Angel Investor Tax Credit Victory in Louisiana Creates Expanded Opportunities

By: Pat Gouhin, Chief Executive Officer

After a tireless effort ultimately met with success, Louisiana angel investors are able to celebrate new opportunities for the early-stage ecosystem!  On August 20, 2021, Louisiana Angel Investor Tax Credit program rule changes made by Louisiana Economic Development went into effect.  This tax credit is now available for investments that are in the form of convertible or subordinate debt.  The significant change enhances the availability of capital for Louisiana-based companies. 

For the past three years, angels in Louisiana (led by NO/LAAN Angel Network in New Orleans and the New Louisiana Angel Fund in Shreveport) have been working tirelessly to see investments structured with convertible debt capital to be made eligible for the Louisiana Angel Investor Tax Credit (LAITC).  Advocates garnered support from legislators in each chamber of the Legislature from all regions within the state of Louisiana.  Although the program change was ultimately not made via legislation, with the support of these legislators, a bill was drafted while gaining additional support from local economic development organizations throughout the state.

When the issue was brought to LED’s attention last fall, LED developed a unique alternative solution that did not require legislation. The public policy solution was a change to the language in the tax credit program rules to incorporate convertible and subordinate debt.  LED’s efforts to work collaboratively with GNO, Inc. and a NO/LAAN’s Director, who is also a member of the ACA Public Policy committee, resulted in an agreement to move forward with this unique approach to achieve a successful outcome for this critical initiative to include convertible debt and subordinate debt, rather than incur the legislative process to achieve our objective.  This approach proved to be very successful.  The updated information was published in the Louisiana Register, the State’s formal rules promulgation process.  Following this rules promulgation process which included a period for public comment, the language modification went into effect August 20, 2021, and now includes Convertible Debt capital. 

This new language empowers entrepreneurs to build companies, create jobs, and grow the economy in the state of Louisiana. ACA applauds all of the time, dedication and hard work necessary to represent the best interests of both angels, entrepreneurs and the broader investment community!

Louisiana Angel Investor Tax Credit – The Details*

To qualify for the Angel Investor Tax Credit, a company must be certified by the Louisiana Economic Development as a Louisiana Entrepreneurial Business. To obtain that certification, a company must have its principal business operations in Louisiana, expect greater than 50% of its sales to come from outside Louisiana, have 50 or fewer full-time employees, and have either less than $10 million in gross annual sales or less than $2 million of net worth. The credit is not available for investments in companies primarily engaged in the business of retail sales, real estate, professional services, gaming or gambling, natural resource exploration or extraction, or financial services.

The tax credit is earned when accredited investors (primarily high net worth individuals and entities owned by such individuals) make an investment in a certified Louisiana Entrepreneurial Business. The credit equals 25% of the investment (35% if the investment qualifies for federal Opportunity Zone benefits) and is taken in equal portions over two years to reduce the investor's Louisiana income tax liability. The credit is also transferrable, which means an investor can sell it if he or she does not have enough Louisiana income tax liability to fully utilize the credit.  

Prior to August 20, 2021, the tax credit could be earned only if the investor made an equity investment in the company; that is, purchasing stock in a corporation, a membership interest in a limited liability company, or a limited partnership interest in a limited partnership. Many private investments in start-up and developing companies, however, are in the form of convertible debt. In a convertible debt investment, the investor receives a promissory note from the company, which may be converted into equity in certain circumstances (primarily when the company sells equity in the future). Previously, investors in convertible note transactions could only hope to obtain the tax credit if and when the conversion occurred in the future. But if the company failed before then, as many start-up companies do, the investor was deprived of the credit. This made it harder for companies to raise capital through convertible debt.

By allowing and incentivizing investors to make investments in Louisiana Entrepreneurial Businesses in the form of convertible debt through the Angel Investor Tax Credit, the new regulations issued on August 20 remedy this problem. The new regulations also allow certain investments in the form of subordinated debt to qualify for the tax credit. Subordinated debt is defined in the regulations as debt that requires no principal payments for at least three years, is not guaranteed by a third party, is not secured by any assets of the company, and is subordinated to all indebtedness and obligations of the company to its general creditors.

*Details of the Louisiana Angel Investor Tax Credit and enhancements has been provided by Stone Pigman Law Firm in New Orleans and Baton Rouge, LA.

Official information on the Angel Investor Tax Credit can be found at Louisiana Economic Development website here: