Angels, Others, React to New Opportunities Provided by Angel Tax Credit Expansion
In June, the state legislature passed, and the governor signed into law, an expanded Angel Investor Tax Credit Program.
The program, which provides a tax credit for a percentage of an angel investor’s investment in a qualifying emerging New Jersey tech or life science business, will help attract early-stage and growth capital for innovative New Jersey companies.
Under the expanded program, the available tax credit has now increased from 10 percent to 20 percent of a qualified investment, with an additional 5 percent bonus available for investments in a business located in a qualified opportunity zone or in a low-income community, or investments in a business that’s certified by the state as minority- or women-owned.
According to an alert from the law firm McCarter & English, the expanded program will only go into effect for investments made after January 1, 2020. However, the New Jersey Economic Development Agency (NJEDA) has clarified that the investment date is defined as one of the following milestones, whichever is the latest:
- The signing date;
- cash transfer date; or
- SAFE or stock issuance date, as long as the issuance is within a reasonable time period following (1) or (2) above.
NJTechWeekly.com asked local angels and other significant members of the New Jersey tech ecosystem to tell us what they thought of this new law, and whether they thought it would bring new investment to minority-led and women-led startups here in New Jersey.
David Sorin, chair of the Venture Capital & Emerging Growth Companies practice at McCarter & English (East Brunswick), is a well-known attorney specializing in startups. He was very positive about the change.
He said, “We at McCarter are seeing firsthand the positive effects of the incentive put in place by the Angel Tax Credit Incentive and the significantly heightened interest on the part of both investors and entrepreneurs resulting from the enhanced credit. We currently are working on several financing transactions for technology companies driven, in part, by the bold action taken by the NJEDA, the state legislature, and the governor.”
Mario Casabona, founder and CEO of TechLaunch and Casabona Ventures (both in Kinnelon), noted, “As an angel investor, the expansion of the New Jersey Angel Tax Credit from 10 percent to 20–25 percent is a game changer for me. I have already invested in a New Jersey-based women-owned business with the tax credit in mind. When my convertible note investment converts to equity next year, I’m definitely applying. This expansion also incentivizes outside-the-state investors to invest in New Jersey-based companies. The New Jersey Angel Tax Credit helps investors like myself mitigate the risk of investing in early-stage ventures.”
Benjamin David Novak, of Morgan Lewis (Princeton), a startup attorney who’s also an angel investor, said that the angel tax credit expansion is a step in the right direction, but he thought that it possibly doesn’t go far enough to help New Jersey compete.
“Several states have adopted angel investor tax credit programs to incentivize investors to invest in startups within their state,” he said. “However, the incentive value of these programs ranges significantly from state to state. For example, Maryland has a program that provides a 50 percent refundable tax credit to qualified investors that invest in qualified Maryland biotechnology companies. New Jersey, to its credit, has had an angel investor tax credit program for some time. But the 10 percent refundable tax credit, when balanced against the application fee, success fee, and administrative burden, resulted in a limited incentive, especially for those investors writing checks for less than a few hundred thousand dollars. Assembly Bill 5604, which was recently signed into law by Governor Phil Murphy, took this program and gave it some teeth. Pursuant to this bill, the 10 percent credit was increased to 20 percent, with an additional 5 percent for certain qualified investments, resulting in a refundable angel investor tax credit of up to 25 percent. Time will tell how much this program incentivizes investment in the state, but there is no doubt that this is a big step in the right direction.”
Speaking for the Jumpstart New Jersey Angel Network (New Brunswick), Gina Tedesco, who is on the board of trustees, said, “Jumpstart New Jersey Angel Network sees the angel incentive program as a win-win for both New Jersey-based investors and entrepreneurs. This tax credit gives local investors more purchasing power, as it mitigates risk and expands available capital to growing entrepreneurs throughout the state. We expect we will see an increase in demand from new investors looking to join our network, resulting in increased dollars available for investment. As angels investing real dollars in startup companies, Jumpstart New Jersey Angel Network welcomes this bold move to increase incentives to spur growth in the New Jersey startup innovation ecosystem.
For Michael (President ) Anderson, cofounder and CEO of MPAC Solutions (Newark), the incentives do not go far enough in creating opportunities for people of color.
“Any tax credits for investments in opportunity zones should reflect the demographics of the Opportunity Zone. For instance, in an opportunity zone in Newark that is 90 percent Black and Afro-Indigenous, tax credits or exemptions should only be allowed for investment in companies or projects with significant Black and Afro-Indigenous leadership. Governor Murphy must create rules and best practices around systematic economic enfranchisement in New Jersey,” he said.
“With regard to the 170+ Opportunity Zones, only investors that have capital gains benefit from opportunity zone investment policies. Who has significant capital gains? The people who benefitted from the status quo … a status quo that institutionally paralyzed people of color. For instance, Blacks have become nearly two-thirds of the prison population, while only constituting one-eighth of the general population.
“I’ve listened to EDA head Tim Sullivan and Governor Murphy promise diversity in venture investing, while supporting firms and an ecosystem that deliberately marginalizes whole communities and punishes champions of inclusion that speak out against financial injustice. Without concrete stipulations and uncomfortable yet progressive conversations around social equity, we will continue to see minorities and women only earn 7 percent of the state’s contracts, as was the case in 2018.
“This past quarter, women earned 3 percent of all venture capital, which continues to experience its largest funding periods as an asset class. Everyone suffers when we block economic progress for all or create policies that dance around the changes necessary.
“I am in favor of innovation. I do not trust the effectiveness of any proposed investment initiative that is not followed up with programmatic equity partnerships on the part of corporations and government, which currently power the state’s VC pipeline and supply the investment firms that fail the people with dry powder. Only programmatic equity partnerships with minority investors, and dedicated capital from corporations, governments, sports teams, universities, etc., will lead to sustainable economic development, and create diverse inclusive wealth.
“I challenge Governor Murphy to work with MPAC, and our allies in local and federal government working to stimulate minority businesses. Private investors without genuine interest in creating diverse wealth are misleading the public about making a difference, while avoiding their fair share of tax contributions. Unfortunately, we the people are financing investors that are excluding us from the largest era of wealth creation in American history. We need to have an honest, open conversation followed up with action that catalyzes innovation through programmatic investing with stakeholders that represent underserved communities.”