Raising capital is an important, but often daunting and difficult, task for entrepreneurs who are just starting out in a new business venture.
Private investment can be an effective alternative way of raising capital than debt and businesses can benefit from not only the investor’s money, but also their expertise.
However, private investors can be deterred by the level of risk involved in investing in small businesses, especially early stage businesses.
This is where the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) (together, the Schemes) come in.
The Schemes are government backed, tax incentivised schemes which aim to incentivise investors to invest in start-ups and early stage businesses.
Under the Schemes, investors can invest up to £1,000,000 (EIS) or £100,000 (SEIS) in each tax year, in return for equity.
Both schemes carry generous tax advantages, including:
Whilst the Schemes can provide a significant incentive for investors, and an effective means of raising capital for new businesses, the “sting in the tail” is that the Schemes have a lot of criteria to satisfy and can be difficult to get right.
The investor shares must be ordinary shares with no special rights (e.g. no preferential dividends) and the funds raised must be used for a “qualifying business activity” as prescribed by HMRC.
There are also other criteria to satisfy, including maximum employee limits (no more than 25 employees for SEIS and 250 employees for EIS) and gross asset tests (£200,000 for SEIS and £15m for EIS).
Legal and tax advice should be taken, and HMRC approval obtained in advance, to ensure that the business meets the strict criteria.
It is also crucial to ensure that the constitutional arrangements of the business are up to date, and reflect the intentions of the parties. A shareholders’ agreement and articles of association should be drawn up to address issues such as:
It is crucial for investors and entrepreneurs alike to ensure that the relevant approvals and constitutional documents are in place to protect their respective investment and business interests.
We have a specialist team of corporate lawyers who advise on all legal aspects of SEIS and EIS investment. If you wish to discuss any issues around SEIS or EIS, or if you require any other investment advice, please contact a member of our Corporate Commercial department to discuss.