Maine Seed Capital Tax Credit Back in Business

posted on September 24th, 2014 in Category:

Early in 2013, the Maine Seed Capital Tax Credit Program reached its statutory cap and the program went into an extended hiatus. Despite bipartisan support for the program, the State’s tight budget made it difficult for the Legislature to extend the program, but it is again open to new investments in eligible Maine businesses, although the amount of tax credits available is limited. This is very good news for early stage businesses looking to raise venture capital for growth and job creation.

Administered by the Finance Authority of Maine, the Seed Capital Tax Credit provides investors in eligible businesses with a tax credit of up to 50% of their investment over a four year period. The Program, which has been in existence for about 30 years, has helped hundreds of entrepreneurs raise tens of millions of dollars to grow their businesses. Investors looking to provide capital to start-ups and early stage businesses weigh the risk of loss and the potential for return when deciding whether to invest, how much to invest and on what terms. The availability of the Seed Capital Tax Credit provides an incentive for investors to make the investments and to increase their investment size, making it possible for businesses to achieve their growth goals.

Due to the tight State Budget, the Governor and Legislature were only able to provide for aggregate tax credits under the Program of $635,000 for the remainder of 2014, all of which has been fully committed. That number is increased to $4 million for investments made in 2015 and to $5 million for investments in 2016 and later. In each year, once the cap on the credit for that year has been reached, investors will have to wait for the next year to make an investment and obtain the tax credit for that investment. However, in 2014 only, the Finance Authority will make an exception due to the small amount of credit authorized for this year. FAME is accepting applications for up to an additional $1 million of investments to be made in 2014 as long as they are structured as convertible notes that convert in January 2015. When the notes convert, FAME will treat those investments as being made in 2015. Kudos to FAME for figuring out a way to speed up investment in Maine businesses!

The process begins when a company applies to FAME to participate in the program. FAME will make a determination as to whether the company meets the statutory criteria. Investors also must apply and be approved by FAME. There is an application fee of $500 for the company and $250 each per investor. The tax credit does not apply to investments made before the company and investor have applied for the credit, so timing is important.

There are a number of eligibility criteria for companies applying to be approved by FAME. The company must have sales of less than $5 million in the prior 12 months, and the company must be a manufacturer, an exporter of a product or service out-of-state, a user of advanced technologies, a visual media production company or a value added natural resource enterprise. In addition, the company must certify that the amount of the investment for which the Seed Capital Tax Credit is being applied for is necessary to create or retain jobs in the State. Application forms are available on the FAME website and it is always a good idea to touch base with FAME staff before submitting an application as the application fees are non-refundable.

One important new feature of the program is that venture capital funds are now eligible for the Seed Capital Tax Credit, even if the fund is located out of State. That provides a major new incentive for venture capital funds in places like Boston and New York to seek out investments in Maine businesses. While Maine investors take the credit as an offset to taxes due on their Maine tax return over a four year period, venture capital funds have the option of requesting a refund from the State of Maine in the amount of the credit they are due, again over a four year period. This “refundable” credit opens a new avenue for raising capital and leveraging investment from Maine investors.

Maine has led the nation in using the Seed Capital Tax Credit as a way to attract capital to businesses that can grow and create jobs. The credit is an important tool for Maine companies looking to raise capital and an attractive incentive for investors to target Maine deals rather than investing out-of-state. There is a lot of investor capital available in Maine searching for good deals and a lot of entrepreneurs trying to build successful businesses. The Seed Capital Tax Credit is the glue that brings investors and entrepreneurs together for the benefit of the State and its economy.

Written by Tim Agnew, MVF Board Member

Timothy P. Agnew is a Principal at Masthead Venture Partners, a venture capital firm with offices in Cambridge and Portland.  Prior to joining Masthead, Mr. Agnew was the Chief Executive Officer of the Finance Authority of Maine from 1988 to 1999.  He serves on the board of CEI Community Ventures Fund and is a member of the Interagency Review Panel and the Maine Angels.  He is a past Chair of the Maine Technology Institute.  Mr. Agnew is a graduate of the University of Virginia School of Law and Vassar College.