WASHINGTON _ The Small Business Administration (SBA) andthe Biotechnology Industry Organization (BIO) offered strongsupport for proposed Internal Revenue Service regulations thatprovide incentives for venture capital investments. The proposed IRSchange addresses stock redemption restrictions to the qualified smallbusiness stock provision of the 1993 Budget Reconciliation law.
The IRS held a hearing Thursday on the proposed regulations, whichwere published in the Federal Register on June 6, 1996. The SBAand BIO were the only scheduled speakers.
"This measure fixes one of the problems with this incentive," saidChuck Ludlum, vice president for governmental relations at BIO."The biotechnology industry relies on venture capital to do theresearch that will produce the cures for cancer and other devastatingdiseases. It is vital that we have workable incentives to makeinvestment in these companies attractive. "
The qualified small business stock provision first appeared in 1992 asa bill sponsored by Sen. Dale Bumpers (D-Ark.) and Rep. RobertMatsui (D-Calif.) The provision was designed to make investment inhigh-risk, long-term growth-oriented ventures more attractive toinvestors. By investing in certain small business corporations,investors could exclude from income 50 percent of the gain realizedon the sale of the stock they held for more than five years providedthe corporation met certain conditions such as any money flowinginto the company had to be new investments. Both Presidents Clintonand Bush expressed support for the bill in their 1992 presidentialcampaigns and promised to enact the legislation in the 103rdCongress.
On April 30, 1993 the Clinton Administration released the legislativelanguage for the Bumpers-Matsui incentive in its revenue proposals."The language proposed so many limitations to the Bumpers-Matsuiincentives as to make it a nullity to the investment community," saidLudlum.
In order to prevent companies from simply reissuing old stocks asnew in an attempt to meet qualification standards, the presidentsigned into law provisions disqualifying the company's stock fromthe benefits if the company redeemed existing stock within two yearsof the issuance of the new stock or if the company redeemed inaggregate more than 5 percent of its existing stock within a year ofissuing new stock it seeks to qualify.
"Congress wanted to limit the benefit of the exclusion to newinvestment," said Russell Orban, counsel for the office of advocacy atthe SBA. "The result was to make potential investors wary of thepossibility that the stock could be disqualified by events beyond theinvestors control."
The IRS regulation will permit companies to maintain theirqualifications even though they redeem some of their stocks. Theregulations allow companies to transfer stocks to employees in returnfor service, sell stocks for legitimate business purposes and forpurchases less than $10,000 or 2 percent of the value of the stockheld by the taxpayer.
"Companies sell stock for all sorts of legitimate reasons everyday,"said Ludlum. "And, they have nothing to do with trying to get aroundthese qualifications."
However, Ludlum noted at the hearing that this change marked onlythe beginning of creating a true investment incentive. For example, aprovision that companies spend 50 percent of the money they raisewithin the first two years of the stock offering also caused problems."It is unclear why these companies should be required to spendmoney against their better business instincts," Ludlum said.
The "spending speed-up" as well as other restrictions on the incentivewill most likely need to be addressed with new legislation.
"Basically, this is a gesture _ it won't solve anything," said Ludlum."We appreciate the gesture, but we would prefer a solution. We arefighting for that in 105th Congress." n
-- Lisa Seachrist Washington Editor
(c) 1997 American Health Consultants. All rights reserved.