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INTRODUCTION
CONTENTS
13
EXAMPLES OF QUALIFYING
COMPANIES
What the rules on qualifying companies
mean in reality is that for a lot of
investors, EIS qualifying company
investments are not necessarily as
risky as they may have thought.
Many people’s perception is that EIS
investments are only into extremely
risky small start-up companies at a pre-
revenue stage – the sort of investing
normally associated with very early stage
fundraising (often from friends and family
and in fact the type of investing SEIS is
designed to encourage to some extent).
But the qualifying criteria now allow very
well established companies with strong and
predictable revenue streams and their own
assets. Recent changes in the legislation
raised the cap on the amount of funds
that can be raised from £2m to £5m and
raised the limit on the number of full time
employees from 50 to 250. This gave a huge
boost to the industry, as it opened up much
bigger firms for investment via the EIS.
WHEN DO COMPANIES
NEED TO ISSUE AN
INVESTMENT PROSPECTUS?
According to European legislation, any
company raising more than €5m by offering
transferable securities to the public must
issue an investment prospectus. This
prospectus has to be approved by the
relevant listing authority and obviously has
a cost in both time and money. Issuing a
prospectus would normally take between
2-3 months. However, there are exceptions:
firms who only make the offer to 150 people
or less, firms who issue non-transferable
securities or firms who only market
their offer to professional investors.
APPROVING INFORMATION
MEMORANDUMS
Firms that do not issue a prospectus will
issue an information memorandum (IM).
If the memorandum is approved by an FCA
authorised person who has carried out
their own due diligence and verified the
claims made in the memorandum, then
the IM can be freely distributed to retail
investors. If the IM has not been approved
y an authorised person, then it can
nly be distributed to high net worth or
ophisticated investors (these categories
can be self-certified in this instance).
et worth investor is somebody
r £100,000 annual income
£250,000 in investible
(assets excluding residence,
ebody
member
els for the
last 6 months or has made one unlisted
pany investment in the last two years.
“We look for businesses that have exceptional leadership teams, who show the
potential to become the next big UK success stories.”
DavidMott,OxfordCapital
A LOOK AT SEED EIS (SEIS)
As noted earlier, Seed Enterprise
Investment Schemes are outside of the
scope of this report, but it is worth quickly
nodding to them here for the sake of
completeness.
Benefits and qualifying criteria of SEIS:
SEIS was introduced in 2012 to
encourage investment in higher risk,
earlier stage companies
The maximum a company can raise
under SEIS is £150,000
The average amount of investment
raised is £72,000
Over 1,100 companies have raised
money through SEIS
Companies have raised over £82m of
funding
On average, £1.3m of SEIS funding is
raised by 19 companies every week
Investors can receive initial Income Tax
relief of 50% on investments up to
£100,000 per tax year in qualifying shares
issued on or after 6 April 2012
The individual investor can be a
director of the company, but not an
employee
An individual’s stake in the company
can be no more than 30%
SEIS tax relief applies only to recently
incorporated companies
The company must have 25 or fewer
employees and gross assets of up to
£200,000
For the 2012/13 tax year only, a CGT
exemption is offered in respect of gains
realised on the disposal of assets that are
invested through SEIS in the same year
EIS IN FOCUS
EIS FOR ADVISERS
ADVISING ON EIS
First the adviser must understand and assess the client’s individual circumstances. This includes doc
their tax and planning needs. Do they earn a level of income or pay sufficient tax to warrant EIS invest
Then comes the appropriateness test. Does the client have the necessary knowledge and experience
the investment? Questions to ascertain this would typically be around the charges, the T&Cs, the liqu
the risks. The appropriateness test is really designed for non-advised, execution only investments – i
is receiving regulated advice then these issues should be covered as part of the wider advice proces
The suitability test centres around whether the investment meets the client’s financial objectives
– it starts from the premise that the client has a financial plan or some financial objectives and the
adviser’s role is to ensure that the investment is well-placed to satisfy those objectives.
