Continuing our series of blogs exploring various sources of public and semi-public funding, I outline the option of securing funding from Venture Capital Trusts (VCTs).
Source of funding and summary of the program
Similar to the Enterprise Investment Scheme (EIS), VCTs were introduced by the Government to encourage investment in small and start-up companies. The scheme allows investors to invest in managed fund vehicles, which in turn invest in the debt and equity of unlisted trading companies.
An investor in a VCT is entitled to income tax relief on 30% of the amount invested. An investor can invest a maximum of £200,000 into VCTs in any tax year and must hold the investment in the VCT for a period of at least five years. Investors are exempt from capital gains tax on any gain realised on the sale of their investment in a VCT.
Unlike EIS funds, VCT funds are publicly traded entities, which provides investors with a greater degree of liquidity after the initial lock-in period.
Eligibility
To qualify for investment from a VCT fund, a company must:
- have no more than £15 million gross assets before and £16 million gross assets immediately after investment
- have been trading for less than 7 years (10 years if a knowledge intensive company), although certain exemptions to this requirement are available
- be independent (i.e. not a subsidiary of another company)
- have less than 250 employees when the investment is made. (500 employees if a knowledge intensive company)
Unlike EIS investments, VCT funds can invest via a mix of shares and loans in a company. However, the VCT must acquire a minimum of 10% (by value) of the issued ordinary shares in an investee company and at least 70% of the VCT’s investment must be in the form of non-redeemable ordinary shares carrying no preferential rights to assets on a winding-up.
A company can raise no more than £5,000,000 (or £10,000,000 in the case of knowledge intensive companies) from VCT investments and other relevant investments in any year. Other relevant investments for this test include EIS and SEIS Investments and other schemes that qualify as ‘state aid’.
VCT investment is only available if a ‘risk to capital test’ is satisfied, requiring (a) that the company have objectives to grow and develop over the long term and (b) that the investment carries a significant risk that the investor will lose more capital than they gain as a return (including any tax relief).
A company will not qualify for VCT investment if it is financially distressed at the time of the investment.
Any restrictions or limitations on access to or use of the funding secured
Like EIS investments, money raised from VCT funds must be used for a qualifying trade. This requirement excludes (among others) businesses dealing in land, shares or commodities, property development activities, farming, financial activities and the operation or management of hotels or nursing homes. Companies must also not use VCT investment monies to pay cash out to shareholder or to acquire other businesses or trades.
What is the process for applying for the funding?
VCT funds are managed by venture capital or private equity fund managers. The fund managers deal with all aspects of the application process, determining if an investee is suitable for their funds requirements, assessing the investee’s business plan, carrying out due diligence on the investee and negotiating the terms of the deal.
If you are looking to secure funding for your business, please contact me directly or another member of our Tech Funding Team.
