By Scott Miller
smiller@scbiznews.com
Published Dec. 27, 2010

Angel investors in South Carolina are working with state lawmakers to increase seed capital available to entrepreneurs.

The goal is to create a tax credit for investors putting money into angel funds, said Matt Dunbar, managing director of the Upstate Carolina Angel Network.

Angel networks are groups of high net worth individuals who invest in early stage companies that present high risks and high rewards.

Right now, only 1% of qualified, accredited investors in South Carolina invest with the state’s two angel groups, UCAN and Charleston Angel Partners, Dunbar said. This proposed tax credit could help attract that other 99%.

“It’s a small incentive for what other states find to be a three to four times return on investment on state’s money,” Dunbar said.

With state lawmakers facing a $1 billion budget shortfall, however, new tax credits may be hard to capture.

“I think we’ll see a look for more comprehensive tax reform, versus let’s give a tax credit here or a tax credit there,” said state Rep. Dan Hamilton, the Greenville Republican who heads the Upstate Legislative Caucus in the House.

Hamilton said he supports efforts to promote more investment capital flowing to South Carolina firms, but doubted that the Legislature would have the appetite to approve any new tax cuts with state revenues in flux.

Proponents of the measure, however, say South Carolina needs to remain competitive.

“Right now, many other states have a similar credit,” said Andrea Marshall, executive director of Charleston Angel Partners. “It would bring us in line with neighboring states, and it would make investors a little more willing to take the risk.

“Because we’re investing at a very early stage, it is inherently riskier than other forms of investments,” she added.

Since 1989, North Carolina has offered a 25% tax credit up to $50,000 per angel investor, with a total of $10 million in credits available annually. Earlier this year, the Georgia Legislature approved a 35% credit. The law allocates $10 million in state income tax credits annually for three years, beginning in 2011.

“This is one of the reasons South Carolina is behind other states in entrepreneurship,” said state Rep. Dwight Loftis. “We need to work a lot on small business. That’s historically what has pulled us out of recessions.”

The Greenville Republican said he will introduce legislation patterned after those of Georgia and North Carolina. Details haven’t been finalized but the S.C. credit would range from 25% to 35%, he said, up to $100,000 per investor. The aggregate limit would be $6 million.

“All of these figures are subject to change,” Loftis said.

Both investors and fund recipients would face qualification criteria. Investors, for example, must be high net worth individuals accredited based on criteria set by the U.S. Securities and Exchange Commission.

Fund recipients would have to be headquartered in South Carolina, organized within the past five years, employ fewer than 25 people in the state and have annual revenues below $2 million. No more than 25% of business activity could come from retail, real estate, construction, professional services, gambling, natural resource extraction, brokerage, insurance or investment activities.

“It’s targeted at the South Carolina economy,” Loftis said. “It could be manufacturing, warehousing, wholesaling, software development, IT, high-growth industries.”

Fund-raising by angel groups has suffered along with the economy because investors are holding capital, Marshall said.

Venture capitalists put $4.8 billion into 780 deals nationally in the third quarter, about the same as last year, according to the Oct. 15 MoneyTree Report released by PricewaterhouseCoopers and the National Venture Capital Association. Just two of those deals and $4.2 million of the dollars, however, were attached to South Carolina. Nearly $825 million in venture capital has been invested this year in the Southeast.

More start-up business, even more established companies, meanwhile, are looking to angel investors because venture capital and bank financing is so hard to secure, Marshall said.

“What happens is deals that would have gone further up the food chain to venture or even debt funding are forced to stay at a lower level for a longer period of time,” Marshall said.

Angel investing has been slow in the Upstate too but is starting to pick up, said Matt Dunbar, managing partner of the Upstate Angel Network. Dunbar said he is working to close the group’s seventh deal since July.

Of those transactions, four were in South Carolina, along with one each in North Carolina, Georgia and Tennessee.

“It’s a great time to be an equity investor because there’s still no shortage of entrepreneurs or entrepreneurial ideas out there,” Dunbar said. “Pricing on deals in our space is favorable right now.”