Early Investors are the Most Vulnerable in latest QSBS Proposed Amendments


How Early-Stage Investors Feel About the Proposed BBBA

Gillian Tett, editor-at-large of Financial Times, shared her stance on the stark divide between the “haves” and the “have nots” of the investment universe. Early-stage investors are left feeling vulnerable by the proposed Build Back Better Act (BBBA), while lobbyist groups in Washington are protecting late-stage and private equity investors in the latest version of proposed amendments.

In 2010, the Obama Administration introduced the Qualified Small Business Stock program as a way to expand upon a previous small business tax incentive program. The idea was to incentivize investors, including angel investors, to trade risk for potential reward by funding small businesses with less than $50 million in assets for a minimum of five years.

Those who invested in “early stage” companies responded. In the world of small business investing, major success stories only happen once in a while. The QSBS incentives promote taking risks on innovative new companies with the potential reward of a tax-free gain. QSBS made it possible for investors to pour capital into small businesses with the hope of stimulating the economy.

With BBBA a looming threat, angel investors and other “early stage” investors are disproportionately affected by the QSBS changes and are understandably furious. Only “4.1 percent of all venture funding currently goes to seed finance,” according to a Carta report  highlighted in the Financial Times

Lobbyist Groups’ Influence Protect Venture Capitalists and Private Equity Investors 

Later stage Venture Capitalists and Private Equity investors would have been more impacted by the carried interest provisions in the BBBA, however, Congress removed the proposed changes to carried interest, and likely did so because the Private Equity industry has more lobbyists protecting their interest and their industry in DC. This advantage has given these companies a leg up over their early investor counterparts.

Undermined Trust Leaves Investors Feeling Vulnerable in these Uncertain Times

Investors are feeling nervous, left with little certainty about their current investments and how their long-term investment plans might be retroactively impacted. Tett says, “the capricious, retroactive nature of the reforms is likely to (further) undermine investor trust in US tax structures or the consistency of future Washington policymaking.” 

Without the same lobbyist support of late-stage and private equity investors, angel investors are looking to each other in an attempt to unify their voices with shared concerns. 

As angel investors are left to make sense of what a reformed and adopted BBBA would look like, the question becomes, what can the angel investing community do to help save QSBS?

At CapGains, we are proud to be working hand-in-hand with the Angel Capital Association and others to fight the proposed changes to QSBS.  Stay up-to-date on our efforts by referring back to our page with regular updates. Would you like to share an angel story of your own? We want to hear from you.

This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.

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