Unofficial: Entirety of Seed Capital Tax Credit claimed on first business day of the year

Brian Rahill, co-founder and CEO of Coursestorm, arrived at the offices of the Finance Authority of Maine at 6pm on Tuesday evening—14 hours before the office opened its doors on Jan. 2, the first business day of the year.

He was there to ensure that his company, which sells course-registration software for educational organizations, had filed the necessary paperwork to claim $327,000 worth of a highly sought-after tax credit for its investors. The Maine Seed Capital Tax Credit 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 has an annual allocation of $5 million, a cap which was reached in April of 2018 for the last calendar year. This year, it looks like the cap will be reached in a single day.

Rahill wasn’t alone standing in line over night. In fact, he wasn’t even first in line (that credit goes to Ourly, the York-based startup that has developed a financial app to allow parents to coordinate with their children on assigning and paying for chores). By Rahill’s tally, 18 companies were in line by the time FAME, which administers the program, opened its doors. Based on an informal poll, he estimated that the entirety of the $5 million was spoken for if all the companies’ applications were accepted.

Nothing is official yet, and it will likely take a few weeks before FAME is able to properly vet and approve all the applications, but based on a “rough re-cap of the day’s activities,” Charlie Emmons, FAME’s director of commercial lending, confirmed that fact for Maine Startups Insider.

“As of this afternoon, FAME has received applications covering 21 companies for $10,165,000 +/- in investment,” Emmons said. “At 50% tax credits for these investments, the $5,000,000 yearly allocation has been reached.”

Expectations were that the cap would be reached very quickly.

“I think it shows how successful the program has been. Obviously we were expecting this to happen, if not by 9 a.m. then by pretty shortly thereafter,” said Tim Agnew, a principal of Masthead Venture Partners and chair of the Maine Venture Fund’s board.

Agnew, who helped create the tax credit program in the late 1980s as CEO of FAME, said the increased demand for the tax credit and the speed at which the cap was reached is testament to how FAME has been working with companies to make it more accessible.

But Agnew is also worried about how hitting the program’s cap so early in the year will impact entrepreneurs’ abilities to raise funds this year as investors will be unwilling to invest until more tax credits are available.

“It’ll be tough for them without the certainty of the credit,” he said.

If you’ve been wondering how so many companies can be ready on Jan. 2 to claim tax credits for investments that are required to be made in the 2019 calendar year, it’s because companies raised money in 2018 with this  situation in mind. While the credit for 2018 might have been tapped early, companies could still offer investors the chance to claim the credit by selling short-term bridge notes that would convert to equity on Jan. 2, 2019, thereby creating an investment in the 2019 calendar year that’s eligible for the tax credit.

Mike Vein, Ourly’s CEO, told Maine Startups Insider that his company submitted an application to claim $375,000 in tax credits (50% of a $750,000 portion of its seed round).

“I’m a big supporter of the Maine Seed Capital Tax Credit program,” Vein said. “We think it is a great program and one of the reasons why we operate in Maine. Not only is it a proven vehicle that spurs private equity investment, it creates good paying jobs in the state of Maine, and increases economic opportunity.”

Owen Brown, CEO of DAVO Technologies, said his company applied for $450,000 based upon $900,000 invested with the company (out of a total capital raise of $1.25 million).

“It is quite an amazing program,” Brown said. “I believe it is a real driver of economic growth, employment and tax revenue to the state.”

Push for expansion

The Maine Legislature will review a proposal to expand the tax credit program this year. Agnew said a proposed bill coming from FAME would propose increasing the annual cap to $15 million. In exchange for that increase, the amount of investment eligible for the tax credit would drop from 50% to 40%. It would also change the limit per business for which the tax credits may be received from $5 million to around $2 million or $2.5 million, which would target the credit to smaller businesses, “which isn’t necessarily a bad thing,” Agnew said.

“They’re good changes,” he said. “I think they’re driven by the fact that you can’t run a program when it’s running out of the credit in the middle of the year, let alone at 9 a.m. on Jan. 2., because it creates such uncertainty for the entrepreneurs and the investors.”

Maine Venture Fund will advocate for an expansion.

“MVF is an enthusiastic supporter of the Maine Seed Capital Tax Credit program and is looking forward to working with the new Governor and Legislators on how to address the increased demand for the credits,” said Jayme Okma Lee, MVF’s investment manager. “We see first hand the value the program brings to Maine-based startups and their investors and therefore support its expansion.”

Tax credit details

The Maine Seed Capital Tax Credit program allows investors—both individuals and venture capital funds—to recoup 50% of their investment (up to $500,000) in an eligible, early-stage Maine company in the form of tax credits, which can be used over at least a four-year period to reduce state income tax liability. To be eligible, the company must have sales of less than $5 million in the prior 12 months, and it 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 must also own less than 50% of the business to receive the tax credits. The aggregate investment limit per business is $5 million for which tax credits may be received.

The program was originally created in the late 1980s, but it took roughly 25 years for it to meet its lifetime cap of $30 million, which it did in 2013. The Legislature revived it in 2014, changing it from a lifetime cap to an annual cap. That annual cap equaled only $635,000 in 2014, but ramped up to $4 million in 2015 and to $5 million in 2016 and each year after.

The Legislature also tweaked the program so the tax credits could be enticing to out-of-state venture capital funds, which don’t have any tax liability in Maine. The program now provides out-of-state VC firms (and only out-of-state VC firms) with what are known as “refundable” tax credits, meaning they could be redeemed for cash if no tax liability exists.

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