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This exemption means that EIS are not
a UCIS where they meet certain criteria,
including, but not limited to, having a
minimum investment level of £2,000 and
no withdrawal rights for investors in the
underlying shares for a period of seven
years (although they can withdraw cash).
In addition, the FCA recently confirmed
EIS funds are not subject to the new ban
on promoting funds and other collective
vehicles, (referred to as ‘non-mainstream
pooled investments’ or NMPIs), to retail
clients so long as they are not structured
as a UCIS. As with all products, the FCA
would only want promotions to be made
where these are suitable for the recipient
but this additional flexibility allows
advisers to exercise their discretion.
There are also clear standards when it
comes to fund management. EIS funds have
recently come under European legislation
in the form of the Alternative Investment
Fund Managers Directive (AIFMD). On the
22
nd
July 2014, all Alternative Investment
Fund Managers (AIFMs) became subject
to either the lighter-touch standards for
small AIFMs or the more prescriptive
regime for full-scope AIFMs. The regime
that applies will depend on the manager’s
total assets under management across
all of its alternative investment funds.
Of course, funds, as opposed to single
company investments, do introduce another
layer of charges, making the investment
more expensive. Charges vary but are
generally around a 3% initial charge and a
2.5% ongoing annual management charge,
and perhaps a performance incentive (fee)
of 20% of the exit proceeds once targets
are achieved. Minimum investment levels
vary greatly from £5,000 to £50,000.
MANAGED PORTFOLIO
SERVICES
Portfolios can be an attractive option,
especially for investors wanting access to
EIS but who are less familiar with typical EIS
sectors or early stage company investment.
As with a fund investment, investors can
benefit from scale and expertise. However,
unlike a fund, the investments are made
on the investor’s behalf on a discretionary
basis and the investment manager will
build up a bespoke portfolio for each
investor based on that particular investor’s
needs, circumstances and risk appetite.
Providing such a bespoke service comes
with a significant increase in the regulatory
burden for the portfolio manager and many
EIS specialists do not have the resources to
undertake the level of suitability analysis
Of course, the platform will charge for their
services, with charges still in the range of 3%
initial and 2.5% ongoing with performance
incentives. Minimum investment levels
are around £10,000 to take part in the
service and around £5,000 for each
individual investment which can make
diversification across managers, sectors
and funding stages easier. Some platforms
even offer a regular contribution feature.
CROWDFUNDING
Crowdfunding platforms are a new
entrant into the EIS space and have further
raised the profile of EIS and Seed EIS.
According to the FCA, crowdfunding is:
“A way in which people, organisations and
businesses (including business start-ups)
can raise money through online portals
(crowdfunding platforms) to finance or re-
finance their activities and enterprises”.
Often this fundraising takes the form of EIS
qualifying companies selling unquoted shares.
Prominent examples include Crowdcube, the
world’s first equity crowdfunding platform and
SyndicateRoom, which gives its members the
opportunity to invest alongside experienced
business angels on a like for like basis.
As with investment platforms, crowdfunding
platforms intermediate between the
investment opportunity and the investors.
The level of due diligence undertaken
on investments varies from platform to
platform. It is therefore worth assessing
how thorough the due diligence has been
when identifying what other research and
investigation the investor should undertake.
Crowdfunding platforms have much
lower minimum investment levels
than traditional EIS platforms, making
diversification much easier.
Although crowdfunding aims to empower
people to make their own investment
decisions, the FCA’s new rules for
crowdfunding platforms seem to favour
crowdfunding through intermediaries. The
new requirements for platforms, when
dealing with ordinary retail investors,
requires that investors put no more than
10% of their net assets into non-readily
realisable securities (such as unlisted shares)
and complete an appropriateness test.
However, the requirements do not apply
when the investor is in receipt of advice or
management services from a regulated firm.
“An EIS Fund allows a portfolio approach to be taken by the investor which in many funds
allow losses to offset capital gains before performance fees are charged”
Alastair Kilgour, Parkwalk Advisers
required to run such a service. In addition,
with the transition to AIFMD, many EIS
providers may no longer have the correct
MiFID (Markets in Financial Instruments
Directive) permissions required to run
such a bespoke portfolio service.
Some EIS arrangements are termed
portfolios or services but do not
offer this bespoke arrangement.
Portfolios where decisions are made in
line with an investment strategy set by
the manager rather than the investor’s
circumstances are likely to be viewed
as a fund for regulatory purposes.
ADVANTAGES OF A PORTFOLIO
What is particularly attractive about any
kind of portfolio of EIS qualifying companies
(provided the investment is not a collective),
is that investors can offset the losses in
individual companies – even if the overall
portfolio is performing well in aggregate.
It’s worth noting that in the EIS sector,
managed portfolio services are often
referred to as funds – technically this is
incorrect, but it is useful shorthand.
PLATFORMS
Some online investment platforms provide
an EIS portfolio-building service and can
offer access to both companies and funds.
Some services such as Rockpool are geared
to investors whereas others such as Kuber
are focused on advisers. In some cases, the
platform simply facilitates the investments
and the investor/adviser stays in control
of which investments to make and how
much of their capital to commit to each
opportunity. In other cases, the platform
can provide a discretionary service which
selects investment in line with an overall
strategy selected by the investor/adviser.
As an online platform arranging
investments the recently implemented
crowdfunding regulations will apply.
Where advice or management services
are also supplied, the platform will take
on an increasing regulatory burden such
as undertaking suitability assessments.
In addition the platform may undertake
due diligence on the company or
fund, or offer information about the
manager and investment structure.
In most cases the investor has beneficial
ownership of the shares through a nominee
account. For more engaged investors,
a platform can provide access to a
diverse range of opportunities whilst still
retaining control over their investments.
