April 2, 2007
Extra credit | A 19-year-old tax credit program run by the Finance Authority of Maine aims to spark investments and make Maine's tax dollars work harder
By Joseph R. Thompson
Untested and unorthodox ideas. Lack of a proven track record. Limited assets. The dangers of investing in startup and early-stage companies are many and daunting.
So why are investors like Diane Sammer putting their money in Maine startup companies? And why are people investing in Sammer's early-stage company, which has yet to generate revenue?
A key reason, according to Sammer and other business owners, is the Maine Seed Capital Tax Credit Program, which counters the risks of investing in early-stage companies with a substantial tax credit for qualified investors.
"[The MSCTCP] is very attractive to Maine investors because it cuts the risk [of investing] dramatically," says Sammer, CEO of Harpswell-based Emergent Music LLC, the developer of Goombah, a free music recommendation program that works with users' iTunes collections. Last year, Goombah received a total of $150,000 from six investors through the MSCTCP. "It encourages people to feel more comfortable with getting involved earlier in a company."
The MSCTCP attracts investors to startup and early-stage companies by offering individual investors a tax credit of up to 40% of their investment ˆ up to 60% if the early-stage company is located in an area of high unemployment, such as Lewiston-Auburn or the Millinocket area ˆ to help offset some of the risks of investing in startup companies. The tax credit has helped generate more than $40 million in investments since the program first went into effect, in 1989, and approximately $14.8 million of the allocated $20 million has been given out as tax credits. To date, 228 businesses have received investments from 1,034 investors. According to a recent FAME survey, those investments had enabled companies to create 101 new jobs by the end of 2005, the most recent year tabulated.
The MSCTCP model is being considered as a way to spark additional investment in the state. In February, the state held a public hearing on a bill to create a tax credit program, similar to the MSCTCP, which would encourage investment in public and private fishery programs. While the bill, LD 358, "An Act To Create the Maine Fishery Infrastructure Tax Credit Program," is still awaiting a work session with the Legislature's taxation committee, it reveals one more way in which the state is attempting to leverage more from each tax dollar.
As a board member of the Small Enterprise Growth Fund, Maine's "patient" venture capital fund, Sammer understands the need for investment in all facets of the state's economy. And as a CEO, Sammer knows how hesitant investors can be when it comes to putting money into a startup. "It's not as easy for a company in Maine to raise money as it is for companies elsewhere," she says.
Send me an angel
The Finance Authority of Maine instituted the MSCTCP in an effort to address Maine's money problem. According to Rob Small, the director of the MSCTCP, FAME sought to encourage investments by creating a tax incentive that would encourage investors and venture capital firms to take a new look at these traditionally riskier companies. So far, Small says, program participants have been primarily angel investors; he's only aware of two venture firms that have used the MSCTCP.
There are several restrictions on the credit. For starters, the credit can't be taken for an amount greater than 50% of the taxes owed by an investor the year before. Also, the credit must be taken incrementally over four years, and the money invested in the company must remain invested for five years ˆ meaning investors must have significant tax bills and moderate levels of liquidity before the credit becomes worthwhile.
According to Small, the accessibility of the program is broad enough to make it difficult to describe a "typical" MSCTCP investor, since investments can range from a modest $10,000 or $25,000 among friends ˆ there is no prescribed minimum amount ˆ to the $500,000 ceiling set by the program. "It really depends on what company you're taking about," says Small, when pressed to describe who's taking advantage of the program. "In some of the larger companies participating, investors are putting in half a million dollars."
To be eligible to receive MSCTCP investments, businesses must be located in Maine, gross less than $3 million in sales annually and be the fulltime activity of one of the principle owners. Additionally, the business needs to fulfill at least one of four requirements: be a manufacturer; export at least 60% of its product outside the state; focus on developing or applying a technology; or "bring significant permanent capital into the state," according to the program guidelines.
According to Small, the program is unique to Maine. Both Small and Sammer say they have fielded questions from investors and legislators in other New England states about MSCTCP.
While that interest sounds good in principle, it could effectively undermine the benefits of the program. According to Dr. Joseph Minarik, senior vice president and director of research at the Washington, D.C.-based Committee for Economic Development, the effectiveness of a program like the MSCTCP is threatened if a neighboring region decides to offer a greater credit ˆ effectively out-bidding Maine for investors by making themselves more attractive to businesses in search of money.
According to Minarik, states must also weigh the pros of a tax credit against the cons of the resulting drain on the economy. "The money is not free, no matter how you think about it," says Minarik. "The money that goes to those investors has to come from somewhere."
After serving three terms in the Maine Legislature, Kevin Shorey, vice president and co-owner of Quoddy Footwear LLC and a Washington County commissioner, knows Maine's tax dollars don't grow on trees. "I think personally the state of Maine is over taxed," says Shorey, "but what has to be looked at is how we best spend the money that's already coming in."
In 2006, Shorey and his wife, Kristen, the president of Quoddy Footwear LLC, needed a cash injection for their company. According to Shorey, Quoddy Footwear reached the point where it needed to expand operations, or else the business would suffer. "The business was becoming too successful," says Shorey.
The Shoreys learned they were eligible for a community development block grant, but that they would need to match the funds, which required liquidity they didn't have at the time. According to Shorey, participating in the MSCTCP encouraged investors to consider investing in a shoe manufacturer in Maine. "I think it certainly helped our investors and our advisors to make the decision to come with us," says Shorey.
Since enrolling Quoddy Footwear in the MSCTCP, Shorey raised $150,000 from three investors, giving the company the money it needed to match the community development block grant, as well as to create five new jobs and retain five existing jobs.
