by Roger Blears, senior partner, RW Blears

In June the European Commission launched a consultation to inform its ”fitness check” evaluation of the  State Aid regulations and the various guidelines applying to venture capital schemes such as EIS, including the Risk Finance guidelines. Here were our recommendations: 

Abolish the “age restriction on eligible recipients for VCT/EIS  funding and replace with a gross assets test of £20 million to determine eligibility 

Justification: The age of a company is not a robust indicator of whether or not it has the capacity or knowledge to scale up its production and therefore neither is it an indicator of its ability to secure bank financing. 

If this first recommendation above is not adopted, then: 

Redefine the definition of a first commercial sale as being the end of the accounting period in which a company’s annual turnover first exceeds £200,000 

Justification: This is the test for  knowledge intensive companies, but all companies developing a  new product or geographic market will undertake sample test sales before making a general entry to market. A company may also not keep adequate paperwork during the first years and months of development to assess when it begins to trade and has its “first commercial sale”. Therefore this concept should be interpreted flexibly so that the same turnover test can be used  for all companies.

Abolish the financial hurdle imposed on the entry into a new product or geographic market 

Justification: The exception to the basic age limit for companies entering a new product or geographic market requires a risk finance investment which is higher than 50% of their average annual turnover in the preceding five years. This is unduly restrictive and is interpreted as requiring that expenditure on each new market should exceed 50% of 5-year average turnover. This penalises an SME that has a business plan to enter two or more new markets rather than one. For example, a biotech company with only one new cure to alleviate pain might qualify for VCT/ EIS funding whilst another with two new cures for different ailments might not. This is clearly nonsensical and is inconsistent with an overriding aim to stimulate growth in new risky market entries which commercial markets won’t finance. 

Knowledge Intensive Company Spin Outs from Universities. 

Some months ago we obtained HMRC clearance for an EIS investment in a spin out from UCL and Imperial. Originally established as a company limited by guarantee it didn’t qualify for VCT/EIS funding as it lacked a share capital structure. It isn’t possible under the Companies Act 2006 to re-register a company limited by guarantee as a company limited by shares. Therefore we re-registered the spin out as an unlimited company with a share capital and undertook a reconstruction so that it became a wholly owned qualifying subsidiary of a private company limited by shares, which it was then able to issue to EIS investors.

This piece has been published as part of the first Adviser’s Guide to the Enterprise Investment Scheme to access the guide in full click here