The premise of your blog that the Angel Fund Tax Incentive controversy is mostly political is right on target.
A few legislators are trying to use this incentive program – which they approved nearly unanimously – as a blunt instrument to against Burgum. He and the other angel investors followed the law closely, and there is no scandal or misuse under current legislation.
The controversy is mostly political theatre, unfortunately.
But it is important to correct some misleading information in your email blast. The Valley and FM Angel Funds have a mailing address at the university-affiliated incubators just like other startups and entrepreneurial concerns. Tech incubators are for members of the entrepreneur community, including angel investors. Nothing scandalous here - normal operating procedure.
The universities have no ownership interest in the angel funds, nor would it make sense for them to do so. Tom Kenville is an independent contractor to our Foundation, is not a university staff member, but is the lead angel investor of that fund. Likewise Jim Buus is neither a university staff member or an independent contractor but is the lead angel investor of the FM Fund. I am a consultant to the funds working under a US EDA grant specifically to help entrepreneurs and angels. There is no scandal or conflict of interest here. We are all doing our job, making angel funds work by finding good entrepreneurs and working with other angles in North Dakota and elsewhere to put a large pool of private equity together. There is no scandal unreported.
The state law does not prohibit angel fund investments out of state so there is no violation of the law. When the angel fund legislation was put in place by the legislature in 2007, it was for the purpose of providing an incentive for angels to form angel funds to invest in entrepreneur firms wherever they could find good companies to invest in. There were no angel funds before the law was passed and now there are 22 angel funds with over 553 angel investors and over $40 M has been invested in portfolio companies, mostly in North Dakota. It was known then by testimony that angel funds needed to invest in surrounding states as syndication across stat e lines was essential. Investments needed to flow easily across state lines – both ways - and it does. What has not been reported is that North Dakota angel funds attract out of state investment through syndication for ND deals. They also need to do likewise, as it must be reciprocal to work well.
The Angel Capital Association (ACA) lists 27 states with angel investor tax incentives. Several states without angel tax credits have it under consideration as entrepreneur activity is lacking from lack of entrepreneur capital. States used this incentive because they realized they were falling behind states that had numerous venture capital funds. Creating Angel Capital Networks was the best way to build a private equity market as venture funds are not interested in “fly over states.” States use tax credits instead of appropriated funds to stimulate private investment, letting private investors absorb all the transaction costs (legal, accounting, due diligence, etc.). The tax credits encourage accredited investors to invest in private companies rather than just in public markets out of state, or real estate and other lower risk investments. To build fast growth entrepreneur companies, private equity is essential.
Our angel funds attract significant investment to North Dakota, and smart businesspeople understand angels also must invest in surrounding states to build strong portfolios in a dynamic marketplace both because of deal flow and reciprocal syndication. Usually 5-8 angel funds invest in a single venture, thus out of state angel funds are required to fill out the investment rounds, just as North Dakota funds are needed in their deals.
The Legislature complained about inadequate reporting, but all funds have met all the annual reporting requirements to the North Dakota Tax Department and the Department of Commerce.
If they wish more reporting information, legislators should ask nicely rather than accuse investors and entrepreneurs of not providing them information they want. Legislators set the reporting requirements in the law, and those reporting requirements were met.
Restricting investments to North Dakota would likely diminish the emerging angel fund industry as angel investors would quickly lose interest with that political restriction. Angels know they could not attract out of state syndication to fill out the required investment round with that political regulation and restriction. No sense trying to win a tough battle with your hands tied behind your back.
North Dakota is still 47th in private equity investing, so still have a long way to climb, but we have a good start.
This political posturing is not helping entrepreneurs or angels as some legislators try to attack Burgum with a phantom stick, but hopefully adults in the room will eventually have sway and we will put growth and diversification of our economy first and foremost as policy.