"There are people that are now working in Washington County that were collecting welfare and who still would be if it wasn't for this program," Shorey says. "There are people working now [as a result of jobs created thanks in part to the MSCTCP] who will be paying taxes long after this program has expired." Those people will more than make up for the money that's been expended by the state and will break some cycles of poverty."
So why are investors like Diane Sammer putting their money in Maine startup companies? And why are people investing in Sammer's early-stage company, which has yet to generate revenue?
A key reason, according to Sammer and other business owners, is the Maine Seed Capital Tax Credit Program, which counters the risks of investing in early-stage companies with a substantial tax credit for qualified investors.
"[The MSCTCP] is very attractive to Maine investors because it cuts the risk [of investing] dramatically," says Sammer, CEO of Harpswell-based Emergent Music LLC, the developer of Goombah, a free music recommendation program that works with users' iTunes collections. Last year, Goombah received a total of $150,000 from six investors through the MSCTCP. "It encourages people to feel more comfortable with getting involved earlier in a company."
The MSCTCP attracts investors to startup and early-stage companies by offering individual investors a tax credit of up to 40% of their investment ˆ up to 60% if the early-stage company is located in an area of high unemployment, such as Lewiston-Auburn or the Millinocket area ˆ to help offset some of the risks of investing in startup companies. The tax credit has helped generate more than $40 million in investments since the program first went into effect, in 1989, and approximately $14.8 million of the allocated $20 million has been given out as tax credits. To date, 228 businesses have received investments from 1,034 investors. According to a recent FAME survey, those investments had enabled companies to create 101 new jobs by the end of 2005, the most recent year tabulated.
The MSCTCP model is being considered as a way to spark additional investment in the state. In February, the state held a public hearing on a bill to create a tax credit program, similar to the MSCTCP, which would encourage investment in public and private fishery programs. While the bill, LD 358, "An Act To Create the Maine Fishery Infrastructure Tax Credit Program," is still awaiting a work session with the Legislature's taxation committee, it reveals one more way in which the state is attempting to leverage more from each tax dollar.
As a board member of the Small Enterprise Growth Fund, Maine's "patient" venture capital fund, Sammer understands the need for investment in all facets of the state's economy. And as a CEO, Sammer knows how hesitant investors can be when it comes to putting money into a startup. "It's not as easy for a company in Maine to raise money as it is for companies elsewhere," she says.
Send me an angel
The Finance Authority of Maine instituted the MSCTCP in an effort to address Maine's money problem. According to Rob Small, the director of the MSCTCP, FAME sought to encourage investments by creating a tax incentive that would encourage investors and venture capital firms to take a new look at these traditionally riskier companies. So far, Small says, program participants have been primarily angel investors; he's only aware of two venture firms that have used the MSCTCP.
There are several restrictions on the credit. For starters, the credit can't be taken for an amount greater than 50% of the taxes owed by an investor the year before. Also, the credit must be taken incrementally over four years, and the money invested in the company must remain invested for five years ˆ meaning investors must have significant tax bills and moderate levels of liquidity before the credit becomes worthwhile.
According to Small, the accessibility of the program is broad enough to make it difficult to describe a "typical" MSCTCP investor, since investments can range from a modest $10,000 or $25,000 among friends ˆ there is no prescribed minimum amount ˆ to the $500,000 ceiling set by the program. "It really depends on what company you're taking about," says Small, when pressed to describe who's taking advantage of the program. "In some of the larger companies participating, investors are putting in half a million dollars."
To be eligible to receive MSCTCP investments, businesses must be located in Maine, gross less than $3 million in sales annually and be the fulltime activity of one of the principle owners. Additionally, the business needs to fulfill at least one of four requirements: be a manufacturer; export at least 60% of its product outside the state; focus on developing or applying a technology; or "bring significant permanent capital into the state," according to the program guidelines.
According to Small, the program is unique to Maine. Both Small and Sammer say they have fielded questions from investors and legislators in other New England states about MSCTCP.
While that interest sounds good in principle, it could effectively undermine the benefits of the program. According to Dr. Joseph Minarik, senior vice president and director of research at the Washington, D.C.-based Committee for Economic Development, the effectiveness of a program like the MSCTCP is threatened if a neighboring region decides to offer a greater credit ˆ effectively out-bidding Maine for investors by making themselves more attractive to businesses in search of money.
According to Minarik, states must also weigh the pros of a tax credit against the cons of the resulting drain on the economy. "The money is not free, no matter how you think about it," says Minarik. "The money that goes to those investors has to come from somewhere."
After serving three terms in the Maine Legislature, Kevin Shorey, vice president and co-owner of Quoddy Footwear LLC and a Washington County commissioner, knows Maine's tax dollars don't grow on trees. "I think personally the state of Maine is over taxed," says Shorey, "but what has to be looked at is how we best spend the money that's already coming in."
In 2006, Shorey and his wife, Kristen, the president of Quoddy Footwear LLC, needed a cash injection for their company. According to Shorey, Quoddy Footwear reached the point where it needed to expand operations, or else the business would suffer. "The business was becoming too successful," says Shorey.
The Shoreys learned they were eligible for a community development block grant, but that they would need to match the funds, which required liquidity they didn't have at the time. According to Shorey, participating in the MSCTCP encouraged investors to consider investing in a shoe manufacturer in Maine. "I think it certainly helped our investors and our advisors to make the decision to come with us," says Shorey.
Since enrolling Quoddy Footwear in the MSCTCP, Shorey raised $150,000 from three investors, giving the company the money it needed to match the community development block grant, as well as to create five new jobs and retain five existing jobs.
"There are people that are now working in Washington County that were collecting welfare and who still would be if it wasn't for this program," Shorey says. "There are people working now [as a result of jobs created thanks in part to the MSCTCP] who will be paying taxes long after this program has expired." Those people will more than make up for the money that's been expended by the state and will break some cycles of poverty."
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