Need more detail on QSBS? Illinois Workers and Businesses Benefit from VC Investment
Illinois is the Midwest leader in venture capital investment creating new jobs, new products and services, and new approaches to living healthy lives. Policy makers in Illinois have historically partnered with the private sector in creating the Illinois VC ecosystem through the Illinois Growth and Innovation Fund (ILGIF) and deploying tools such as the Illinois Angel Investment tax credit program and a host of other thoughtful and forward-thinking policies. Since 2000, member firms of the Illinois Venture Capital Association (IVCA) have invested in more than 900 Illinois-headquartered companies, helped create more than 370,000 jobs, and supported business that have raised more than $129B in capital.
According to the Chicagoland Chamber of Commerce:
Chicago is one of America’s leading tech hubs with 18% growth in the tech workforce in the last decade.
- Chicago’s tech ecosystem is essential to the city’s economy, employing over 106,000 people – 8% of the Chicago workforce – and spurring significant economic activity and hundreds of millions of dollars in tax revenues for our state and local governments.
- The tech ecosystem grew 18% in Chicago over the past decade compared to the overall economy, which saw growth of just 1%. Tech has also demonstrated greater resilience and supported Chicago’s recovery during the COVID-19 pandemic.
- The growth is due in part to new start-ups, but also because tech cuts across every industry in Chicago, from government to health care, Fortune 500 and small and mid-sized businesses.
- Drawing people to Chicago are the region’s deep bench of talent from local universities, a diverse workforce pipeline, central location, and affordable cost of living.
However, Illinois trails nationally, receiving only .8 to 1.0% of venture capital dollars (NVCA data) invested even though Illinois population is ~3.7% of the country and Illinois GNP is ~3.9% of the country, compared to New York which receives ~9.5% and Massachusetts ~5.1% of venture capital funding
ILLINOIS PROGRESS PUT AT RISK
SB 3019 (PA 104-0468) (calendar 26 / FY27 revenue omnibus) included a provision which decoupled Illinois from the federal tax code Section 1202 Qualified Small Business Stock Exclusion (QSBS) which jeopardizes future VC investment in Illinois. Recognizing and acknowledging the delicate balancing act required to produce a revenue omnibus, the Illinois Venture Capital Association encourages the legislature and the administration to repeal this provision in the Fall veto session until it can it be studied further.
- The introduced bills including provisions to decouple QSBS were not subject to legislative due diligence or stakeholder comment. SB 3796 was never referred to a standing committee; HB 5125 was sent to the Revenue Committee briefly and then returned to the Rules Committee. Illinois entrepreneurs deserved an opportunity to inform legislators prior to this provision being included in the final hours of the session in a must pass bill.
- The benefits from QSBS only occur for investments made for at least 5 years (and in many cases much longer). The objective of QSBS is to encourage long-term investments in innovation and entrepreneurship which turns into economic growth and job creation.
- Investments made 5 or more years ago will now be taxed, even though there was no expectation of that when the investment was made. A retroactive tax on investors who made long-term, good-faith investments sends a negative signal to the business community. And it creates a huge incentive for investors, founders, and companies to invest outside Illinois or relocate out of Illinois.
- The long-term ramifications for future investments could be even more dire with fewer dollars being invested in Illinois and the best entrepreneurs and investors relocating elsewhere. As noted above, Illinois receives about 25% of the dollars it should based on population and GNP. Keeping this provision is very likely to further reduce this key statistic.
- Failing to address the 1202 provision in SB3019 makes Illinois vulnerable to losing its leadership position in the Midwest over the long term.
WHAT QSBS DOES
QSBS traces its origins back to 1993 and the Clinton administration. It subsequently was improved by Democratic majorities in the U.S. Congress in the Small Business Jobs Act in 2010 and signed into law by President Obama (The Obama Jobs Act). Supporters of this provision in SB3019 have argued this was in response to H.R. 1, the recently enacted federal budget legislation.
What it really did was reverse years of pro-business policies largely attributed to Democratic legislatures and presidents. QSBS offers incentives for investment in early-stage growth companies. It has been extremely successful in getting startups off the ground and into the economy which has benefitted entrepreneurs, employees, investors, and consumers working with those products and services. SpotHero and Grubhub are just two examples of companies created in Illinois where QSBS played an important role in their creation and growth.
ILLINOIS SHOULD RESTORE OPPORTUNITY
The IVCA encourages Illinois policy makers to repeal the decoupling provision for QSBS in SB 3019 and continue to offer reasonable and meaningful tax incentives to startup companies. It is noted that California is one of the states which has also “decoupled” – this is a genuine and rare opportunity for Illinois to potentially capture VC and startup activity which might otherwise take place in California -- the state of New Jersey rejected efforts to decouple, opting to offer the incentive for VC investment in the state.
The IVCA looks forward to working with you to evaluate the opportunity to restore this important economic development provision in state law and to further work with you to advance an Illinois economy which welcomes the ideas and the jobs of the future.
Questions? Please contact Dave Stricklin (312) 771-2562 / david@stricklinassociates.com