There is an explicit requirement that any money raised from EIS investments must be for the company’s organic growth and development or, where the company is a parent company, the group’s. The legislation does not define what is meant by growth and development. It therefore takes its ordinary meaning. Generic indicators of growth would include results such as:
- increasing revenues over time
- increasing a company’s customer base
- increasing the number of employees.
However, there may be other indicators depending on the specific circumstances of each company’s activities. In essence the money must be employed to deliver something that will enable the company to grow rather than preserve the status quo. The money may not be raised to:
- acquire all or part of an existing business
- the money may not be used primarily to cover pre-existing day to day expenditure.
However, there may be some cases where, for pre-revenue companies, a small proportion of funding is required to cover pre-existing costs as part of an overall programme of growth and development. This should be set out in the business plan, and companies will be assessed on a case by case basis.
Money raised by issuing shares to an EIS investor to replace an existing loan is unlikely to meet the growth and development condition. Being freed from the burden of debt alone is not sufficient purpose. A company would need to demonstrate that the extra growth and development it would benefit from would be commensurate with the amount of the investment.
Companies should state clearly in their business plan how the growth and development requirement is expected to be met. For example, a company may wish to set out explicitly how many new employees will be taken on, what new products will be developed, and/or how the investment will allow the company to reach new customers. The level of detail in a business plan will depend on the size and development stage of the company and the amount of investment that is being sought. Each case will be decided on its own specific circumstances.
A company has been set up by its two founder directors to develop an app for a smartphone. They have raised £150,000 SEIS funding and now want to raise a further £100,000 EIS funding. The company needs extra funding to enable it to employ a new specialist programmer and a sales manager. The directors expect the product to be ready for market in 6 months which will enable the company to start selling its product. The investment meets the growth and development condition.
A company has been set up by its founder directors to develop a new product and is seeking £5 million in EIS funding. The company’s business plan sets out in detail what it plans to spend the money on, including new employees, plant and machinery and business premises. The business plan includes discounted operating costs and revenue projections for the next 5 years as well as projected future funding requirements. The investment meets the growth and development condition.
A company has been set up to build a warehouse for a large company to use for its internet sales. It wants to use £5 million of investments to carry out the build. The company will make a few small sales before the warehouse is finished to show it has started to trade and sell on the warehouse to the internet company after it has been trading for three years.
The company does not meet the growth and development condition. It has been set up for the purpose of building a warehouse for another company and after the warehouse has been delivered the company will be left with no ongoing business and no, or few, employees commensurate with the original £5 million investment.
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