The Examination of Entrepreneurial Investment Tax Credits: Angel vs. Crowdfunding Investing

• In Event: Stakeholder Response to Tax and Technology Interventions

Abstract

Many states use equity-investment tax credits to incentivize investments for the purpose of spurring entrepreneurial activity and, in turn, economic development (Acs, Asterbro, Audretsch, and Robinson, 2016; Bell, Wilbanks, and Hendon, 2013; Erken, Donselaar, and Thurik, 2016). Yet, there is little evidence about whether investment tax credits accomplish their objectives (Ebersole, 2017). Further, little is known about the investing decisions of low net-worth investors, whom the SEC has only recently permitted to make equity-investments in startups via crowdfunding platforms. This paper experimentally examines whether tax credits increase an individual’s likelihood to invest in startups across the two regulated investing methods, Angel and Crowdfunding, which differ in market and agency risk. Results indicate that equity-investment tax credits are effective at incentivizing investors to make risky capital investments in startups via Crowdfunding. Notwithstanding the tax credit, individuals are more likely to invest when the investing method is characterized as Angel investing, characterized by lower agency risk. The investor accreditation level of the individual (unaccredited vs. accredited) did not influence the effectiveness of the credit. Yet, unaccredited individuals are more likely to invest overall. These results indicate that current investment tax credit programs, which target Angel investing of accredited investors, may not be necessary to incentivize investors. Instead, tax credit programs may be more effective and offset risk and cost for unaccredited investors if tax credit legislatives are adapted to align with the increasingly popular Crowdfunding regulation.

Authors

• Laura Ruth Barthel, Eastern Kentucky University

• Jennifer K Schafer, Kennesaw State University

• Diana Falsetta, University of Miami