Raising via SEIS, limit of £150,000
August 19, 2013 at 10:59 am #1031
We are raising £250k for our startup Snug. We would like to raise £150k via SEIS and another £100k via EIS. Is there anything we should be looking out for? Is this a common strategy?
LeonAugust 19, 2013 at 3:17 pm #1041
Yes, this is a common strategy.
A few points to watch:
1. You need to have spent 70% of the SEIS cash before you can raise money under EIS (not normally a problem for most startups!)
2. You must do it in the order you suggest i.e. SEIS and then EIS. If you secured EIS first, then you’re barred from SEIS.
3. You can kill two birds with one stone in the HMRC advance assurance process (if you choose to go down this route) by seeking assurance for both upfront – I tend to include a separate letter in addition to the standard HMRC form as its easier to spell this out in a letter compared to the SEIS tick box form.
You might also find this link from HMRC useful on SEIS FAQs which they’ve (fairly) recently released.
Best of luck with your new venture!
SteveAugust 19, 2013 at 4:31 pm #1043
Thanks Steve, very useful.
So when, for example, a company would like to raise £250,000 through one fundraising round and take advantage of both the SEIS and EIS reliefs, would the company be able to raise the full amount in one go so that the balance of £100,000 is perhaps held in an interest bearing escrow account until 70% of the £150,000 has been spent on the business and it can then be released? Is the same investment agreement used to cover the future issue of £100,000 worth of EIS shares, as well as the initial SEIS share issue? As SEIS is still quite new and this situation must be coming up quite often now, I wonder what is becoming common practice to make things as straightforward as possible, rather than having to produce too much paperwork for the deal?August 20, 2013 at 1:57 pm #1046
Often start-ups find that £150k SEIS funding is not enough so look for additional funding via EIS but the funding dynamic plays against EIS funding for start-ups as the more relaxed investment criteria favours more established (and safer) business opportunities. In addition to this, at least 70% of the SEIS funding must be spent first before EIS funding is allowed.
There are strategies to deal with this:
1) revise your initial cash commitments and overhead expenditure to make the business reach breakeven on funding of £150k only by adopting the lean start-up approach,
2) look for funding providers that has a twin SEIS and EIS approach to their investments,
3) consider potential matched grant funding alongside the SEIS funding which could eliminate the EIS funding requirement and
4) engage SEIS and EIS investors on a co-investment strategic platform – often EIS investors will engage if there is an established SEIS investment fund involved leading the investment.
You might also want to look into the Jenson Seed EIS Fund. More info can be found here: bit.ly/Y5H6IE. Hope that helps?
Jenson SolutionsAugust 20, 2013 at 3:54 pm #1047
The requirement not to issue EIS shares until 70% of the SEIS money has been spent doesn’t preclude a single fundraising push followed by split share issues (and use of a combined SEIS/EIS fund raising document is common) but there are a few pitfalls to avoid. If the target is £250k though you would need to be wary of the gross assets limit – the company can’t have £200k of assets immediately before the share issue. Provided the escrow arrangements are robust this may be fine but one to watch. It might be better to collect cheques in but not cash them until the appropriate time with the understanding that the money does not belong to the Company until that point.
There was a decision in a case called Blackburn (http://www.taxbar.com/Blackburn_CA.pdf.pdf) (paragraphs 12, 21 and 26) which is helpful regarding money paid to a company in advance of a share issue being consdiered a genuine pre-subscription rather than a debt (the issue of shares in satisfaction of which would not be EIS qualifying) but this would not get you round the gross assets limit issue.
Typically, the spending of 70% of the SEIS money takes no time at all so the delay in issuing the EIS shares shouldn’t be particularly significant. (The more common error in terms of losing EIS/SEIS relief is not to collect the money in advance of issue and hence issue partly/non-paid shares).
You can draft a fairly detailed shareholders’ agreement where the subscribers commit to make multiple tranches of investment through a nominee at different times subject to staggered conditions (including notification that 70% of the SEIS money had been spent). This is one way to ensure as far as possible, that the steps are documented and that reliefs are maintained.
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