Indiana’s Venture Capital Investment tax credit (VCI credit) is set to get a major boost as a result of this year’s legislative session.
Early this year, I wrote about proposed changes to the VCI credit; specifically that the Indiana House’s version of this year’s budget bill, House Bill 1001, expands the VCI credit to reward those who invest in funds. Yesterday, the Senate passed its version of the budget and retained the provisions increasing the VCI credit.
The Indiana Chamber has long advocated for such an expansion. This includes increasing the cap beyond $12.5 million, increasing the percentage of the investor’s credit beyond 20% and incentivizing investments into venture funds. We are on the precipice of accomplishing all three.
Under the current bill, beginning in 2022: The cap increases to $20 million; the percentage increases to 25% (30% if the business is a minority or women’s business enterprise) of the investment; and investors will receive a VCI credit equal to 20% of their investment in a “qualified venture fund.”
In anticipation of these changes, it might be prudent to better understand the types of funds lawmakers hope to foster.
The bill defines qualified venture funds as follows:
[A]ny private fund that meets the definition of a venture capital fund in 17 CFR275.203(l)-1 and … makes investments according to a policy that: (1) requires eligible companies to be primarily focused on the commercialization of research and development, technology transfer, or application of new technology; and (2) prioritizes investments in companies that:
(A) have received a grant, loan, or other investment funds provided by the Indiana twenty-first century research and technology fund established by IC 5-28-16-2; or (B) maintain a substantial presence in Indiana.
The definition of the VC credit, 17 CFR275.203(l)-1, was the subject of much discussion in 2020 as federal regulators modified the Volcker Rule, which aims to protect bank customers by preventing banks from making certain types of speculative investments that contributed to the 2008 financial crisis. In October 2020, Federal Deposit Insurance Commission officials loosened the restrictions of the Volcker Rule, allowing banks to make large investments into venture capital and similar funds.
A future Tech Talk will cover in greater detail the specific requirements that a private fund must meet to qualify as a venture capital fund under SEC regulations and whether relying on the federal definition is the best option for growing Indiana-based investment funds. Regardless, it is exciting to think about banks and other financial institutions being incentivized to help grow Indiana’s entrepreneurial community.
The takeaway for today is that the VC credit is evolving in a positive direction. Now that the Senate passed its version of the budget bill, it returns to the House. The House will either concur or – more likely – the bill will go to conference committee, where members of the House and Senate will work together to get the bill into its final form.
Conference committee is where bills are altered or amended in sometimes unexpected ways. Despite the VCI credit language receiving widespread support, it could be subject to reduction if lawmakers need to make cuts to add funding to other budget initiatives.
We, as members of the tech community, cannot let this happen. Technology, innovation and small business growth are critical for our state’s future economic well-being.
Stay tuned as my Chamber colleagues and I keep a close watch on the budget bill in these final days, and please be prepared to contact your lawmaker(s) if “the powers that be” attempt to stifle the future of Hoosier innovation and entrepreneurship.
