Jun 04

New Law Incentivizes Investments in Delaware-based Small Businesses by Offering Refundable Tax Credit to Angel Investors

On May 24, 2018, Delaware Governor John Carney signed the Angel Investor Job Creation and Innovation Act (the “Act”) into law, amending Titles 29 and 30 of the Delaware Code in an effort to spur job creation and innovation within the State.

The Act is noteworthy to angel investors because it awards a fairly significant tax credit to those who invest in Delaware-based small businesses. Though the credit itself is not new, the Act amends the State’s current offering to increase the tax credit to an amount up to 25% (previously 15%) and to allow investors to claim a refund for credits that exceed the total amount of tax due to the State (enabling investors to receive a portion of their initial investment back within the first year).

In order to qualify for the tax credit, individuals must invest over $10,000 and angel investment networks (defined as “Qualified Funds” in the Act) must invest a minimum of $30,000. Subject to other limitations, individual investors can receive up to a maximum credit of $125,000 and spouses filing a joint return can claim a credit up to $250,000.

It is notable that investors need not be Delaware residents, but in order to receive certification as a “qualified small business,” companies must be headquartered in Delaware. The latter requirement may prove to be a shortcoming of the Act, because while many entities are formed under Delaware law for various purposes, the vast majority of these entities are actually headquartered elsewhere.

For those companies that are headquartered in Delaware, the Act sets forth additional requirements, including, amongst other things, the need to pay decent wages (at least 175 percent of the federal poverty guideline for a family of 4), employ fewer than 25 employees, and engage in innovation in one of several areas as its primary business activity which include:

  • Using proprietary technology to add value to a product, process, or service in a qualified high-technology field;
  • Researching or developing a proprietary product, process, or service in a qualified high-technology field;
  • Researching, developing, or producing a proprietary product, process, or service in the fields of agriculture, manufacturing, wildlife preservation, environmental science, financial technology, or transportation; and
  • Researching, developing, or producing a new proprietary technology for use in the fields of agriculture, manufacturing, financial technology, or transportation.

In addition to the requirements set forth above, the business may not have previously received private equity investments of more than $4,000,000 or have issued securities that are traded on a public exchange.

To find out more about the credit and how to apply to be a certified investor or business, you can read the full text of the Act, along with its legislative history here.  As always, prior to offering or purchasing securities in a privately held company, be sure to consult a securities attorney to ensure the offering complies with state and federal securities laws. Investors seeking to take advantage of the Act’s tax benefits should also speak to a tax planning professional.

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