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The demand for EIS investments is
increasing. In the past, uncertainty about
where this niche range of products sits
within the regulatory landscape sometimes
limited their appeal to advisers and
wealth managers. However, with EIS
investments now a firmly established
concept, the industry is seeing increasing
engagement from intermediaries as well
as increased take-up of direct sales.
There are a number of ways of accessing
EIS investment opportunities. Whichever
of these routes is selected, the result will
always be ownership of shares in the
company (whether beneficially or directly)
so that EIS relief can be claimed. However,
the route selected makes a significant
difference to how (and if) the
regulations apply.
SINGLE COMPANY EIS
In order to be appealing to potential
investors, many companies who are looking
to raise money by issuing shares seek to
be EIS qualifying. Minimum investment
levels range from £10,000 – £30,000.
From a regulatory perspective, single
company issues are the least complex
EIS arrangement. In fact, single company
fundraising does not even have to require
the involvement of a regulated firm.
As long as the EIS company is willing to
limit its target market to certain categories
of investor, and undertakes its own
distribution, a regulated firm does not
need to be involved. Having said that, some
companies seeking a wider distribution
network will bring on a promoter to source
investors for them and this promoter
should be regulated by the FCA.
Although it may not be complex, the lack
of regulation in such an arrangement
provides investors with fewer protections
and rights of recourse if something
goes wrong. It therefore may not be
as appealing to investors as other EIS
arrangements. In addition, without a fund
or portfolio manager the investor will
have to carry out their own due diligence
and assessment of the opportunity.
Investors may also find that as a single
investor they lack representation and
influence on the company board, or
alternatively they might be called upon to
provide additional capital to unlock the
value of the investment – something that
may be easier for funds rather
than individuals.
Without the economies of scale of collective
investing, single company investing also
makes it harder for smaller portfolios
to diversify. However, for very engaged
investors running their own portfolio of
single company investments can be fun,
exciting and rewarding (as well as
very demanding).
In addition, the ban on adviser commission
brought in by the Retail Distribution
Review (RDR) does not usually apply to
a single company raise. In all other EIS
arrangements, as with most investment
products, the ban applies when a
recommendation is made to a retail client
to invest in an EIS product and the adviser
must agree their charges directly with
their client.
EIS FUNDS
Funds pool and manage investors’
money on a common basis. The fund
manager typically selects EIS qualifying
investments according to an investment
strategy which determines the profile of
the companies that they will invest in,
any investment restrictions they impose
and their overall approach to investing.
Investors sign up to this strategy and the
fund will be managed in line with this.
There are a huge number of funds to
choose from, some are generalist but many
specialise in a particular segment of the
market or particular funding stage. Funds
can also be ‘approved’ or ‘unapproved’. In
an approved fund, for Income Tax relief
purposes investors will be treated as having
made the EIS investments at the date of
the fund’s close, which provides certainty
for the investor. To qualify as an approved
fund, the prospectus must be reviewed by
HMRC, and at least 90% of the fund’s assets
must be invested within 12 months. This
usually requires an existing pipeline of deal
flow, as making selective investments in
such a short time frame is a big challenge.
In an unapproved fund, Income Tax relief is
available following each investment by the
manager. This is often preferred as there
is greater flexibility around the Income
Tax relief – especially when the ability to
carry back tax relief is taken into account.
One important point to be clear on – there
is no real difference in the risks with either
an approved or unapproved fund and just
because a fund is approved, advisers and
investors should not assume that it is in
some way ‘better’ than an unapproved
one. As noted above, it simply refers to the
technical status of the fund in the eyes
of HMRC.
Typically the investments are all held in
a nominee name, by the fund manager
or a custodian, and the investors have
beneficial ownership of the shares in order
to benefit from the potential tax reliefs.
EIS funds promise the benefits of scale
and investment expertise. A fund-based
approach means that investors can diversify
their risk across a broad portfolio of
investments, even if they have a relatively
small amount of capital to invest (see the
section
later for more
insight into the importance of diversification
in this market).They also benefit from the
fund manager’s expertise and resources
– meaning, in principle, that only the most
attractive opportunities are selected for
investment and thorough due diligence is
undertaken before money is committed.
Unlike an individual investor with a modest
contribution, when a fund that makes a
significant investment in an EIS qualifying
company, the fund manager will often have
influence over the board and can therefore
look after their investors’ interests in an
ongoing capacity. This could include making
sure that the investors’ shareholdings are
not diluted, influencing the timing of an exit,
ensuring EIS qualifying status is retained
and that the company is headed in the
right direction.
In order for investors to access the tax
relief, EIS funds do not have a typical
fund structure and are instead simply a
collection of money and shares held by
the manager and collectively managed on
behalf of the investors in the arrangement.
From a regulatory perspective, EIS funds
can be easier to promote and recommend
than traditional investment funds. The vast
majority of EIS funds are not categorised
as UCIS, making distribution easier. This is
possible thanks to a dedicated Enterprise
Initiative Scheme exemption within the
FSMA Collective Investment Schemes Order.
INVESTING IN EIS
