[Congressional Record Volume 146, Number 114 (Friday, September 22, 2000)]
[Senate]
[Pages S9033-S9035]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. COLLINS (for herself, Mr. Cleland, and Mr. Roth):
  S. 3096. A bill to amend the Internal Revenue Code of 1986 to 
increase and modify the exclusion relating to qualified small business; 
to the Committee on Finance.


              encouraging investment in small business act

  Ms. COLLINS. Mr. President, I rise today to introduce the Encouraging 
Investment in Small Business Act, legislation intended to stimulate 
private investment in the entrepreneurs who drive our economy. I am 
very pleased to be joined today by my good friend, the Senator from 
Georgia, Mr. Cleland, and by the distinguished chairman of the Finance 
Committee, Senator Roth, in introducing this important legislation. 
Senators Cleland and Roth both understand the importance of small 
businesses to our economy and have been tireless advocates on their 
behalf.
  The bill we are introducing today will encourage long-term investment 
in small and emerging businesses by rewarding individuals who risk 
investment in such firms. According to the U.S. Small Business 
Administration, small firms account for three-quarters of the Nation's 
employment growth and almost all of our net new jobs.
  Small businesses employ more than 50 percent of all private workers, 
provide 51 percent of our private sector output, and are responsible 
for a disproportionate share of innovations. Moreover, small businesses 
are avenues of opportunity for women and minorities, younger and older 
workers, and those making the transition from welfare to work.
  At the same time, small businesses face unique financing challenges. 
I know this from my experience serving as the New England Administrator 
for the Small Business Administration. There are so many small 
entrepreneurs who have a wonderful idea for an innovative product but 
simply have great difficulty in getting the financing they need to get 
that idea off the ground.
  Simply put, entrepreneurs need access to more capital to start and 
expand their businesses. Small businesses that cannot deliver ``dot-
com'' rates of return are particularly having trouble raising needed 
funds. As the Small Business Administration noted earlier this year, 
``Adequate financing for rapidly growing firms will be America's 
greatest economic policy challenge of the new century.''
  A recent report by the National Commission on Entrepreneurship 
presented findings of 18 focus groups with more than 250 entrepreneurs 
from across the country. According to the report, these entrepreneurs 
were ``nearly unanimous in identifying difficulties in obtaining seed 
capital investments.'' That is the early stage financing that helps get 
a business off the ground.
  Moreover, minority-owned small businesses and research-intensive 
businesses that may take many years to develop a product find raising 
sufficient capital to be particularly difficult. Consider that it 
takes, on average, 14 years for a biotechnology company to develop a 
new pharmaceutical. This promising and growing sector of our economy 
requires patient capital--and lots of it.

[[Page S9034]]

  Cheryl Timberlake, the executive director of the Biotechnology 
Association in my State, recently wrote to endorse the legislation I am 
introducing today and to reinforce the need to stimulate more 
investment in biotech firms. Cheryl wrote that:

       Many of the Maine biotech companies are still in the 
     research stage and rely on venture capital to fund their 
     innovative drug development. Most research-stage biotech 
     companies do not yet have products on the market. Without a 
     source of revenue, there are no profits to fund their 
     business. These companies are dependent on private investors 
     for most or all of their financial support. [Therefore, 
     the Biotechnology Association of Maine] believes that the 
     changes in . . . the Internal Revenue Code [such as you 
     propose] will enable more small business investment in our 
     member companies.

  I think Cheryl summed up the problem well in Maine. We have a growing 
and diverse biotechnology sector, but they are having difficulty in 
finding the kind of financial support that they need to grow.
  I also received recently a letter of support from the executive 
director of the National Commission on Entrepreneurship. He noted that 
startup companies are ``struggling to find access to equity investments 
[particularly in the range] between $100,000 and $3 million.''
  His letter continues:

       So the question becomes: how can we motivate more 
     individuals with investment capital, who may not have 
     previous experience with entrepreneurial companies, to invest 
     in such companies at the ``seed'' or ``early-stage'' level? 
     The Encouraging investment in Small Business Act, by 
     increasing the incentives provided by Section 1202 of the 
     Internal Revenue Code, may well provide one important part of 
     the answer to this question.

  Similarly, the National Federation of Independent Business, our 
Nation's largest small business group, has also written in support of 
the legislation that the Senator from Georgia and I are introducing 
today.
  Dan Danner wrote:

       Unfortunately, while our nation's current prosperity has 
     brought unprecedented funds to certain sectors of our 
     economy, small business entrepreneurs still lack access to 
     valuable capital needed to start and expand their businesses.

  Mr. President, I ask unanimous consent that the three letters from 
which I quoted this morning be printed in the Record, in their 
entirety.
  There being no objection, the letter were ordered to be printed in 
the Record, as follows:

                                         Biotechnology Association


                                                     of Maine,

                                     Augusta, ME, August 28, 2000.
     Hon. Susan M. Collins,
     U.S. Senate, Russell Building,
     Washington, DC.
       Dear Senator Collins: On behalf of the Biotechnology 
     Association of Maine (BAM), a trade organization representing 
     Maine's biotechnology companies, our affiliated educational 
     institutions, and the not for profit research organizations. 
     I am writing to endorse the Encouraging Small Business Act.
       In an industry survey conducted by our sister organization 
     the Center for Innovation in Biotechnology (CIB), the first 
     most critical challenge to the success of biotechnology firms 
     in Maine is financing. The incredible pace of new 
     technological developments create unceasing demands for new 
     and established companies to remain competitive and grow. All 
     efforts to stay competitive require investment. Businesses in 
     Maine involved in biotechnology and life sciences look for 
     any opportunity to increase their financial footing.
       Many of the Maine biotech companies are still in the 
     research stage and rely on venture capital to fund their 
     innovative drug development. Most research-stage biotech 
     companies do not yet have products in the market. Without a 
     source of revenue, there are no profits to fund their 
     business. These companies are dependent on private investors 
     for most or all of their financial support.
       BAM believes the changes in Section 1202 of the Internal 
     Revenue Code, as proposed will enable more small business 
     investment in our member companies. The changes will enable 
     private investors to use the Code, as it was intended and 
     eliminate the duplication and unnecessary provisions that 
     complicate the process. The key is to encourage investment, 
     in whatever means possible. It should be recognized that the 
     Section 1202 has proven useful to small and large companies, 
     but it frequently burdensome, with difficult accounting 
     procedures and other unrelated hurdles.
       On behalf of the Biotechnology Association of Maine, I 
     appreciate your continued leadership and thank you for 
     proposing the Encouraging Investment in Small Business Act. 
     We look forward to working with you on passage of this 
     important piece bill. Thank you.
           Sincerely yours,
                                             Cheryl C. Timberlake,
     Executive Director.
                                  ____

