Gov. Janet Mills and the Maine Legislature have expanded the Maine Seed Capital Tax Credit program, which provides tax credits to investors and venture capital funds that invest in early-stage Maine companies.

The amount of tax credits available to investors each year has been increased from $5 million to $15 million. The change was included in the new supplemental budget that lawmakers agreed on, and which Gov. Mills signed, in late March.

The tax credit program, which has been around since the late 1980s, has become very popular the last few years, with demand exceeding supply and leading startup founders to camp outside state offices on Jan. 1 to get their paperwork in early enough to claim some of the credits for their investors. This year, as well as in 2019, all of the available $5 million in tax credits were claimed on the very first business day of the year. In 2018, the cap was reached in April. In 2017, in September.

John Burns, director of the Maine Venture Fund, said the expansion of the tax credit program couldn’t have come at a better time for Maine’s startups. He said since the outbreak of COVID-19 he knows of at least three local startups that have begun raising capital to form a cushion to prepare for potentially tough times ahead.

“As the COVID-19 pandemic began to slam companies with all sorts of headwinds, many companies that were either in the process of raising capital, or now would like to raise capital as a buffer in this environment, have an additional tool to entice those investors who want to be supportive but otherwise might be too fearful of the risks,” Burns told Maine Startups Insider. “The availability of the credit will be an important contributor to the difference between companies surviving through these difficult days, or failing.”

CourseStorm is one company that will benefit from the expansion of the program.

The Orono-based company, which sells a course-registration software platform to help organizations manage their educational offerings, has just closed on a $500,000 investment round that only took three weeks to complete from term sheet to close, according to CEO Brian Rahill. He said the increase in the cap “absolutely” made it easier for his business to raise the capital it needs.

“I am sure that the MSCTC expansion was a significant inducement to get investors to invest during these highly uncertain times,” Rahill told Maine Startups Insider.

Being located in Orono can be a challenge sometimes when pitching investors, Rahill said in testimony he gave before a legislative committee in February, but the “incentive of the Maine Seed Capital Tax Credit allows us to shift the conversation in our favor and levels the playing field with startups in other markets.”

“The tax credit has been critical for us in the fundraising process. It has helped entice individual Maine angels as well as outside VC firms to invest in CourseStorm,” Rahill said.

Rahill was one of those startup founders who camped outside the offices of the Finance Authority of Maine (FAME), which administers the tax credit program, on the night of Jan. 1, 2019. To avoid a repeat of that scenario in 2020, FAME changed its policy for how it accepted applications. Instead of a first-come-first-served policy, it accepted all applications received on day one and spread the $5 million in credits amongst them all on a pro-rated basis. So, what this meant for the applications FAME accepted on Jan. 2, 2020, is that investors will receive credits worth approximately 34.5% of their investment rather than 50%, according to FAME.

Thankfully, no startup founders had to camp outside FAME’s offices this year, but it did create uncertainty around how much of the tax credits would be available and who would get it.

“Once that started happening it wasn’t working as an incentive anymore,” Rahill said. “The new changes enable it to function again as it was intended—to entice investment in quality Maine companies so they can continue to grow and be economic engines in their communities.”

more details on the program and changes

The expansion to the tax credit program was based on a legislative proposal the Finance Authority of Maine (FAME) developed last year, but which the Maine Legislature did not approve despite bipartisan support. But Gov. Mills showed her support in expanding the program by including it in her administration’s 10-year economic development plan, released late last year.

While the total amount of credits was increased, other elements of the program were tweaked to help pay for the increase. In addition to raising the cap to $15 million through at least 2026, the changes also include:

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

FAME will also be subject to a new review reporting process by the Maine Office of Program Evaluation and Government Accountability, according to Christopher Roney, FAME’s general counsel.

Specific to 2020, Roney said the additional $10 million in tax credits available for the year are available for investments made on or after April 1, 2020. None of the new credits will be used to adjust the credits given out on Jan 2, 2020, he said.

“The new credits will be handled first come, first served, and we expect availability to last for several months, if not through the end of the year,” Roney told Maine Startups Insider. “People should still check in throughout the year to get more timely information on credit availability.”

The eligibility criteria have not changed. Companies whose investors are eligible to receive the credit must have sales of less than $5 million in the prior 12 months, and must either be a manufacturer, derive at least 60% of its sales from outside the state, develop or apply advanced technologies, be a visual media production company, or a value-added natural resource enterprise. Investors, who must own less than 50% of the business to receive the tax credits, are required to use the tax credits over a period of four years (25% of the credits a year) starting in the year of the investment. For more on the program and special rules for out-of-state VC firms, visit FAME’s website.