Over the years, we are constantly asked what are the best ways of obtaining equity financing for companies and how to raise capital for one off projects. Our answer is nearly always the same: it depends. It depends on what stage the company is at - whether it is startup funding that is required or whether it is equity finance that is required for an established business. It also depends what sector it is in and who is behind the company - the personality of the entrepreneur, the credibility of the board of directors etc.
Some sectors of course are easier to raise capital for than others. For example, property is currently very difficult to raise money for. We have helped to raise funds for the property sector but is is always a struggle and is very location / project specific. However, the tech sector is a different matter. We recently did a pitch to a well known London nomad/broker regarding a potential REIT (Real Estate Investment Trust) and sensing that there was not much interest decided to ask if they had any interest in the online sector as we had a company looking to raise finance via an AIM listing. Within minutes the roles had reversed and we no longer were trying to "pitch" but rather we were the ones being "pitched" to.
So if your company needs to raise capital, there are tried and tested ways of obtaining it. Below are what we believe to be the five most successful:
1) Equity financing up to £150,000 (i.e. Startup funding) - for this stage it has to be the Seed Enterprise Investment Scheme ("Seed EIS"). Any new company seeking startup funding needs to register as a Seed EIS. It is definitely an attractive way to get investors interested in your company as it provides investors with 50% income tax relief, 50% capital gains tax relief, 100% capital gains relief on the gains made on the investment and 100% inheritance tax relief after two years. If you want to raise small amounts of startup funding for a new company, a Seed EIS in our opinion is definitely the way to do it. Not registering as a Seed EIS is missing an opportunity to attract investors (and save them a considerable amount of tax). Combining a Seed EIS with crowdfunding is a good way for any entrepreneur to raise startup funding.
2) Equity financing up to £5,000,000 (i.e. startup funding / established businesses) - for this it has to be the Enterprise Investment Scheme ("EIS"). Similar to the Seed EIS, the EIS provides investors with 30% income tax relief, capital gains tax deferral (note: unlike Seed EIS, it is not capital gains tax relief), 100% capital gains tax relief on the gains made on the investment and 100% inheritance tax relief after two years. The EIS is one of the most popular ways to make an investment in your company attractive and any company wishing to raise capital should offer this to investors. There are of course other methods, such as venture capital, but the EIS route is currently proving the most successful.
3) Equity financing over £5,000,000 (i.e. established businesses, property funds etc.) - for this a fund structure such as a Jersey Expert Fund or a UK exempt property unit trust ("EPUT") is appropriate. Fund structures come in all different shapes and sizes and no one structure fits all. It very much depends on the sector the company is in and how the investors would like to invest. For example, if it is UK pension monies investing in property, then an EPUT may be most appropriate. Costs can vary widely also - from the inexpensive onshore fund structures to the expensive (and very slow) listing of a fund on the Channel Islands Stock Exchange (CISX). Also to be considered is venture capital which is attracted to high growth companies that are already established. This is a difficult segment to be in, too small for an AIM listing, too big for an EIS. It is the segment where an investment adviser can add most value in helping the company raise money.
4) Equity financing up to £30,000,000 (i.e. a company wishing to expand) - the AIM market is very attractive for such situations. It is widely recognised by investors to be a highly liquid market (unlike the CISX) and is relatively inexpensive to list on. We have advised AIM listed companies and have always found working with AIM to be straightforward and relatively light touch in regard to regulation.
5) Equity financing over £30,000,000 (i.e. established companies) - then either the AIM market or the main market. However, funds approved by the Financial Conduct Authority should not be overlooked as a means to attracting retail investors. However, it depends largely on the sector that the company specialises in. For example, to successfully list a REIT, it needs to be circa £100 million in size. The AIM market is very attractive for REITs as the 2012 Finance Act abolished the previous 2% entry charge. In summary, there are many options that companies can choose from in this segment.
It is almost always difficult to raise capital. It can take a long time and you need to be prepared for a long process of dealing with legal and accounting due diligence questions as well as endless questions from investors and/or regulators.
Sapphire Capital Partners LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. We assist our clients obtain finance via Seed EIS, EIS, onshore and offshore funds and preparing for an AIM or CISX listing.
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