State auditors couldn’t determine how well the Commerce Department follows procedures to ascertain whether businesses are leaving Kansas earlier than allowed under a program intended to help small, innovative startup companies.
A new legislative audit out Wednesday questioned if the agency is consistently following the processes that were developed after a 2020 audit, which found that some businesses participating in angel investors program left the state sooner than allowed by law.
At the time of the 2020 audit, all businesses participating in the program were required to stay in Kansas for 10 years, although that has since been changed by the Legislature.
The 2020 audit found three instances where a business left Kansas sooner than the 10 years required by law at a cost to the state of about $340,000.
A fourth business whose investors received $25,000 in tax credits may also have left too soon, the 2020 audit reported.
A year later, the Legislature changed the requirement for remaining in the state to 10 years for bioscience businesses and five years for all other businesses.
Auditors recommended at the time that Commerce proactively enforce the requirements in state law.
Commerce has since implemented a process to monitor whether businesses participating in the angel investor program are leaving the state sooner than state law allows, but auditors said the process needs improvement.
The agency said it’s working toward improving the system in a way that it will provide more accountability moving forward.
Started in 2004, the angel investor program provides $6.5 million in yearly tax credits to investors in certain types of innovative companies in areas such as computer systems and medical manufacturing, as well as scientific and research development services.
An accredited investor is allowed a 50% tax credit on their investment of up to $100,000, per qualified business per year.
Additionally, for each tax year, an angel investor is limited to claiming no more than $350,000 in tax credits.
The tax credit is intended to partially offset the cost of an investment, lowering investors’
risks and encouraging them to invest when they otherwise wouldn’t.
“Between 2015 and 2022, investors received $44.4 million in tax credits for investing $102.1 million in Kansas businesses,” the audit reported.
Almost 1,2000 investors put money into 123 Kansas start-ups during that time period, the audit reported.
Commerce is responsible for tracking whether businesses stay in Kansas as required by state law after they participate in the program.
Businesses that leave the state too early must repay the state in an amount determined by the secretary of commerce.
Commerce officials told the auditors that they use the Department of Labor’s unemployment data and secretary of state’s business listings to determine if a business is still in Kansas.
If the staff finds that a business may have left the state, officials told the auditors the agency’s attorneys do more investigation before pursuing legal action.
However, auditors say they couldn’t evaluate how consistently Commerce follows the process because it’s not well documented.
The agency “also couldn’t provide high-level data about how many businesses Commerce found to be compliant and non-compliant each year or the number of businesses
they’re investigating or pursued legal action against,” the audit said.
Based on the information auditors reviewed, they said it appeared that Commerce may
not review all businesses timely.
For example, Commerce officials told the auditors that they cross-matched all businesses with data at the Department of Labor and secretary of state data.
“But they said they hadn’t completed further investigations on businesses that may have left Kansas,” the audit said.
The audit suggested that some of the issues it found could be attributed to Commerce not having enough staff to track the businesses.
Commerce officials said one person is assigned to the program.
“Under their current process, one staff member doesn’t appear to be enough to manage day-to-day operations and investigate past participants,” the audit said.
Commerce officials said they’re revising their process to make it more efficient. “Commerce plans to start an annual survey that may increase the speed and efficiency of their monitoring process,” the audit reported.
Commerce will ask for updates on businesses’ statuses in the survey and require businesses to provide documentation showing they employ Kansans.
Commerce said it will continue to work with the Department of Labor and secretary of state to document the investigation process to guarantee that businesses are staying in Kansas to comply with the law.
The agency said that additional staff would help but acknowledged recognizing the importance of thorough documentation.
Commerce said it would continue to update its monitoring processes “to continue to be successful within our current capacity.”
The overall goal of the audit was to determine whether the tax credits for Kansas start-ups were influencing investor behavior.
The Commerce Department said the audit validated the agency’s view that the program works as intended.
“The innovative and dynamic Kansas companies who receive angel investments are the
entrepreneurs and early-stage businesses who keep our state economy vibrant and keep Kansas at the forefront of growth,” the agency said in a statement.
Surveys conducted by the auditors indicated that investors and businesses like and use the
program, and many said it affected their investment decisions.
However, determining whether the program leads to better business performance is still
unclear, the audit concluded.
The 2020 audit found that businesses participating in the angel investor program survived about as long as nonparticipating peer businesses.
“We couldn’t tell whether this meant the (angel investor) program had no effect on businesses, or if it helped lower-growth businesses perform better than they otherwise would have,” the audit said.
In the most recent audit report released Wednesday, auditors surveyed 1,073 investors or groups of investors that participated in the angel investor program from 2015 to 2022.
Most investors responding to the survey – 67% – said the angel investor program was very or extremely important to their investment decisions.
However, they listed other important factors such as the quality of the business management team, the quality of the business product or service, the expected return on investment and the quality of the business plan.
Most investors – 58% – said they would have invested less in start-ups or invested at a later date if the tax credit had not been available.
Another 27% said they wouldn’t have invested at all, saying that investing would have been too financially risky without the tax credit.
Another 10% said the availability of the tax credit would not have changed their decisions one way or the other.
Businesses that were surveyed – 158 owners, executive officers, or finance officers – said the investments were important and helped them do things they otherwise wouldn’t have been able to do.
Almost 80% of those participating businesses said that the angel program investments were very or extremely important.
That was followed by personal funds at 69%, money from family or friends at 54%, venture capital at 29% and state grants and loans at 23%.
Most of the businesses surveyed said their businesses would have started even without the angel investor program.
However, 56% said their businesses would have hired fewer employees without the program, and 44% said their businesses would have had to use less desirable types of financing, the audit said.
Twenty-seven percent said their businesses would have offered fewer or lower-quality products or services, and 13% said their businesses would have started later.
“The survey results,” the audit said, “suggest the program helps participating businesses.
“Most investors told us they wouldn’t have invested as much or as soon without the (angel investor) program. And businesses told us the program helped them start sooner, hire more people, or offer more or better products.
“However, we don’t know if investors and businesses who didn’t respond to our survey have different opinions from those who responded.
“Most investors and businesses that participated in the program didn’t respond to our survey. They may have different perspectives on the program.”
The Commerce Department believes the program has contributed to the state’s overall economic development success.
“Many angel investors not only invest their money but their time by consulting or mentoring the entrepreneur,” the department said in a statement.
“Having (the program) in the Kansas economic development toolbox contributes to the success our state is having.”
