Legislature fails to expand Maine Seed Capital Tax Credit, meaning a run on 2020 credits is likely

Despite bipartisan support, the Maine Legislature during its first regular session did not expand a popular program that provides tax credits to individuals and venture capital funds that invest in Maine startups. The result is that startup founders will continue to have a more difficult time raising capital this year.

The Maine Seed Capital Tax Credit program has been around for 30 years, but has grown in popularity over the past few years. It offers investors in eligible early-stage Maine companies a chance to recoup 50% of their investment (up to $500,000) over the course of at least four years in the form of credits that reduce their Maine tax liability (or, in the case of out-of-state VC funds without Maine tax liability, in the form of cash).

The tax credit program currently has an annual allocation of $5 million. In 2018, that cap was reached in April. This year, the cap was reached on Jan. 2, 2019—the first business day of the year. In a scene reminiscent of fans camping out overnight to buy concert tickets, company CEOs and representatives on Jan. 1 camped outside the offices of the Finance Authority of Maine, which administers the program, in order to get in their applications first to claim the credit.

With all of 2019’s tax credits claimed on the first day of the year, startup founders have faced a more difficult time raising capital this year because many investors are aware of the program and want to wait to invest until the credits are available again.

Chad O’Leary, founder of Mobile Price Card, is one entrepreneur who experienced first-hand the difficulty of raising money in an environment where uncertainty exists around the availability of the tax credit. He was raising capital for his startup in 2018, when the tax credit program reached its annual cap in April.

“The credit, we came to discover, is very important to potential investors. They closely monitor the availability of the credit,” he said in testimony delivered in March 2019 before the a legislative committee. “Once it was used up last year, our capital raise became very difficult. Investors wanted to wait until the following year to start investing again. However, we were not in a position to wait months for the capital.”

So, like many other companies in Maine, O’Leary had to change the structure of the offering. Instead of selling equity outright, he sold short-term bridge notes that would convert to equity on Jan. 2, 2019, which would make the investment eligible for the year’s newly available tax credit allocation.

“This helped us bring investors back to the table and helped us to successfully raise $850,000 in August,” said O’Leary, who estimated the restructuring of the offering cost him $30,000 in legal fees.

This is why so many companies had all their paperwork ready to go and were waiting for FAME to open its doors on Jan. 2, 2020.

The legislative proposal

Recognizing the overwhelming demand for the credits and how the scarcity was impacting startup founders’ ability to raise capital, FAME developed a legislative proposal to increase the credit from $5 million each year to $15 million. State Sen. Matthew Pouliot (R – Kennebec) sponsored the bill on FAME’s behalf. To help pay for the increase, the FAME bill would reduce the percentage of an investment eligible to receive the credit from 50% to 40% and reduce the maximum credit available to any one business. The bill’s fiscal note estimates the expanded program would cost the state $1.3 million its first year and $2.9 million the second year.

In summary, the bill would:

• Increase the annual limit of credits from $5 million to $15 million;
• Reduce the percentage of an investor’s investment (made after April 1, 2019) eligible for the tax credit from 50% to 40%;
• Reduce the total aggregate investment eligible for tax credits for any one business from $5 million to $3.5 million; and
• Limit to $2 million the total aggregate investment eligible for any one business in any calendar year.

While lawmakers supported the bill, it did not secure the necessary funding and died on the appropriations table. The Legislature will pick it up again during the second session, but that doesn’t begin until January.

“I am pleased that the FAME bill got such strong bipartisan support and I am hopeful that the bill can be addressed in the Second Session,” Tim Agnew, a principal of Masthead Venture Partners who helped create the program in the late 1980s when he was CEO of FAME, told Maine Startups Insider. “Meanwhile, it’s a challenging time for seed and early-stage companies to raise capital without the assurance of access to the credit.”

The Legislature could address FAME’s bill in a special session before the second session convenes in January, but Agnew said that’s unlikely to happen.

To avoid the scene of startup founders lining up in the dark outside FAME’s offices in the wee hours of Jan. 2, 2019, FAME will change how it reviews the applications and allocates the credits. Instead of the first-come-first-served approach, it will review all applications received during regular business hours on Jan. 2. If the amount of credit requested exceeds $5 million, FAME will pro-rate the $5 million over all accepted applications. This approach will mean two things, one good and one not so good. It means startup founders won’t need to line up in the dark to get their application. But it also means founders will have no way of knowing how many credits their investors will be able to claim because it will depend on the amount of applications received on that day.

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