Raising capital through the Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) is a government-backed initiative aimed at encouraging investment in small, high-risk companies across the UK. For startups and early-stage businesses seeking capital, issuing EIS shares can be a powerful strategy to attract investors. However, while the benefits of EIS are substantial, entrepreneurs need to fully grasp the implications of raising investment through this route. In this blog, we’ll explore the key considerations, benefits, challenges, and overall impact of issuing EIS shares on a business.

Benefits of raising investment through EIS shares

Attracting investors:

The most compelling advantage of EIS shares lies in the significant tax reliefs they offer investors, including 30% income tax relief, exemption from Capital Gains Tax (CGT), and loss relief. These incentives make investments in high-risk companies more attractive, potentially making it easier for businesses to raise capital.

Increased funding limits:

Through the EIS, companies can raise up to £5 million per tax year and up to £12 million in total. This level of funding can be critical for expansion, research and development, or launching new products.

Enhanced credibility:

Being an EIS-qualifying company can boost a startup’s credibility. It signals to potential investors and partners that the business is compliant with government regulations and eligible for significant tax incentives, which can enhance trust and attract further investment.

Flexibility in fund usage:

Unlike other funding routes, EIS does not impose stringent restrictions on how the funds must be used. This flexibility allows businesses to allocate resources in line with their growth strategies and priorities.

Key implications of issuing EIS shares

Compliance requirements:

To qualify for EIS relief, companies must meet specific criteria set by HM Revenue and Customs (HMRC). This includes maintaining limits on employee numbers, gross assets, and adhering to trade guidelines. Non-compliance can lead to disqualification, affecting both the company and its investors.

Holding period:

Investors are required to hold their EIS shares for a minimum of three years to retain the tax benefits. As a business, it’s essential to ensure that your company can sustain operations and continue to meet investor expectations throughout this period.

Dilution of ownership:

Issuing EIS shares results in the dilution of ownership for existing shareholders. While raising capital is crucial, founders need to consider the impact on their control and decision-making power within the company.

Increased investor scrutiny:

EIS investors, drawn by the tax benefits, may conduct thorough due diligence. They will closely examine your business model, financial projections, operational management, and exit strategies. Therefore, businesses must be prepared to present detailed information and demonstrate strong growth potential.

Exit strategies and liquidity:

EIS shares are generally illiquid, meaning that investors may find it difficult to sell their shares quickly. As a founder, it’s important to clearly communicate potential exit strategies, whether through acquisition, listing, or other means.

Investment caps and reporting:

Startups must be aware of the strict reporting requirements associated with EIS investments. This includes submitting forms such as EIS1 to claim tax relief and issuing EIS3 certificates to investors. Accurate record-keeping and timely compliance are essential to avoid penalties and ensure the success of ongoing capital-raising efforts.

Impact on future funding rounds:

Issuing EIS shares early in your company’s lifecycle can influence perceptions during future funding rounds. It’s vital to consider how the capital raised now could affect later fundraising efforts and investor expectations in subsequent series.

Raising funds through the issuance of EIS shares offers a unique opportunity for startups and growing businesses to secure investment while providing attractive incentives for investors. However, it’s crucial for entrepreneurs to carefully weigh the implications, from compliance and reporting obligations to ownership dilution and investor scrutiny. If you are interested in using EIS or other fundraising options to support your company’s growth ambitions, contact JW Hinks on 0121 456 0190. Our friendly team of experts can provide advice tailored specifically to your business needs, ensuring you access funding through the route that suits you best.