HMRC recently issued a new and stricter Seed Enterprise Investment Scheme (SEIS)/Enterprise Investment Scheme (EIS) guidelines for businesses planning to crowdfund soon and its effect on crowdfunding could see the chances of success become ultimately higher.
John Auckland – founder of global crowdfunding communications agency ‘TribeFirst’ – explores the new guidelines and how this can increase the chances of startups receiving advanced assurance before launching their crowdfunding campaign.
The UK is a great place to crowdfund for your new startup. It has some of the most attractive startup investment tax relief schemes in the world.
SEIS and EIS provides investors with up to 80% protection against an investment they make into a UK-based startup, which is taken as a tax relief against the startups’ income tax bill.
However, the length of time it takes for businesses to get advanced assurance is getting longer. This is down to the fact that over a third of companies that apply for advanced assurance fail to subsequently raise funds.
As a result, HMRC issued new, stricter guidelines, in the hope of turning applications around in 15 days, rather than the current 6 weeks.
From 2 January 2018 we will not provide an advance assurance on speculative applications. More than a third of the advance assurances we provide do not result in an investment. To ensure HMRC resources are used efficiently, therefore, we will only provide an opinion where the application names the 6 individual(s), fund manager(s) or other promoter(s) who are expected to make the investment.
Though we do not expect the company making the application to have formalised offers of investment, we do expect the company to have approached potential investors before making the advance assurance application to determine the likelihood that they will attract actual investment.
This new guideline will have a profound effect in crowdfunding, causing some campaigners to stumble before they even get out of the blocks.
But for those left standing, the chances of success will ultimately be higher.
What Does It Mean For My New Crowdfunding Campaign
As is the case with guidelines, they’re open to interpretation. So, we spoke to crowdfunding platforms to ask for clarification and they in-turn contacted HMRC.
HMRC responded by saying that a crowdfunding platform alone won’t be considered a sponsor, since so many of their campaigns go on to fail. Therefore, to successfully receive advanced assurance, it’s important that you name six individuals or institutions who you are in advanced discussions with.
In relation to crowdfunding, HMRC has asked businesses to 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.
So, in essence, you must show that your crowdfunding campaign is being seriously considered or has begun initial screening for listing by a platform.
These platforms will most likely, anyway, provide some kind of selection process to ensure there is a degree of quality in the proposition, and that there has been a process of due diligence.
However, there is a high likelihood that a lot of these campaigns will go on to fail, so the new guidelines have allowed a degree of speculation to sneak back in.
Crowdfunding platforms are not asking that the deal is done, just that there are serious conversations taking place.
The good news for those looking to crowdfund is that you should be lining up these conversations in advance anyway.
So if you’re planning your campaign properly, it won’t make much difference – Other than to give you an advantage over those who aren’t properly prepared.
Equity crowdfunding has been around for seven years now, so there’s a lot of information out there about how to run an effective campaign.
As such, it shouldn’t surprise you that most of your effort and resource will go into preparing your campaign for the public raise, and a large part of this effort will be applied to finding lead investment.
The very first thing we encourage campaigners to do is initiate conversations with angel investors, institutions and friends & family, as they are the most common source of the lead investment that will be put into a campaign
Our recommendation is to try and line-up as much of your initial target as possible before launching your crowdfund to the public.
Not all of it will close, of course, but if you are confident of hitting between 60-100% of your target in the first few days, this will give HMRC confidence, as well as providing the early momentum that sets apart the most successful crowdfunding campaigns.
Who Can I Engage As A Sponsor
This is the most ambiguous aspect of the guidelines. Just what or who classifies as a ‘sponsor’, especially in a crowdfunding context?
The crowdfunding platforms have been told they aren’t sponsors, but I suspect it will help to mention you’re planning being listed on a platform, especially if you have evidence that a large proportion of your initial target has been committed to from your named investors.
So, to who else might you turn to strengthen your application?
They can help to connect you with lead investors and use their crowdfunding success rates to show that you’re more likely to gain funding.
Why Will The New SEIS/EIS Guidelines Increase My Chances Of Success
I’m going to make a bold prediction – New SEIS/EIS guidelines will provide a significant uplift in equity crowdfunding success rates across the sector.
My first reason for this is because companies that don’t properly prepare won’t receive advanced assurance.
They will then realise they’re at a disadvantage and either choose not to crowdfund, or do the legwork to find lead investors.
Secondly, companies will seek out more support from intermediaries who will help them find lead investors, and help give confidence to HMRC that the investment is likely to happen.
Lastly, a lot more businesses will launch their campaign to the public with most of their initial target on the board already, which is a good thing for crowd investors because more campaigns will have been first vetted by more sophisticated investors.
Only time will tell if my predictions are correct.
However, the new guidelines should be seen as a good thing for the industry, and a good thing for your campaign. This will only encourage you to run the right kind of campaign, that is well-prepared.
My advice to anyone looking for crowdfunding is still to line up as much as you can before you launch your campaign, because it can’t hurt your application to have both platform approval and lead investors.
And it will undoubtedly improve your chances of success.
John Auckland, founder, 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.
Article has since been updated 3rd April 2018