Analysis of the New Iowa Angel Tax Credit Legislation

Iowa’s Governor Tom Vilsack has signed legislation into law that would offer significant tax breaks to investors providing capital to early stage
Iowa companies. The bill, House File 2271, was approved by overwhelming majorities in the Legislature and signed into law on February 28.

The goal of HF2271 is to incent and encourage individuals, companies, banks and insurance companies to invest in promising start-up
companies in the state. The legislation had been supported by a broad coalition of business, technology and economic development groups,
and is expected to lead to substantial levels of new investment in Iowa start-ups.

The bill provides a tax credit equal to 20% of an individual’s investment in a qualifying Iowa company, and may be applied as a direct offset to
individual state income taxes owed. The legislation defines a qualifying company as one with the following characteristics:

Located in Iowa

In business no more than 3 years

Owner has qualifying experience, education, or training

Not a retail, real estate, health care or other professional
service business

Net worth less than $3 Million

Must raise at least $250,000 total capital within 24 months

The legislation also provides for a similar 20% tax credit for investments in community-based seed capital funds. This credit is available to
individuals, corporations, banks and insurance companies as an offset to their state tax liabilities. Qualifying seed funds must meet the
following requirements:

Be either a limited partnership or limited liability company

Have total Capital between $500,000 and $3 million

Have at least 10 different investors, with no one investor having
more than 25% interest

Must invest at least 33% of its capital in at least 2 Qualifying
Businesses within 3 years

The credits are earned for investments made after January 1, 2002. However, due to the state’s current budget shortfalls, the credits cannot be
claimed until the tax year beginning January 1, 2005. The maximum credit that can be claimed by any one investor is $50,000 per company,
and an investor may claim the credits for no more than five companies A total of $10 million in tax credits have been authorized, allowing $50
million in private capital to be leveraged. No more than $3 million of the credits may be granted in 2002 or 2003, with no more than $4 million
granted in 2004.

The tax credits will be administered by the newly created Iowa Capital Investment Board. The board has not yet been formed, but naming of
board members by the Governor’s Office is anticipated within the next several weeks.