This article has been updated here
At the start of this year the new guidelines in relation to SEIS and EIS came into force. SEIS and EIS provide investors with up to 80% protection against an investment they make into a UK startup, which is taken as a tax relief against your income tax bill.
Most of what the new guidelines say provides context to their decisions, but this is the part that matters most to crowdfunders:
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 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.
You can read the full guidelines here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/663935/Tax-advantaged_venture_capital_schemes-streamlining_advance_assurance_service-Gov_response.pdf
If you’re thinking of crowdfunding, how will this impact you?
As is the case with guidelines, they’re open to interpretation. So, we spoke to the platforms to ask for clarification and, in-turn, they 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 individuals or institutions who you are in advanced discussions with. This doesn’t mean that the deal has to be done – just that there are serious conversations taking place.
The good news for crowdfunders 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.
Most of your effort and resource for crowdfunding will go into preparing your campaign for the public raise, and a large part of this effort will be applied to finding lead investment.
Companies we work with typically take 2-3 months prep time, and with the new guidelines we don’t expect this to change – HMRC is planning on reducing advanced assurance applications to 15 days. The very first thing we encourage campaigners to do is initiate conversations with angel investors, institutions and friends & family – 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 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.
The most ambiguous aspect of the guidelines is the use of the word ‘sponsor’. The crowdfunding platforms have been told they aren’t sponsors. So, who else might you turn to strengthen your application?
We’ve seen a number of other service providers spring up as the crowdfunding market matures, and I expect some of these providers will classify as sponsors, whereas others won’t. Ultimately, it will come down to how successful they typically are.
At TribeFirst, we have a greater than 87% success rate, and 100% in the last six months, which will give extra confidence to HMRC that our client’s campaign will probably go on to fund.
There are other options available to you, such as companies like Focused for Business, or IdeaSquares who run their own crowdfunding accelerators. Or you can work directly with these organisations on a 1-2-1 basis, where they help to connect you with lead investors and use their higher-than-average crowdfunding success rates to show that you’re more likely to gain funding.
I believe the new guidelines for SEIS/EIS advanced assurance will provide a significant uplift in equity crowdfunding success rates across the sector, because companies that don’t properly prepare won’t receive advanced assurance, so they will realise they’re at a disadvantage and either choose not to campaign, or do the legwork to find lead investors.
Overall the new guidelines should be seen as a good thing for the industry, and a good thing for your campaign. It will only encourage you to run the right kind of campaign – the well-prepared kind.
ABOUT THE AUTHOR
John Auckland is a crowdfunding specialist and founder of 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. TribeFirst is the world’s first dedicated marketing communications agency to support equity crowdfunding campaigns and the first in the UK to provide PR and Marketing campaigns on a mainly risk/reward basis. John is also Virgin StartUp’s crowdfunding trainer and consultant, helping them to run branded workshops, webinars and programmes on crowdfunding. John is passionate about working with start-ups and sees crowdfunding as more than just raising funds; it’s an opportunity to build a loyal tribe of lifelong customers.