Deadline looms for companies raising funds to take advantage of investor incentives

A key deadline is looming for many companies actively planning to raise funds while allowing investors to take advantage of current Enterprise Incentive Scheme (EIS) reliefs, says gateway2investment (g2i).

This summer will see the introduction of new rules that will restrict the number of companies who can qualify for EIS relief.

“There is still time for some companies to push through their fundraising but they will have to move quickly,” says Neil Pamplin of Grant Thornton UK LLP, which is the lead partner in the innovative g2i investment-readiness programme that supports fledgling technology companies seeking investment funding.

“The alternative is to wait until after the summer but risk potentially less investor interest due to the reduced incentives on offer."

The new rules were announced during the Chancellor’s Budget Speech this year which introduced two new qualifying criteria for EIS and Venture Capital Trust (VCT) reliefs. Firstly, investors in companies with more than 50 employees will no longer be eligible to claim reliefs. Secondly, new restrictions were announced on the amount companies may raise within any 12 month period under various tax advantaged schemes.

These followed on from Mr Brown's 2006 changes which greatly reduced the number of companies that could qualify for the EIS and VCT reliefs by restricting them to companies with gross assets of £15 million or less to those with only £7 million.

“The new rules do not affect share issues to EIS investors before the Finance Bill receives Royal Assent – most likely to happen in July,” Pamplin says. “Whilst there are many factors which impact the timing of a fundraising, we would suggest this may tip the balance in favour of a pre-summer transaction for some companies.”

The changes to VCT rules do not apply to investments made from funds raised before 6 April 2007, but such funds are finite and are likely to run out over the next few months.

“EIS and VCT reliefs are extremely attractive to the individual investor and any restriction is almost certain to limit the supply of funds and potentially affect owners’ dilution,” says Mr Pamplin. “It is difficult to gauge why these requirements have been introduced other than to limit or redirect funds to companies at the smaller – and therefore riskier – end of the scale.”