SELECTION
The process for selecting the correct EIS investment should go through the following steps:
Look at the clients’ entire investment portfolio to see how this currently meets their requireme
Highlight opportunities or circumstances where EIS investments will be appropriate to their ne
Select a range of products that fit the investment objectives
Reviewing the investment managers’ track records
Look at the underlying investments and overall investment strategies
Obtain and review independent investment reports where they are available
Review the c sts
Select the most appropriate product
Advisers should be con ervative when assessing underlying company investments – there is
overestimate potential revenues and underestimate costs. Check what they are raising fund
really being used to deliver business growth.
RISKS
As noted earlier in the report, small company investing is inherently risky – but advisers shoul
mistake of assuming that all EIS investments are equally risky. Well established and AIM listed
both qualify for EIS status and should be lower risk than start-ups. Funds aiming for capital pr
should, in theory, be lower risk than those aiming for growth – although changes made in the
ities available in the market.
hood, it will be a more aggres
ave some capacity for loss. EI
able to absorb losses.
t bank should not be too hard – the focus should be
allocate to an EIS portfolio. Solutions for the majori
ensions before EIS really comes into the picture. Th
ent dog’, however, with tax breaks such a
extensive use of EIS investments if more
IS benefits are stacked in favour of more w
As with any investment, the advice process is
ensuring the product is appropriate and suita
the client, and that they understand the inves
objective and the risks associated with it as w
inv stment itself.
KEY FINDINGS
do so for the tax benefits,
whereas investors were
more focused on the level
of returns available (36%)
with the tax benefits being
less important (only 18%)
The
TREASURY
has
indicated that it is
unhappy with some
of the lower-risk,
‘exit-focused’
EIS investments
The sh pe of
the EIS market has
changed dramatically
over time.
Investing in smaller
companies is inherently
more risky than investing
in established listed
companies, but the tax
advantages of the EIS tilt
QUALIFYING COMPANIES
may be larger and better
established than many
people think.
EIS
investments
allow
is the
Investing in EIS
funds is still
somewhat
opaque
, with
accurate
investment
PERFORMANCE
DATA HARD TO
COME BY
RISK/REWARD BALA
back in
favour
of the
investor
*potentially **theadministrationandmanagement costsofa largeportfolio couldbe significant
OF
BE
INCOME
qualify for EIS
AIM listed firms
can
91%OF
ADVISERS
WHORECOMMENDEIS
INVESTMENTS
Driven by
the
need for
diversification,
tax benefits
and strong
returns, the
EIS market has
seen
STELLAR
GROWTH
over
the last
few years
ADVISINGON EIS
40
Q. Which factors are most likely
to make you hesitate about
recomme ding an EIS fund?
A. The most common reasons cited
by advisers as to why they hesitate
recommending an EIS fund is due t
having a complex investment proce
with 58% of respondents seeing thi
as a reason to be hesitant. Rules a
regulations surrounding EIS invest
an be quite complicated and i vo
large amount of paperwork, whic
put advisers off recommending a
product. The poor quality of infor
provid d on the fund was seen a
second most common reason to
recomm nding an investment wi
of advisers considering this to b
Providing regular reporting and
information can really add valu
managers’ investment propositi
knowledge, experience and tra
of the fund manager is seen as
important consideration for ad
42% citing the managers’ track
and 37% a previously poor ex
with the fund manager as reas
hesitate recommending an EI
Q. What are your preferred
for EIS fund investments?
A. Renewable energy was hig
58% of advisers as being thei
investment sector. This may
number of energy opportun
in the market place which p
and competition, the gover
behind the sector (through
obligation certificates) or t
investments are often asse
offer steady returns over a
long period of time. They c
to investors as they have
affect and can support loc
and the local community.
investment sectors inclu
with 47% and AIM listed f
sectors such as consume
and bars and restaurant
popular, which could be
being a smaller number
available, less competiti
or a perception that the
Q. Do you feel that th
competition in the EI
A. It is important to ide
advisers feel they hav
choice and whether th
competition in the ma
is generally seen as h
costs and improves e
SECTOR
PREFERENCE
(ADVISER):
Please note: unless otherwise stated, all charts and graphs have been provided by Intelligent Partnership
