Too limiting. A lack of suitable investment opportunities. A mismatch between companies and investors. The Seed Enterprise Investment Scheme (SEIS), which promises a maximum of 78% tax relief on up to £100,000 invested in early stage companies, had its detractors a matter of weeks after its launch this Spring. Even before it received Royal Assent as part of the Finance Bill in July it seemed the knives were out.
But why? The fact is it could yet be the hidden gem for small businesses and investors alike. For a government scheme designed to help those with some cash in the bank avoid a hefty tax bill and for fledgling companies to get their hands on much-needed capital, SEIS surprisingly and rapidly gained an unwanted reputation.
SEIS: The makeover
The early pressure heaped on embattled chancellor George Osborne, however, could soon be relieved. Months after launch, the makeover has started. And it was the government’s increasingly prominent enterprise advisor Lord Young who was chosen to spearhead the revamp last week, alongside former Dragons’ Den investor Doug Richard. The main thrust is a national roadshow of events to promote what Richard described as “the most radical tax incentive in any western economy” throughout October and November.
Speaking to members of the business press at the MADE Festival in Sheffield Lord Young talked of the “remarkable benefits” SEIS offers and added: “What the economy needs now more than anything is new businesses – not so much new start-ups, but slightly larger companies to begin to grow.”
He pointed to the importance new funding platforms, such as crowdfunding, will play. With Seedrs and Crowdcube securing Financial Services Authority (FSA) regulatory approval the legitimacy of it is assured – and the ability for new angels to invest smaller sums and spread the risk and their money fits neatly with SEIS.
“You can invest under SEIS using the Seedrs crowdfunding programme,” said Lord Young. “I think crowdfunding is going to get more and more important across the three areas, which is equity funding, loan funding, and invoice discounting. The three areas are where I fear the banks have let down the SME community and I think crowdfunding is helping to fill that gap, but there’s a long way to go.” Seedrs co-founder Jeff Lynn will feature on the tour.
Growing support for SEIS
Billed as “the voice and face of SEIS” by Lord Young, Dale Murray holds the distinction of being the Angel Investor of the Year 2011 from the British Business Angels Association. The former mobile telecoms entrepreneur has been investing for eight years and claims to have already made two SEIS investments. “Why wouldn’t you [use SEIS]?” she implored. “It’s a fantastic scheme. You can do more investments and get involved with more small businesses.”
To reiterate, the facts are as follows:
• An individual can put a total of £100,000 into a number of early stage companies and gain a 50% income tax relief in the year the investment is made.
• In addition, they can save a further 28% if the money invested is a capital gain. This exemption brings the total potential tax relief to 78%.
• Recipient companies must be in their first two years of trading, must not have gross assets of more than £200,000 and cannot employ more than 25 people.
• Investee start-up companies can only raise £150,000 in a single SEIS investment from a syndicate of investors.
• Investors using SEIS cannot take more than a 30% stake in a company.
• The Enterprise Investment Scheme (EIS), which was introduced in 1994, is for larger opportunities and more established companies.
No wonder some active angel investors are seeking to exploit the opportunity. “If I invest £100,000 in SEIS investments, £78,000 of that is funded by the government, which is kind of staggering isn’t it,” said Murray. “You’re getting a foothold in these fabulous, emergent businesses and the government is subbing you 78 grand or 78%.”
Mercia Fund Management’s Mark Payton, who looks after the hybrid SEIS / EIS Mercia Growth Fund is incredulous that more hasn’t been made of the scheme. “Promotion of EIS and SEIS by the government has been nominal, indeed virtually non-existent,” he said. “This seems wasteful, especially as high income tax payer with a substantial CGT liability investing into SEIS…stands to get most if not all of their original investment back in tax reliefs in the event that investment fails.”
Finding investable start-ups
Designed specifically for start-ups with high potential, the aforementioned rules are where some investors have complained there are too few opportunities where the investee would enable them to sensibly meet the criteria and make money down the track.
Mercia Fund Management’s Mark Payton said: “The challenge for investors is to find investable businesses, and ensure that the cost of making the investment in regard to due diligence, transactions costs etcetera is worthwhile when set against the tax reliefs available.”
He added that relatively ‘green’ investors could be hampered by not having the wherewithal to vet opportunities. “The detail of the actual SEIS investment can be complex and an experienced fund manager will build a portfolio of SEIS compliant companies providing the investor into the fund a portfolio exposure not available should he or she back a single company,” he said.
The sum of £100,000 to invest per annum also limits the ability to meaningfully spread investments. It may explain why Payton has seen strong interest in the Mercia SEIS fund. The SEIS portion of the fund is already over 50% subscribed or allocated to investors.
On the plus side for investors, recent signs suggest the pipeline of promising start-ups may be emerging. Speaking to one founder, Warren Knight, who this week announced his £150,000 SEIS fundraising for social sharing e-commerce platform Gloople, there is a great deal of interest in the start-up community.
“Meeting the criteria is quite easy and they do make it quite transparent,” he said. “Because it’s quite a new scheme the accountants and lawyers had to do a little more research, but essentially it’s the same process.” He added that he understood HM Revenue & Customs (HMRC) “had a pile of companies that wanted to be approved as SEIS”.
Another fear has been that start-ups will place unrealistic valuations on their businesses, and with investors still standing to lose some money, irrespective of the generous tax incentives, the distance between price tags placed on the company by either party may be too great. Responding, Knight said: “As a business owner you’ve got to respect the true worth of the business, where it can go and what can be achieved. Our valuation came out at just under £1m and angels always like to negotiate.” Ultimately, Knight gave up 16.2% equity to complete his deal. But how many more like that does the UK actually have?
For example, if a company attempts to secure the full £150,000 for 30% it is effectively putting a price tag of £500,000 on the business, which for a nascent company with a limited track record may seem a high price. Furthermore, the stand-out start-up companies showing great potential may well seek more than £150,000, pushing them out of the SEIS sphere.
Admittedly, a start-up may seek £60,000 for 30% say, thereby pricing it at £200,000. The investor may then question whether it will have sufficient funds to challenge and provide an attractive return some way down the track.
Angel investing realities
Losing money is a reality angel investors have to come to terms with as soon as they choose it as a route to make money. It is always the case that the seasoned speculators spread investment across several companies and there’s an understanding in angel circles that out of 10 investments you might get one ‘winner’, a couple that make a relatively tidy return, a few that trundle along, and the rest will fail. Nevertheless, it is what the roadshow will have to contend with as it seeks out new investors.
Former Dragon Richard believes investors have to enter the SEIS sphere on the basis that the investments represent a “higher risk gain” made worthwhile because of the potential upside. “SEIS is not designed to amplify the opportunities for bad investments,” he said. “It’s intended to broaden the basis for investment, so that businesses that could not have found investment now have an opportunity to do so. And savers who would not have had a working purpose for their money now have an opportunity to make something.”
Murray is well aware of the risks posed by SEIS over EIS (Enterprise Investment Scheme). “By nature, these investments are going to be riskier because they are even more early stage. And that’s why the government gives such good incentives, because they recognise the risk. The government also recognises that it needs to get start-ups off the ground.” In other words, investors can’t expect it all to be handed to them on a plate. Whether such words turn the trickle of interest into a flood remains to be seen.