Could Your Startup Benefit from NJ’s Proposed Angel Investor Bill?

Could Your Startup Benefit from NJ’s Proposed Angel Investor Bill?

The New Jersey Legislature is working to attract more “angels” to the state. It recently passed a bill, Assembly Bill 5604, that increases the tax credit provided for qualified investments under the New Jersey Angel Investor Tax Credit Act. The goal is to make New Jersey more attractive to angel investors and stimulate investment in innovative New Jersey startups.

What Are Angel Investors?

Angel investors are typically high net worth individuals who provide funding for early-stage startups or entrepreneurs. In exchange for financial backing, angel investors generally seek ownership equity or convertible debt.

Unlike venture capitalists (VCs), angels tend to be individuals investing their own money. In addition, they are often former entrepreneurs themselves. Angel investors are more willing to get in on the ground floor, while VCs typically look for start-ups that are farther along in their life cycle and have enjoyed some measure of success.

Angel investors often are more willing to take a gamble on an unproven company, although they usually do so with smaller investments than VCs usually provide. Angel investments commonly range between $100,000- $600,000, while VCs usually prefer to invest their capital, time and reputation in multi-million dollar transactions.

New Jersey’s Angel Investor Tax Program

Under New Jersey’s existing Angel Investor Tax Credit Program, a taxpayer filing in New Jersey who invests in a qualifying, emerging New Jersey technology business with fewer than 225 employees, at least 75% of whom work in New Jersey, can apply for a tax credit against New Jersey corporation business or gross income tax. An emerging business is defined as one that has qualified research expenses paid or incurred for research conducted in the state; conducts pilot scale manufacturing in the state; or conducts technology commercialization in the state in the fields of advanced computing; advanced materials; biotechnology; carbon footprint reduction technology; electronic drive technology; information technology; life sciences; medical device technology; mobile communications technology; or renewable energy technology.

Currently, the tax credit is equal to 10% of the qualified investment made in a New Jersey emerging technology business, up to a maximum allowed credit of $500,000 for each qualified investment. Up to $25 million of Angel Investor Tax Credit may be approved per calendar year.

Qualified investments include non-refundable transfers of cash made directly to the New Jersey emerging technology business in connection with at least one of the following:

• Stock, interests in partnerships or joint ventures, licenses (exclusive or non-exclusive), rights to use technology, marketing rights, warrants, options, or any similar items (including, but not limited to, options or rights to acquire any of the interests listed above; or
• A purchase, production, or research agreement.

To be considered non-refundable, these items must be held or not expire for at least two calendar years from the date of the transfer of cash, with an exception being made for initial public offerings (IPOs), mergers and acquisitions, damage awards for the business’s default of an agreement, or other return of initial cash outlay beyond the investor’s control.

Applicants have six months from date of investment to submit an application to the New Jersey Economic Development Authority. While the application must be completed by the investor, the business receiving the investment must also participate in the process. 

Assembly Bill 5604

The proposed legislation increases the tax credit provided for qualified investments under the New Jersey Angel Investor Tax Credit Act from 10 percent of the qualified investment to 20 percent of the qualified investment. For businesses that are minority or woman-owned, or located in a distressed area of the state, the credit could be increased to 25%.

“New Jersey has one of the most highly-educated workforces in the nation,” said sponsor Kristen Corrado (R-40). “What we’re missing is a tax environment that encourages investors to put that talent to work in new tech businesses right here in the Garden State. This legislation helps fix that. 

On June 20, 2019, the Assembly passed the bill, with the Senate following suit one week later.  The legislation now heads to Gov. Phil Murphy. The attorneys of the Scarinci Hollenbeck Corporate Transactions & Business Law Group will continue to track the progress of Assembly Bill 5604 and post updates.

If you have any questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Kenneth J. Hollenbeck, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.