In addition to the ongoing conversations in the Senate related to the House of Representatives’ version of the $1.75 trillion Build Back Better Act (BBBA), the federal government will be seeking stricter regulations for Special Purpose Acquisition Companies (SPAC) in the near future. Background on SPACs and the current provisions within the BBBA impacting the business operations of life sciences companies is detailed below.

On a positive note, as was featured in BIO’s daily newsletter, a report from the Schmidt Futures Task Force on Synthetic Biology and the Bioeconomy noted that the U.S. bioeconomy can help the country reach net-zero carbon emissions through the use of manufacturing processes that rely on biomass rather than petroleum and “capture the lion’s share of what is projected to be a $4 trillion global industry”—but we need to invest in it. 

The task force recommends the U.S. government “commit to remaining the global leader in biobased science and scale up manufacturing” with investments including:

• Establishing and funding a 5-year, $600 million Bioproduction Science Initiative (BSI) that expands budgets and remits of relevant science agencies.
• $1.2 billion in an extensive and flexible bioproduction infrastructure—one that can process multiple feedstocks using multiple organisms to produce multiple products at multiple scales—over two years to expand domestic bioproduction capacity in an equitable and strategic manner.
• Establishing creative public-private partnerships with the goal of reducing the time it takes to successfully scale new products from several years to months.

A week after the Schmidt Futures report was released, the Biden Administration signaled that in addition to the drug pricing and fiscal implications to businesses and investors in the BBBA, regulatory changes are coming in the near future for Special Purpose Acquisition Companies (SPAC). The popularity of this route for taking a private company public has risen in the past few years. Several Colorado life sciences companies have found success utilizing this route. The Association will continue to monitor activity on this developing issue from the Securities and Exchange Commission.

CBSA conducted outreach to the offices of Senators Michael Bennet and John Hickenlooper in November with a letter on the BBBA’s provisions related to the Orphan Drug Tax Credit. As a follow-up to the letters, productive meetings took place with the staff from both offices. CBSA along with our partners at BIO and the Council of State Bioscience Associations (CSBA) will continue to advocate with policymakers against the regressive business proposals within the Build Back Better Act (BBBA), background information on the current proposals is outlined below.

Special Purpose Acquisition Company (SPAC)

Earlier this week, Gary Gensler, Chair of the U.S. Securities and Exchange Commission (SEC), signaled his intent to have the Commission impose stricter regulations on SPACs. A SPAC is a company that has no commercial operations and is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring or merging with an existing company. 

Gensler noted the SEC is looking out for firms that want to use SPAC mergers to avoid the regulatory implications associated with traditional IPOs. He was quoted giving the following rationalization, “These three core tenants about disclosure, marketing, and gatekeepers to ensure that the protections in the traditional IPO market are comparable here and that we don’t have some imbalance or what people might call an arbitrage between the two approaches.”

Gensler said the tougher rules would aim to enhance investor protections by focusing on the disclosures made by SPACs, by examining how the companies market themselves, and by ensuring banks hired by SPACs are “digging deeper” and providing the appropriate level of scrutiny.

Orphan Drug Tax Credit (ODTC) 

Congress enacted the ODTC in 1983 to encourage biotechnology and pharmaceutical companies to develop therapies for rare diseases and conditions. The credit can be taken on qualified clinical testing expenses incurred for FDA-designated orphan drugs. Prior to the Orphan Drug Act’s passage in 1983, there were less than 40 drugs approved in the United States specifically to treat rare diseases. Congress last addressed the ODTC as part of the Tax Cuts and Jobs Act of 2017, where the credit was halved from 50% to 25%. And under the current House proposal, drug manufacturers would be ineligible to collect the ODTC if the drug had previously been approved by the FDA for a separate indication.

Capital Gains Tax Rate 

Under the current proposal, the highest capital gains tax rate would increase to 25% from 20% and this increase would retroactively apply to capital gains recognized after Sept. 13, 2021. And for the tax year 2022, individuals could face a maximum 31.8% combined tax rate on long-term capital gains. This a combination of the base 25% capital gains rate, plus a 3.8% net investment income tax, and 3% high-income surtax. Additionally, the holding period for carried interest would be extended from three years to five years. 

IRA Provisions

The package would make two notable changes to the investments that may be made in an IRA. These changes would be effective starting in 2022 and would have a two-year grace period for investors to address any existing investments that are no longer in compliance. The purpose of these changes is to limit the ability of certain IRA owners to invest in investments that aren’t generally publicly available, for example, opportunities open only to “Accredited Investors”. 

The second change would prohibit an IRA to be invested in any investment where the IRA owner owns 10% or more of the entity a which is a significant decrease from the current ownership threshold of 50% or where the IRA owner is an officer or director.  

Qualified Small Business Stock (QSBS)

The QSBS rule has been an effective tool for promoting investment in startups and early-stage growth companies. This is particularly the case for early-stage and pre-revenue life sciences companies that already face challenges with attracting investors. The rule limits capital gains taxes for founders, employees, and investors in qualified small businesses on the first $10 million in gains derived from qualified company stock. Shares acquired from a secondary sale are ineligible. To qualify, the enterprise (C-Corp) must, among other things, have less than $50 million in assets, 80% of which are used in the active conduct of a qualified business. Lastly, stock owners must hold the stock for at least five years.  

CBSA advocates for proposals that strengthen the incentives necessary to sustain innovation in the life sciences and create high-wage, high-value jobs. Whether it is related to trade, intellectual property rights, or tax incentives we will continue to make the case to policymakers that these sweeping policy efforts will have sustained impacts on our state’s life sciences ecosystem. 

CBSA’s USPTO Roundtable

This week, CBSA hosted the annual U.S. Patent and Trademark Office (USPTO) Roundtable, sponsored by Holland & Hart. The discussion was led by Molly Kocialski, the Regional Director of the Rocky Mountain USPTO Office, and included Sarah Al-Awadi and Monica Shin, both of whom are Primary Patent Examiners. This was a great opportunity for the ecosystem to learn about patent examination, recent statistics and to get direct examiner insights on experimental results, intended use, and property/functional limitations in claims. You can watch the entire roundtable here. Access code: Roundtable!

•