                                               National Commission


                                          on Entrepreneurship,

                               Washington, DC, September 15, 2000.
     Hon. Susan M. Collins,
     Russell Senate Office Building, U.S. Senate,
     Washington, DC.
       Dear Senator Collins: I congratulate you on your 
     introduction of The Encouraging Investment in Small Business 
     Act of 2000. The bill represents one way that tax policy can 
     help address the current ``capital gap'' facing emerging 
     high-growth companies throughout the country, especially in 
     regions just beginning to build entrepreneurial economies.
       The National Commission on Entrepreneurship has just 
     completed 18 focus groups with 250 entrepreneurs around the 
     country. We asked these entrepreneurs to tell us what key 
     external constraints face the start-up and growth of their 
     companies. Finding qualified people--from entry level to 
     technical to management employees--was their number one 
     concern. But also very high on their lists was a growing 
     ``seed capital'' or ``early-stage capital'' gap. 
     Entrepreneurial companies are struggling to find access to 
     equity investments roughly between $100,000 and $3,000,000.
       In brief, the ``early stage capital'' problem is this. 
     Entrepreneurs can cobble together the equity they need up to 
     about $100,000 through the use of credit cards, second 
     mortgages, and cash investments from friends and family. And 
     if they are building a company, say in ``hot'' sectors like 
     the Internet or biotech, where the dynamics of the industry 
     require extraordinary amounts of cash early in a firm's life, 
     they can find venture capital firms to invest a minimum of 
     three to five million dollars. But if they need less than 
     $3,000,000 for the near future, investors at that funding 
     level are very hard to find.
       Highly developed entrepreneurial regions provide this 
     ``early-stage capital'' typically in the form of organized 
     ``angel'' investor networks. ``Angels'' are usually 
     previously successful entrepreneurs and other wealthy 
     investors connected with the entrepreneurial economy in their 
     regions who regularly and systematically review potential 
     investments. They then serve either as board members or 
     mentors to their new investee companies, and prepare them for 
     a round of venture capital investment or acquisition by 
     another company or an initial public offering.
       Unfortunately, regions just beginning to build 
     entrepreneurial economies do not yet have these ``angel 
     networks'' in place. So the question becomes: how can we 
     motivate more individuals with investment capital, who may 
     not have previous experience with entrepreneurial companies, 
     to invest in such companies at the ``seed'' or ``early-
     stage'' level?
       The Encouraging Investment in Small Business Act, by 
     increasing the incentives provided by Section 1202 of the 
     Internal Revenue Code, may well provide one important part of 
     the answer to this question. While we have not reviewed in 
     detail all the provisions of your legislation, your bill 
     takes two important steps in this direction.
       First, the bill accounts for post-1993 changes in tax rates 
     for capital gains of all kinds, by increasing the capital 
     gains exclusion for investments in small businesses from 50% 
     to 75%. And second, the bill excludes the gains from these 
     investments from calculations under the Alternative Minimum 
     Tax (AMT) provisions of the Code. Combined with the other 
     provisions of your bill that simplify the use of Section 
     1202, the tax incentives could well motivate many more 
     investors to allocate more of their investment dollars to 
     high-growth entrepreneurial companies. Typically, the 
     combined investments of several individuals in one such 
     company would amount to meeting the critical ``seed'' or 
     ``early stage'' capital needs of that company.
       We look forward to working with you as your legislation 
     moves forward and would be delighted to provide any 
     additional information about ``angel'' investing and the 
     growing ``early-stage'' capital gap. To that end, I have 
     taken the liberty of attaching a copy of one of our bi-weekly 
     columns that addresses the topic.
           Sincerely,
                                               Patrick Von Bargen,
     Executive Director.
                                  ____



                             NFIB, The Voice of Small Business

                                                   Washington, DC.
     Hon. Susan Collins,
     U.S. Senate,
     Washington, DC.
       Dear Senator Collins: On behalf of the 600,000 members of 
     the National Federation of Independent Business (NFIB), I 
     want to express our support for the Encouraging Investment in 
     Small Business Act, which you will be introducing in 
     September.
       As you are aware, small businesses are the engines driving 
     our economy. They constitute 98 percent of all businesses in 
     America, and they employ almost 60 percent of the workforce. 
     Additionally, small businesses have created roughly two-
     thirds of the net new jobs in the American economy since the 
     early 1970's.
       Unfortunately, while our nation's current prosperity has 
     brought unprecedented funds to certain sectors of our 
     economy, small business entrepreneurs still lack the access 
     to valuable capital needed to start and expand their 
     businesses.
       Your legislation goes along way towards addressing this 
     problem. By reforming and improving Section 1202 of the 
     Internal Revenue Code, investors will now have a true 
     incentive to invest in small businesses. Under current law, 
     Section 1202 is no longer a viable option in many of the 
     circumstances it

[[Page S9035]]

     was originally intended to address. Moreover, Section 1202's 
     impact will continue to be diluted by a scheduled decrease in 
     long-term capital gains rates applicable to most stock 
     purchased after 2000 and the probability that still more 
     taxpayers will be subject to the extremely complicated and 
     cumbersome Alternative Minimum Tax. The Encouraging 
     Investment in Small Business Act would eliminate unnecessary 
     complexity in Section 1202 and make it a more robust engine 
     of capital formation for small businesses.
       Senator Collins, thank you for your continued support of 
     small businesses. We look forward to working with you to get 
     the Encouraging Investment in Small Business Act enacted into 
     law.
           Sincerely,

                                                   Dan Danner,

                                            Senior Vice President,
                                            Federal Public Policy.

