EIS Industry Report 2018/19

37 36 How the risk-to-capital condition might apply in this case Taking all the information in the case on the previous page into account, an investment in the parent production company can meet the condition, although a direct investment in the SPV could not. THE SPV ISSUE The SPV is a subsidiary of the film production company. Investment is only permitted in companies that are not controlled by another company. If the SPV was set up as an independent company, headed by the film production company, investment in the SPV would not qualify for relief as the SPV would not grow and develop. The film production company as the parent company of the SPV would likely qualify, as it has developed the project itself and intends to grow and develop as a company. It intends to retain the capital and reinvest the profits frommaking the film in future projects. OTHER RELIEFS AND PRE-SALES REDUCE THE RISK It is normal commercial practice in the film industry to secure pre-agreed income (for example, pre-sales or eligibility for other support, such as Film Tax Relief). To meet the risk-to-capital condition, the investment must be genuinely at risk. If the investment attained pre-agreed income or support, the company would be unlikely to qualify for tax relief. DOES SUBCONTRACTING CONSTITUTE CAPITAL PRESERVATION? Though the film production company contracts out many elements of the film production, this is standard industry practice and the company maintains control over end-to-end production of the film. As such, subcontracting in this situation does not necessarily indicate capital preservation. However, if the company contracts out all or most of the activities, it may not be eligible. The company must retain control and be active in carrying out genuine film production activities. If the company acts mainly to deliver projects developed by others, in other words acting as a shell, it will not be eligible for investment. The growth and development provided by such arrangements is of these sub-contracted companies, not the company raising the money. CASE STUDY HMRC FILM PRODUCTION EXAMPLE The company intends to carry on developing content, such as screenplays, and making films in the future. It intends to reinvest most of the profits from making this film to help it grow and develop, taking on more employees, and establishing a ‘brand’. A film production company is seeking investment for a new film It sets up a wholly-owned subsidiary company , a special purpose vehicle (SPV) to produce the film. The company has agreed some pre-sales for the film and has applied for Film Tax Relief. The pre-sales and tax relief provide security for a small proportion of the overall investment. The production company retains overall control of the project and decision-making in relation to production activities. The film production company subcontracts elements that it does not have expertise in, such as set design and visual effects, to different freelancers and companies. Conclusions 1. TECH WILL DOMINATE INVESTMENT Early-stage technology investments are, more often than not, compliant with the new risk-to-capital condition. It is likely that there will be a continuing trend towards tech offers in the EIS market. What’s very encouraging is that tech EIS offers appear to be orientated around performance. Managers can’t merely deliver a one-to-one return of investors capital, which was often the case in the days of capital preservation. 2. FILM EIS HAS BECOME HEAVILY RESTRICTED Film EIS had previously been a significant feature of the EIS market. However, it appears that the new rules have heavily restricted the way in which film production companies previously used EIS as a way of fundraising. Of course, investing in a film production company itself has not been prohibited from EIS qualification. However, with a large amount of films being run on a project basis, EIS funding is significantly more difficult for the film industry to acquire. 3. TECH OFFERS HAVE A HIGH BARRIER TO ENTRY Although the barrier to entry for all open EIS offers is undoubtedly high, tech offers present an even higher upfront commitment, with the most common minimum subscription for an EIS tech offer being £25,000. Tech investments are also very risky, and possibly lie at the more volatile end of growth capital early-stage investments. This makes tech EIS investments suitable for a smaller cohort of investors — ones that can afford to stomach a significant loss. Market Update / Case Study