I’ve been investing money here and there via Crowdfunding platforms for the last two or three years. I find it exceptionally interesting and enjoy looking through the information available upon a particular business and then try and work out whether it’s something that I think can make money – if I do then I will part with £50 (I’m definitely not a risk taker).
The idea that the crowd can support an early stage business is of course a relatively new one. In the aftermath of the 2008 economic crisis, when banks weren’t lending, the crowdfunding platform concept began to gain traction. Today there are a number of different players in the marketplace, but given I’m based in the South West, Crowdcube is the one that I use the most.
I’ve also seen crowdfunding from the other side of the table as an adviser, and have advised where businesses are looking to offer EIS relief to their investors – this is a particularly important part of the process because with EIS relief available, the investor’s true cost of investment is 30% lower than it first appears and if there are any gains to be made then the gain will be CGT free. Most, if not all, crowd based investors will expect EIS (or SEIS) to be available, but because it’s a complex area, the company must take careful steps to ensure that they understand the rules and don’t do anything to prejudice the tax position of their new shareholders.
EIS can be exceptionally confusing. If the fundraise is straight forward, then EIS can be simple and easy to understand – but, in other circumstances the voluminous amounts of anti-avoidance can tie even the most experienced lawyers and accountants up in knots. In my own career I’ve seen a business profess not to be a legal services business to HMRC (which does not qualify for EIS as it is specifically excluded) and yet then proceed to book large amounts of legal services income in its P&L. We’ve also seen large amounts of cash end up in the company, but the paperwork for the shares be compiled months (sometimes years) later and all of that carries compliance risk. We’ve also seen companies tell investors that EIS is available, but forget to mention that the HMRC compliance certificate that they need to claim the relief on their tax return will not actually be issued for another two years whilst the company ‘prepares to trade’ (EIS3s cannot be issued until four months after the start of trade) and this is something that annoys investors no end. Another thing I’ve seen is a company raise funds under EIS only when it could have also offered (the more beneficial) SEIS to the first tranche of investors – and then get hammered on the forum section of the website when they were challenged a number of times on the issue. I have to confess that was a pitch I was interested in but the company refused to accept that they were wrong and my interest evaporated. The other main thing with crowdfunding is the ‘value received’ rules where gifts to EIS investors above a de-minimis of £1,000 can reduce the amount of EIS relief available – with larger investments often the company provides a ‘thank you’ in some form and care needs to be taken not to breach the threshold. There are so many traps for the unwary…
Some of the businesses that we have seen that are considering crowdfunding assume that they qualify, but don’t actually get advance assurance from HMRC before the pitch begins. As I say above, savvy crowdfunding investors expect the company to have obtained advance assurance from HMRC that their company qualifies. If you don’t have this, it looks a little odd and like you are unprepared. Sometimes the company will be too big for EIS or will have already raised the maximum under EIS that is permitted – I recall I have invested money in BrewDog and Hybrid Air Vehicles – both ineligible for EIS, but this was clear and I knew that when I made the investment.
It’s therefore important that if you are consider crowdfunding you get to grips with the EIS position as early as possible and do not underestimate the complexity of it.