Small companies unite against tightening of EIS regulations
I recently wrote that early stage companies were paying the price for the tightening up of EIS regulations, However, a new trend could help them seize the benefits too.
Last year some of our single company raises benefitted from the return of un-invested monies from more than one fund manager. If this continues it puts the ball back in the court of the early-stage single company. And a trend towards a collective format could lower the risk of supporting these smaller independent companies.
The changes to the EIS regulations means there are fewer of the asset-backed investment opportunities capital-preservation investors want. In 2016, the Financial Times reported that Octopus Investments, the largest manager of EIS investments, had stopped accepting any new money into its EIS business, citing growing demand for the firm’s VCT product. It was the first definite move away from EIS from a big player. But I suspect investor demand will continue to outstrip supply for larger-scale capital preservation EIS.
This puts the emphasis back on the smaller single companies the EIS scheme was originally created for. These are a riskier prospect and therefore traditionally harder to raise for. And yet it’s well known that these companies have the potential to deliver excellent tax-free returns.
A collective proposition
So here’s where investing in small single companies through a collective proposition starts looking like a smart thing to do. Smaller companies benefit from being part of a larger umbrella. Investors benefit from the time saved in due-diligence, as well as the risk mitigation of investment spread. SyndicateRoom did just this when they created Fund Twenty8, a passive EIS fund without a sector bias. An initial £4.5 million was raised into companies typically seeking between £250,000 and £3million.
We’ve made our own move towards facilitating investment into smaller companies. The Decent Media EIS fund launches in Q3 2017. Decent Media features a collection of British Indie films with an average EIS requirement of well below £1 million.
Seismic is a business consultancy and venture capitalist specialising in SEIS and EIS fundraising