Monday, 31 October 2016
The S/EIS model is broken
We came across someone recently who was in the process of raising money for their business using equity crowdfunding.
The business had a good level of support from HNIs but there was an issue over EIS due the length of time the business had been running.
As part of our conversation I was told that EIS was an essential part of the HNIs participation - they wanted their 30% rebate or they would not back the project.
This strikes us as being back to front. If you believe an idea or business is investible then it has to investible with or without EIS. Receiving a 30% tax break when you lose all of your investment makes you a loser - not a HNI.
Agreed both SEIS and EIS are useful derisking tax breaks but they should certainly not be making the investment decision. This is not the first instance we have come across where ECF investors have leapt blindly off a cliff simply because they know that the fall is not the full distance. Fact is it is still a fall and is still very likely to end in tears.
This reliance on tax rebates is also skewing the market from the entrepreneurs' perspective. Many companies over 7 years old, or outside the time limit for these rebates, would make good investments based on the business fundamentals. A few use ECF but most are scared off by the overwhelming numbers showing how qualifying for S/EIS makes for a successful ECF pitch. Likewise, many non starters get funding simply on the basis of these breaks.
What is the purpose of the 7 year limit? Why 7? Shouldnt we be encouraging businesses that have succeeded for 7 years or more to expand by allowing them also to access this new funding. God knows, it might even produce some decent ROI.