The Chancellor's March 2011 Budget introduces changes to the way companies can raise money from Venture Capital Trusts (VCTs) and through the Enterprise Investment Scheme (EIS). Due to take effect largely from April 2012, the changes are likely to open up significant new sources of funding for companies looking to list, or raise further funding, on AIM.
In essence, the Treasury is doing three things which may help many AIM companies raise funding from individuals and VCTs:
First, it is making EIS investments more attractive to individual investors by:
- Increasing the up-front income tax relief to 30% (from 20%); and
- Doubling the annual amount that an individual investor can invest under the EIS to £1 million.
Secondly, it will allow VCTs and EIS investors to invest in much bigger companies than is currently the case by:
- Increasing, from 50 to 250, the number of full-time employees a group may employ; and
- Allowing VCT and EIS investments in companies with aggregate gross assets of up to £15 million immediately before, and £16 million immediately after, the share issue (previously, assets were capped at £7/8 million).
Finally, it will allow companies to raise up to £10 million from VCT and EIS investors in any rolling twelve month period - a 500% increase on the current cap of £2 million.
In addition, changes announced in last year's Budget, which come into effect on 6 April 2011, mean that newer VCTs must invest a significantly greater proportion of their funds in equity (rather than loan stock or preference shares). This will result in AIM stock becoming a more attractive investment opportunity for them.
What does this mean for you?
It's widely anticipated that these changes will generate a lot more interest in investing in VCTs, or EIS-qualifying share issues. This means:
- If your company is listed on AIM, or looking to join AIM in the short to medium-term, VCTs and EIS investors will, once more, represent a key source of potential funding.
- If you are an individual looking for tax effective ways of investing your money, or a VCT fund manager, there are likely to be a lot more investment opportunities. These will be created as a result of many more companies becoming eligible for investment under the VCT and EIS schemes.
- If you are a fund manager thinking of launching a new VCT or EIS fund, there is likely to be a lot more appetite from investors (and a growing number of other managers looking to launch new funds!)
But bear in mind that not all companies will be eligible for investments by VCTs and EIS investors - there are still a number of conditions to be met for a company to be eligible. So whether or not an AIM company is eligible for VCT and EIS investments could become an important factor in that company's ability to raise funds.
What should you do?
Many of the changes will not take effect until April next year. But in the meantime:
- If your company is listed on AIM, or looking to join AIM in the short to medium term, start looking now at whether you would be eligible for investment by Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS) investors. If you are, consider whether it is worth waiting until next year, when all of these changes should have been implemented.
- If you are a fund manager, and looking to raise funds to take full advantage of the changes, the planning for that process starts now.