsin’s new venture capital and early stage finance programs

By:
Gregory J Lynch, and Brad R. Taylor
Wisconsin Technology Network

If high tech is the engine of future economic growth, Wisconsin is running low on investment "fuel." A recent study by the California-based Milken Institute ranks our state 32nd out of 50 in availability of the risk capital that technology entrepreneurs need to turn innovative ideas into marketplace successes. That may soon change thanks to the recent enactment of 2003 Wisconsin Act 255 by Governor Doyle.

Act 255 encourages angel investors and venture capitalists to invest in Wisconsin high tech companies, and helps those companies secure federal and third party funding. Although the Wisconsin Department of Commerce must still resolve a number of questions, its two key provisions – investment tax credits, and a grant and loan program – hold real promise to generate new sources of investment that emerging companies need for growth.

Investment Tax Credits

Act 255 creates two tax credit programs for early stage seed investments and angel investments, both to be overseen and administered by the Department of Commerce. Commerce must certify that the credits go to qualified new business ventures which:

Is headquartered in Wisconsin

Employ less than 100 people, and at least 51% of those are in Wisconsin

Is engaged in, or has committed to engage in, manufacturing, agriculture, or processing or assembling products and conducting research and development or developing a new product or business process

Is not engaged in traditional financial, consulting, professional services, retailing, hospitality, construction or transportation activity

Have been operated in Wisconsin for not more than seven consecutive years

Have not received more than $1 million in investments that qualify for angel tax credits

The Early Stage Seed Investment Credit against individual and corporate income and franchise taxes is equal to 25% of the initial investment paid to an investment fund manager to invest in qualified new business ventures in any taxable year, beginning after December 31, 2004. There is a $35 million maximum for all combined credits claimed in all tax years. Partnerships, limited liability companies or tax-option corporations may not claim the credit, and Commerce must certify that fund managers are eligible to accept and properly invest venture capital.

The Angel Investment Tax Credit authorizes an individual angel investor to receive an income tax credit of up to 12.5% of any bona fide angel investment, to a maximum of $500,000 for each investment made in any two consecutive taxable years beginning after December 31, 2004. The maximum allowable aggregate credit amount is $30 million for all tax years. Investments are defined as the purchase of an equity interest or other expenditure in qualified new business ventures, made by an individual or network of individuals who regularly review new businesses for potential investment.

Commerce must publicly list the eligible venture investors and qualified new business ventures that it certifies, and make an annual report on investment activity. Act 255 also requires Commerce to define what expenditures other than equity investments constitute bona fide angel investments, and to develop rules limiting angel investments to $3 million per year and venture investments to $3.5 million per year.

Grant and Loan Program

The second key element of Act 255 is the creation of a Technology Commercialization Grant and Loan Program funded at $2.6 million annually. It is administered by the Department of Commerce to ensure that grant recipients are located and grants are spent in Wisconsin and that the applicants are viable. The program authorizes five types of grants and loans:

Early Stage Planning grants and loans, to cover up to $15,000 in professional services needed to apply for federal R&D funding or to achieve business objectives required by third party investors. Recipients must have enough other funding to cover at least 25% of total project costs.

Matching grants and loans of up to 20% of project costs or $250,000 (whichever is less) to fund professional services that help a recipient develop or commercialize innovative products, processes or services. Recipients must either have secured, or be about to secure, federal funding to bolster their efforts.

Bridge grants and loans of up to 75% of project costs or $100,000 (whichever is less) to tide recipients over until they receive third party financing or federal grants to develop or commercialize their innovations.

Venture Capital grants and loans of up to 50% of project costs or $250,000 (whichever is less) to enhance recipients’ ability to secure early stage third party financing.

Entrepreneurial & Technology Transfer Center grants of up to $500,000 a year to finance centers that serve multiple regions of Wisconsin by providing entrepreneurs with planning, intellectual property, referral and similar business development services.

Two key points to re-emphasize about these Technology Commercialization Grants and Loans. First, they are supplemental funding. Applicants and recipients must be small businesses or entrepreneurs who have applied for or are waiting to receive federal grants for early stage R&D funding or early stage third party financing. And second, the Wisconsin Department of Commerce must confirm that applicants are viable and that their innovative products or services are primarily developed in or sold from this state.

With similar restrictions in place for the investment tax credits, it may take a while to generate substantial momentum among small and emerging businesses to take advantage of the full program. But, thanks to Act 255, the fuel for growth is there – and all of Wisconsin will benefit.

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Gregory Lynch and Chad Taylor are attorneys in the Madison office of Michael Best & Friedrich LLP.