In a series of articles commissioned by Intelligent Partnership, we asked industry experts RW Blears to share their thoughts on the current state of play in the venture capital scheme market. In the fourth article, written by Adam Lawrence, he gives us some helpful tips on questions you should ask EIS managers before you invest.

When it comes to providing a clear timeframe for investors to receive EIS 3 forms (in the case of unapproved funds and single EIS companies) and EIS 5 forms (in the case of the approved funds), investment managers are generally silent.

In fairness as there are so many different scenarios which can lead to a delay, many of which are outside of the control of managers, their reticence is somewhat understandable. Asking the manager the right questions though can give some clues as to how long the process might take and allow IFAs to better manage their clients’ expectations.

For structured EIS products, particularly infrastructure related funds where the manager is heavily involved in setting up the new companies in which the fund invests, managers should be asked when they anticipate these underlying companies will commence trading?

The trading start date is important because companies are only eligible to apply to HMRC for EIS 1 certificates (the certificates required for EIS 3 forms to be issued) after they have been trading for at least four months. On top of this, it takes a further six to eight weeks for HMRC to turn around an EIS 1 application and issue the EIS 3 forms. Investors should therefore expect to be in a position to apply for their tax relief, six months after the trading start date of investee companies.

With structured EIS products, investments in the underlying investee companies are typically completed very quickly – with shares issued to investors shortly after the fund’s closing date. What takes longer is the actual deployment of the EIS monies by the investee companies in buying assets with which to trade.

Before recommending a structured EIS product IFAs should also consider asking managers whether appropriate assets have been identified and the extent to which terms have been agreed with suppliers?

If the core of the company’s trade is reliant on the construction of a key item of plant and machinery which has a long build out time, ask the manager whether it has considered any ancillary businesses with which companies could start the four month trading clock.

For example, back when subsidised renewable energy was a permitted trade, an EIS bio gas company waiting for the construction of its biogas plant could start trading by erecting solar panels on the biogas plant site – a relatively straightforward process – and once electricity was being sold to the grid, HMRC accepted that trading had started. As ever, both the core and any ancillary business activity should be captured in the company’s advance assurance application so HMRC is aware of all activities being carried on by the company when it grants its approval.

Investment managers for structured products are often vague about the underlying details of the investee companies in which the structured fund will invest. It might be worth asking the manager to see business plans for these to ascertain how the EIS monies will be spent and when it is projected the companies will start generating revenue.

For private equity/venture capital EIS funds, most of the underlying investee companies will already be trading at the time of investment so the trading start-date is less material. More material, is the timeframe, in which funds will be deployed.

Most private equity/venture capital IMs boast about the extent and quality of the manager’s pipeline of prospective investee companies but what is less clear is how much of this pipeline is investment ready. The question managers should be asked is how advanced negotiations are with prospective investee companies?

Query whether the manager has entered into heads of term which grant the fund exclusivity and whether formal due diligence has commenced? Most managers are likely to be bound by confidentiality provisions so they understandably won’t be able to reveal too many details about advanced negotiations with investee companies. If, however, they have entered into heads and are carrying out formal due diligence, investors can be more confident their subscription monies will be invested sooner rather than later, thereby increasing the speed at which they will receive their tax relief.