  Ms. COLLINS. Mr. President, if we want to remain the world's most 
entrepreneurial country, which is certainly the strength of this 
Nation, where small businesses generate the ideas and create the jobs 
that fuel our economy, we must continue to create an environment that 
nurtures and supports entrepreneurs. Our bill would help to create such 
an environment, not by establishing a new Federal program or adding a 
complicated new section to our Tax Code but, rather, by simplifying and 
improving a provision that is already there.
  By way of background, section 1202 was added to the Internal Revenue 
Code in 1993 in order to encourage investment in small business. The 
bill that created this section was introduced by senator Dale Bumpers 
and enjoyed widespread bipartisan support. Similarly, the legislation 
we introduce today will improve upon the 1993 legislation.
  In brief, section 1202 of the Internal Revenue Code permits 
noncorporate taxpayers to exclude from gross income 50 percent of the 
gain from the sale or exchange of qualified small business stock, known 
as QSB stock, held for more than 5 years. The concept is a sound one. 
In practice, however, this section has proven to be cumbersome to use 
and less advantageous than originally intended.
  As an article in the December 1998 edition of the Tax Adviser noted:

       Section 1202 places numerous and complex requirements on 
     both the qualified small business and the shareholder.

  The article went on to note that the provision ``is no longer the 
deal it seemed to be.''
  The Encouraging investment in Small Business Act would amend section 
1202 to eliminate unnecessary complexity and to make it a more robust 
engine of capital formation for small business. As it stands now, that 
engine needs some fine-tuning. Given the reductions in capital gains 
rates subsequent to section 1202's enactment and the fact that more and 
more taxpayers are now subject to the alternative minimum tax, section 
1202 is no longer a viable option in many circumstances. Moreover, its 
impact will continue to be diluted by a scheduled decrease in long-term 
capital gains rates applicable to most stock purchased after the year 
2000, as well as the probability that still more taxpayers will be 
subject to the AMT.
  The Encouraging Investment in Small Business Act makes a number of 
improvements to this section of the code. First, the bill increases the 
amount of qualified small business stock gain that an individual can 
exclude from gross income from 50 percent to 75 percent. Second, the 
legislation strikes the section of the Tax Code that makes a portion of 
the section 1202 exclusion a preference item under the alternative 
minimum tax. These two changes rejuvenate the section and make it the 
potent generator of small business capital that it was intended to be.
  Currently, an individual who invested in QSB stock, sold it, and 
found her or himself subject to the AMT, would face an effective 
capital gains rate of 19.9 percent or just .1 percent less than the 
existing rate on long-term capital gains. When we consider that the 
number of taxpayers subject to the AMT is predicted to triple over the 
next 5 years, it becomes crystal clear that a fix is needed now. The 
legislation would take additional steps to make section 1202 more 
attractive to small businesses and investors.
  The legislation may sound complicated and, indeed, revising tax law 
is always a challenge, but the bottom line is that our legislation 
makes a number of common sense changes that are all designed to 
encourage more investment in small businesses, the engine of our 
economy.

  These changes have been endorsed by the leading small business 
organizations. They are changes recommended by a recent Securities and 
Exchange Commission forum on small business capital formation, and they 
are the changes needed to accommodate and, indeed, to foster the 
capital-raising needs of small business, the foundation of our national 
economy.
  I thank the Chair and yield the floor.
  The PRESIDING OFFICER. The Senator from Georgia.
  Mr. CLELAND. Mr. President, I applaud the distinguished Senator from 
Maine, Ms. Collins, for her gargantuan effort to tackle the Byzantine 
aspects of the U.S. Tax Code to see if there is some way we can assist 
our venture capitalists to help our small businesses, particularly our 
high-tech small business more.
  It is a pleasure to work with Senator Collins, not only in this 
endeavor but in other endeavors. We serve together on the Government 
Affairs Committee. One of our responsibilities is oversight of the 
Securities and Exchange Commission which looks at the world of 
investments in businesses in this country. I applaud her for her 
insight, for her innovation in this area, she is right on target. I am 
pleased to associate myself with her remarks today and pleased to 
cosponsor the legislation of which she speaks.
  On that point, in terms of being relevant to what is driving the 
American economy, not only in my home State of Georgia, particularly in 
Atlanta, where more and more high-tech businesses are located, but in 
Silicon Valley, where I just got back from a tour in early August, it 
is obvious that we are generating a lot of talented young minds in 
America with great ideas and that those young minds can form together, 
and with the right capital at the right time can generate businesses 
that literally were unknown or unheard of just months ago. We see those 
kind of successes now driving the American economy. Information 
technology economies now provide the leading edge for American economic 
growth and our prosperity. I couldn't agree more with the Senator from 
Maine. We will do everything in our power to assist this legislation 
and move it forward.
                                 ______