AN ACT ESTABLISHING TAX CREDITS FOR ANGEL INVESTORS.

This bill establishes a transferable income tax credit for eligible people, know as “angels,” who invest in qualified Connecticut start-up businesses. The credit is 25% of a cash investment up to a maximum of $ 125,000. The taxpayer must claim the credit in the income year in which he or she invested the cash.

Angels can carry unused credits forward for up to five years or can sell or otherwise transfer them to another taxpayer, who can in turn transfer them to a third person. The bill limits the total credits to $ 10 million per year for all investments. It establishes criteria for credit-eligible investors, investments, and businesses, as well as a procedure for accessing the angel credits.

EFFECTIVE DATE: July 1, 2009. The credits apply to the income years starting on or after January 1, 2009.

To be an angel investor, a person must qualify as an “accredited investor” under the Securities and Exchange Commission (SEC) rules. (Accredited investors are typically upper-income, high-net-worth, individuals and entities—see BACKGROUND. ) Angels may seek active involvement in the businesses in which they invest, through consulting or mentoring, but the following investors are ineligible:

1. a person who controls 50% or more of the business receiving the investment;

2. a venture capital company; and

3. any bank, savings and loan association, trust, insurance company, or similar entity for activities that are part of its normal business.

1. (a) have its principal place of business in Connecticut or (b) be a corporation that, even if it is the wholly owned subsidiary of an out-of-state corporation, either does business primarily, or has substantially all its production, in the state;

2. have gross revenue under $ 5 million for its most recent income year;

3. have fewer than 25 employees with more than half residing in Connecticut;

4. have operated in Connecticut for less than 10 consecutive years;

5. be primarily owned by its management and their families;

6. have received less than $ 1 million in angel credits under the bill; and

7. be included on the Department of Economic and Community Developments' (DECD) list of businesses qualified to receive credit-eligible angel investments.

The business receiving the angel investment can be owned by an individual, partnership, association, or a corporation.

The bill requires DECD to issue the first list of qualifying businesses by August 1, 2009, and update it monthly thereafter. The list must categorize businesses by the estimated amount of their tax credits and the types of qualified securities they offer.

1. its name and a copy of its organizational documents;

2. a business plan that includes a description of the business and its management, product, market, and financial plan;

3. a statement of its innovative and proprietary technology, product, or service;

4. a statement of its potential economic impact, including the number, types, and location of the jobs it expects to create;

5. a description of the qualified securities it offers, their cost, the amount of requested tax credits, and the earliest year the credits can be redeemed;

6. the amount, timing, and projected use of the funds raised from the sale of the securities; and

7. any other information the commissioner requires.

An angle investor who intends to invest cash in a listed business must apply to the commissioner to reserve a tax credit for the amount he or she intends to invest.

To be eligible for a credit, an angel must make a cash investment in the business' qualified securities. These securities can be equity or debt instruments. Equity can include general or limited partnership interests, any type of common or preferred stock, or any combination of subordinate or convertible debt with a means of equity conversion attached. Debt instruments can be secured or unsecured, but must (1) be subordinated to the debtor's general creditors and (2) require no payments of principal, other than payments out of the debtor's future profits, for at least the first seven years of their term.

Cash investments in Connecticut Innovation, Inc. , the state's quasi-public venture capital agency, are ineligible for angel credits.

Credits cannot exceed an investor's total income tax due for a particular year. Investors can carry forward unused credits for up to five succeeding years or can sell or otherwise transfer them to others who may transfer them a second time. When a transfer occurs, the seller and the buyer must jointly notify the revenue services commissioner within 30 days and indicate (1) the credit certificate number, (2) the transfer date, (3) the amount of credits transferred, (4) the tax credit balance before and after the transfer, (6) the tax identification numbers of both parties, and (7) any other information the commissioner requires. Violation of the notice requirement disallows the credits until the parties comply.

1. a bank, insurance company, registered investment company, business development company, or small business investment company;

2. an employee benefit plan, as defined in the federal Employee Retirement Income Security Act (ERISA), if (a) it has more than $ 5 million in total assets or (b) a bank, insurance company, or registered investment advisor makes its investment decisions;

3. a charitable organization, corporation, or partnership with more than $ 5 million in assets;

4. a director, executive officer, or general partner of the company selling securities;

5. a person with individual net worth, or a couple with joint net worth, over $ 1 million at the time of the security purchase;

6. a person with income over $ 200,000, or a couple with joint income over $ 300,000, in each of the two most recent years and a reasonable expectation of the same income in the current year; and

7. a trust with more than $ 5 million in assets that is not formed to acquire the offered securities, and whose purchases are made by a sophisticated person.