Be an Angel

Marketplace, Oct 04, 2005

Since the Wisconsin Angel Network was launched earlier this year, excitement has been building among entrepreneurs and potential investors, says Joe Kremer, WAN director. The calls keep flooding in, he says, and many people have the same questions about the angel network and the Qualified New Business Venture program.

In September, the Wisconsin Department of Commerce held informational meetings throughout the state to share nuts-andbolts information about early-stage investor tax credits. What follows are answers to the most common questions.

What is the Qualified New Business Venture program?

Operated by the Wisconsin Department of Commerce, the Qualified New Business Venture program provides tax credits to eligible investors who make early-stage investments in certified businesses. Investors may receive a 25 percent Wisconsin income tax credit which will reduce investment risk.

Which investors are eligible?

The tax credits are available for angel investors and members of angel networks who invest in certified Qualified New Business Ventures (QNBVs). "Angel investors" are defined as individuals or natural persons, not an entity or a trust. An "angel network" is a group of angels organized for investing in a single business. For purposes of this program, eligible investors:

* Meet the Securities Exchange Commission definition of accredited investor or the State of Wisconsin definition of sophisticated investor.

* May not already have 20 percent or more ownership, or be closely related to such a person.

* Must have a Wisconsin income tax liability to take advantage of the tax credit.

What companies may be qualified new business ventures?

Early-stage businesses conducting research and development activities leading to proprietary product development with good commercial potential may be designated QNBVs. To receive certification, companies must also primarily operate in Wisconsin; be seven-years old or less; have fewer than 100 full-time-equivalent employees; and have raised less than $5 million in private capital. (For a listing of QNBV criteria, go to: http://commerce.wi.gov/Act255).

The Commerce Department must QNBV certify a company prior to the investment for an investor to claim tax credits. QNBV designation lasts one year from certification date, and companies may re-apply for QNBV status.

What are tax-credit program limits?

* Aggregate: Wisconsin legislation authorized $30 million in angel tax credits spread over a minimum of 10 years starting in 2005. This translates into tax credits for $120 million in overall angel capital investment. A limit of $3 million in angel tax credits is allowed per year, representing $12 million in annual angel investment. If the $3 million annual taxcredit ceiling is reached, additional qualified investments may cascade for-ward and be recognized in the next calendar year. (The same legislation authorized $35 million in tax credits, $140 million invested, for certified early-stage venture funds making investments in QNBVs.)

* Per QNBV: Businesses can receive up to $4 million in tax crediteligible cash equity investment, of which angel investors can provide up to $1 million. (That is, venture funds and angels may co-invest in a QNBV but no more than $1 million invested by an angel network qualifies for tax credit). A QNBV is not restricted from acquiring more capital, but dollars raised over these limits are not eligible for tax credits.

* Per angel: For each individual investing in a specific QNBV, $500,000 is the maximum amount eligible for tax credit. Angels may receive tax credits for investment in multiple QNBVs.

* Filing: Investors receive Wisconsin income tax credits totaling 25 percent of their eligible investment. Typically, two 12.5 percent tax credits are claimed over two years. A 15-year carry-forward provision applies if the investor is initially unable to use the tax credits.

What are the steps for an investor? Before investing, make sure the company has QNBV certification. Tax credits are not available if the business is certified after investment. Current QNBVs are listed at: http://commerce.wi.gov/Act255/.

This Web site also explains how companies obtain QNBV designation.

Complete the Commerce "Accredited (Sophisticated) Investor Status Form". An investor must fill out this form for each QNBV investment made and submit to The Commerce Department for approval. This form may be submitted either before the investment is made or when claiming the tax credit.

To claim the tax credit after investment, the QNBV and investor jointly submit The Commerce Department "Early Stage Investment Program Tax Credit Investor Request Form." This form documents the eligible investment amount and is signed by the QNBV treasurer. Investor agreement (if it exists) and proof of investment (evidence of deposit from investor to business account) must accompany this form.

When The Commerce Department receives the completed application, the tax credit is locked in.

The Commerce Department sends the investor a confirmation letter and tax credit verification form showing the total investment tax credit, the two years the credit applies, and the tax credit per year.