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Expanding Equity Investment in Small Businesses

Mark Marich

PDE staff were on hand earlier today at the House Small Business Committee hearing on the impact of the current financial crisis on investment in small businesses and steps to expand equity investments. Our report of the hearing follows:

In today’s hearing for the Small Business Subcommittee on Investigations and Oversight, Chair Jason Altmire (D-PA) noted the pivotal role entrepreneurs played in the economic downturn of the mid-1990s, creating 3.8 million new jobs. The question Congress members posed to six witnesses at today’s hearing was how to reverse the feeling of uncertainty and risk within the currentmarket.

Ideas like improving access to entrepreneurial education and instituting a nationwide tax credit to those investing in start-up companies were met with a positive response. However, it was capital gains taxes that yielded the most feedback.

John May, founder and managing partner of New Vantage Group, said he heard an overwhelming consensus at a recent conference for investors: institute low or no capital gains taxes.

“That’s the key thing that we believe will keep angels investing in start-ups,” May said. “There are so few of these people who are so wealthy that do this. They need to have as much capital in their hands (as possible) because they know what to do with it.”

The fear is that the projected rise in capital gains taxes will send investors to countries like China and Hong Kong, where capital gains are not taxed, said Catherine Mott, founder and CEP of Blue Tree Capital Group.

Another policy suggestion, from Patrick Dalton, President and COO at Apollo Investment Corporation, involves supporting Business Development Companies.

“BDC loans are the lifeblood of Main St. businesses … supporting over 1.2 million U.S. jobs,” Dalton said. “In 2007, we estimate that BDCs provided approximately 50 percent of all junior debt capital loans to the small and mid-sized businesses throughout the United States.”

Dalton said the problem is BDCs fall under the same regulations and required asset tests as mutual funds, even though the two serve very different purposes: Mutual funds invest in liquid assets and are required to redeem shareholders at any time, while BDCs invest in illiquid loans to small and mid-sized companies, which they intend to hold to maturity. Under current regulations, the result is fewer loans to the small business community.

Altmire assured those who testified that their words would be taken into advisement in the subcommittee’s future formulation of policy.

[Reported by Paige Ingram]

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