Congress looks to angels to revive economy


A man enter the doors of the "WeWork" co-operative co-working space on March 13, 2013 in Washington, DC. In a large warehouse-type office in Washington, software coders work on apps, while angel investors and mentors help budding entrepreneurs figure out strategy for their startups, in what is being dubbed Silicon Valley on the Potomac. AFP PHOTO/Mandel NGANMANDEL NGAN/AFP/Getty Images (Mandel Ngan/AFP/Getty Images)

Hoping to fuel more job-creating companies, lawmakers on both sides of the aisle are crafting legislation intended to encourage individual start-up investors, commonly called “angel investors,” to pour even more capital into new and growing businesses — but they don’t all agree on the best way to help.

“We want you to make more investments, we want you to take more risks,” Sen. Chris Murphy (D-Conn.) told investors at the Angel Capital Association’s annual summit last week in Washington. “So why don’t we take a look at our regulatory structure so that we’re reducing the barriers to the type of investments that you make, not increasing them.”

In the United States, angel investors funnel more than $1 billion into thousands of early-stage companies every year, and more of that money is moving into rapidly growing sectors like mobile and health care technology, according to a new report by Silicon Valley Bank and the Angel Resource Institute, a research organization.

In addition, angel funding is increasingly spread out across the country, as opposed to traditional venture capital (pooled money among a group of investors), which has long been concentrated in metropolitan areas, particularly technology hubs like New York City, Boston and Silicon Valley in California.

Rep. Patrick McHenry (R-N.C.) emphasized that second point in his own remarks at the conference, calling angel investors “very important for us in the rest of America, the ones outside of large urban areas, to ensure that entrepreneurs with great ideas have an opportunity to get started.”

In an attempt to encourage those investors to put more of the their wealth behind a larger number of companies, Murphy, McHenry and other lawmakers in both chambers are working on proposals meant to make start-up investing simpler and more financially appealing. Here’s a look two of the ideas they are working on right now in Congress.

National angel tax credit

Murphy, for one, has put forth a bill that would create a national angel tax credit, which would give investors a tax break worth up to 25 percent of their total annual investments in high-tech start-ups based in the United States.

The proposal is modeled after a program in Murphy’s state, which allows Connecticut investors who funnel at least $100,000 to an early-stage business in certain sectors to take an income tax credit equaling up to 25 percent of their investment. Since it started in 2010, it has supported more than 200 investments from 90 angel investors going to dozens of companies in fields like biotech, clean technology and information technology.

“Our tax credit has worked,” Murphy said. In addition to funding companies that create jobs, he argued that expanding the credit nationwide will help “target growth in the science, technology and engineering fields, so the United States can continue to lead the world in innovation.”

Murphy acknowledged that the proposal could be a tough sell as policymakers are currently looking for ways to simplify the tax code, not add new deductions. Moreover, the proposal has not sat well with consumer groups, who have slammed the tax break as yet another handout to some of wealthiest Americans.

However, David L. Verill, founder of Hub Angels Investment Group in Boston and chairman of the Angel Capital Association, says that with successful entrepreneurs-turned-investors, that money will nearly always be funneled right back into the economy. Citing talks with other angel investors, he believes most would “plow the savings they get from the tax credit right back into another company.”

“So it’s not going into the third house or the yacht or something like that,” he said. “It’s getting churned right back into the entrepreneurial ecosystem.”

Reworking the JOBS Act

North Carolina’s McHenry called the national angel tax credit idea a good idea — but he says lawmakers should first follow up on the JOBS Act.

Signed into law two years ago, the Jumpstart Our Business Startups (JOBS) Act directed the Securities and Exchange Commission to ease a number of restrictions on the way entrepreneurs can communicate with and solicit funding from investors. However, a number of lawmakers and investment groups have complained that, in writing the rules to implement those changes, the SEC has actually made it harder rather than easier for companies to reach out to investors.

As part of the law, for instance, regulators were to lift the ban on what is called general solicitation, which had prevented companies from widely advertising their securities offerings to investors. In doing so, though, officials have proposed some new requirements for certain investors — requirements that McHenry says have made some of the key provisions in the law “unworkable.”

He pointed out that regulators now require investors in some cases to file documentation two weeks in advance of launching discussions with a company in which they may consider investing. Noting that angel investors only tend to invest in a tiny fraction of the businesses from which they hear pitches, McHenry said “the idea that you are going to prefile 15 days before you even start discussions is absolutely absurd.”

Meanwhile, the proposed regulations could require some angel investors to start proving their level of wealth via third-party certification, moving away from a longstanding precedent of self-certification for accredited investors.

“They’re putting friction where there wasn’t any before,” Verill said.

If the agency doesn’t amend some of those rules, Congress may step in.

“At the end of the day, it’s going to be up to Congress to legislate and fix this problem, and we’re working on that now,” McHenry said, later adding, “I think you’ll see further action in a bipartisan way to hold [the SEC] accountable.”

However, that might not happen right away. McHenry noted that the regulations are already well behind schedule, with some rules still yet to be finalized. And with the mid-term elections looming, many lawmakers are currently too preoccupied on the campaign trail to craft and debate new legislation on the Hill.

Follow J.D. Harrison and On Small Business on Twitter.

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he manages the Post's On Small Business blog.
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