How the new EIS Guidelines impact crowdfunding

Crowdfunding new HMRC EIS GuidelinesWhen it comes to start-up investment, the UK has some of the best tax relief schemes anywhere in the world.

The Enterprise Investment Scheme (EIS), along with its earlier-stage sibling the Seed Enterprise Investment Scheme (SEIS), offer protection of investments in UK start-ups. If the business fails, investors can claim up to 80% of the investment as tax relief against their income tax bill.

Not only do these schemes help UK start-ups get the capital they need to get going, it also offers experienced investors the opportunity to broaden their portfolio without adding a huge risk.

Needless to say, it’s become very popular with both start-ups and investors.

The problem, however, was that start-ups were flooding HMRC with requests for advance assurance, leading to long waiting times. To help minimise more speculative applications, HMRC recently revised their guidance on seeking advance assurance.

Crowdfunding platforms weren’t initially consulted about these new regulations and felt that they may discourage entrepreneurs from crowdfunding – an unintended consequence on behalf of HMRC. As such, all the major crowdfunding stakeholders met with HMRC to agree a new set of guidelines that would enhance equity crowdfunding campaigns rather than discourage them.

In order to understand these new guidelines and what they mean for crowdfunders, we spoke to John Auckland, CEO of crowdfunding marketing agency TribeFirst.

HMRC updated their SEIS/EIS guidelines just weeks after the previous update. What was going on there?

Lots of start-ups were sending in applications for advance assurance (AA) just in case they needed it in the future. These speculative applications were slowing down HMRC’s ability to process and issue AA to companies that were looking to raise immediately, causing some big issues.

To help minimise these speculative applications, HMRC asked applicants to supply details and evidence of a lead investor or sponsor for their fundraising campaign. Not only would this require start-ups to be actively seeking funding, but it also meant their fundraising campaign would be more likely to succeed.

However, when I investigated, it became clear that crowdfunding platforms themselves would not count as a sponsor since such a large number of campaigns either never launched or did launch but later failed.

EIS has been such a large catalyst behind the success of crowdfunding in the UK that crowdfunding platforms got very nervous. It was almost like the rug was about to be ripped from under their feet.

Fortunately, these crowdfunding platforms were able to reach out to HMRC and plan a roundtable discussion to iron out these details. It was that discussion that led to the revised guidelines being published just a couple of weeks after the previous revision.

What’s changed in these new guidelines?

The UK is a European leader in the start-up scene, largely due to the success of crowdfunding. HMRC had no desire to hamper the impressive innovation and growth that crowdfunding supports, so it makes sense that they would meet with the platforms straight away to review the guidance.

In the new revised guidance, HMRC have made clear provision for start-ups engaging in crowdfunding, stating that a company must provide:

‘…evidence, for example letters or emails, to demonstrate that the company has engaged with and begun the screening process with the platform. It is not enough for the company to show it has approached a platform; there must be confirmation that the platform accepts the company may be a viable investment for its customers and that further engagement is underway.’

What this essentially means is that start-ups need to have been approved by the crowdfunding platform for listing before they apply for AA.

Since most crowdfunding platforms engage in a selection process and conduct their own due diligence, approval for listing indicates that the proposition has merit and is likely to succeed.

Is this a good thing or bad thing for crowdfunding?

Personally, I feel that crowdfunding success rates are lower than they really should be, and that damages the perception of crowdfunding among the wider community.

For that reason, I felt that the new guidelines would force more crowdfunders to be better prepared and have an agreed lead investor before they launched. In theory, then, campaign success rate should improve across the board.

Of course, the impact on start-ups would be to increase the workload and lengthen the campaign, but this seemed a fair trade-off for greater success and more trust from investors.

That being said, crowdfunding is about moving away from traditional institutional investment and opening up the start-up scene to a wider range of investors. In this way, innovative projects get the exposure they need to succeed, get a trial-by-fire from the crowd, and inspire other innovators to start their own business.

Anything that restricts that could have enormous knock-on effects to the entire crowdfunding industry and will be seen as bad.

On balance, I think the updated guidelines manage a good compromise between the two positions. On the one hand, crowdfunders will be forced to improve their campaigns leading to greater crowdfunding success rates and increased investor trust. On the other, campaigns won’t be stifled by a reliance on specialists and institutional investors.

It would have been nice to see HMRC’s process and expectation around AA applications – will an accepted platform listing or evidence of a lead investor lead to a higher chance of AA approval, for example?

There seems to me to have been a missed opportunity to include a quality control measure that would have both improved success rates and encouraged more people to go down a crowdfunding route.

What is your advice to aspiring crowdfunders?

For the best chance of obtaining advance assurance from HMRC, getting your campaign approved by crowdfunding platforms, and ultimately hitting your equity fundraising target, be sure to line-up as much of your investment as possible – from your lead investor as well as friends, family, and other investors – before you launch your campaign.

Securing this investment before you launch will also raise your profile with other crowdfunding investors. They’ll trust your business, believe in your campaign, and will be much more likely to invest.

You can also find more practical help in How to prepare your business for crowdfunding.

About the author

This guide has been written exclusively for ByteStart by John Auckland, a crowdfunding specialist and founder of TribeFirst, a global crowdfunding communications agency that has helped raise in excess of £4m for over 20 companies on platforms such as Crowdcube, Seedrs, Indiegogo and Kickstarter. John is passionate about working with start-ups and sees crowdfunding as more than just raising funds; it’s an opportunity to build a loyal tribe of lifelong customers.

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