As a small business or startup, you may have heard of the Seed Enterprise Investment Scheme (SEIS) which was designed to help startups through their capital raises.
On 23rd September 2022, the UK government announced certain amendments to the existing SEIS regime. More specifically, the amendments are closely related to the following:
- The size and age of companies that can raise SEIS investment
- The amounts they can raise
- The income tax and capital gains tax reliefs investors can claim on their SEIS investment
So, what do these changes mean for your business? And what can your business do to remain compliant with these changing laws?
Let’s discuss these amendments in more detail.
What Is The Seed Enterprise Investment Scheme (SEIS)?
Before we dive into the changes, let’s quickly go through what the SEIS actually is.
The SEIS is an incentive for investors to invest in small businesses and startups in the UK. More specifically, it offers tax reliefs to investors who intend on purchasing or subscribing shares in a company.
This is good for small businesses and startups who are in the early stages of their business journey and require the necessary funding for their next steps.
Under the scheme, businesses can receive a maximum of £150,000 to help them hit the ground running (however, this is set out to change – we’ll cover this in more detail below).
What Are The New SEIS Measures In 2023?
Now that we’ve gone through what the SEIS is, what’s changing in 2023?
Essentially, the proposed amendments are:
- Increased investment limit: the amount of money that a company can raise in the relevant period, and on which investors can claim relief, will be raised from £150,000 to £250,000.
- Increased gross asset limit: the limit on a company’s gross assets at the date of the investment will be raised from £200,000 to £350,000
- New definition of ‘new qualifying trade’: the company’s age limit that applies to new qualifying trade will be increased from 2 years to 3 years
- Increased investment limits: the annual investment limits on which individual investors can claim reliefs will be increased from £100,000 to £200,000
When Will These SEIS Changes Take Effect?
These changes were first announced by the UK government in September 2022. However, they are to be legislated in the Spring Finance Bill 2024 and have effect for shares issued on or after 6th April 2023 (the new tax year).
What Do These Changes Mean For Your Business?
If you’re a small business or startup that is currently raising funds, or you’re looking to raise further funds, it’s important that you consider how these changes will affect your current capital raising strategy.
For instance, if you plan on increasing the amount you wish to raise as a result of increased investment limits, your legal documents should accurately reflect these changes. It’s also important that all parties to these contracts are on the same page, so they should be reviewed by both parties and an expert lawyer.
Otherwise, if you have yet to draft the relevant documents due to a change in your capital raising strategy, our team is happy to help here too.
So, what kind of documents would be affected by these changes?
Capital Raising Documents Your Business Needs
Whether you already have the relevant documents and need to update them according to business changes, or you don’t have the documents yet and need a lawyer to draft them for you, you’ve come to the right place.
Let’s discuss which documents you’d need for your capital raising journey and where you can get the right legal help.
Advanced Subscription Agreement
An Advanced Subscription Agreement (ASA) is commonly used when an investor pays for shares, but they will be allocated at a later date.
ASAs are a popular option for startup owners because it’s often difficult to accurately value your shares when you’re just starting out. An ASA means you can still get the financing you need to get started, and then issue shares at a higher valuation later down the track. This way, you won’t have to worry about investors negotiating a lower valuation and you getting less than you deserve!
By the time you get to your next equity round, there is a higher chance of your valuation being a bit more accurate. Since the shares are not being allocated just yet, it’s important that you get the key details in writing between you and your investors.
It’s also important to note that this is slightly different to a Convertible Note as an ASA has no interest, thereby qualifying for SEIS/EIS tax reliefs. A Convertible Note does not qualify for SEIS. If you want to learn more about Convertible Notes and how they could help your startup (separate from SEIS), our expert lawyers are more than happy to chat you through your options as part of our Convertible Note package.
An ASA is easy to confuse with other types of documents involved in a capital raise – we’ve written more about the difference between a SAFE Note and an Advanced Subscription Agreement to help you take the right steps.
Share Subscription Agreement
A Share Subscription Agreement is an essential legal document if an investor is receiving equity in your company. This is different to ASAs (as discussed above), where investors don’t receive any shares until a later date.
Under a Share Subscription Agreement, the investor will receive the shares upon purchase. So, this type of agreement is more suitable for investors purchasing ordinary shares or preference shares.
A Share Subscription Agreement should outline the relationship between you and the investor buying shares, and details around the payment they’re making for those amounts of shares.
This way, if anything goes wrong or any issues arise, both you and the investor can refer back to the Share Subscription Agreement to settle key matters.
Term Sheet (Capital Raise)
Another key document you’ll need as part of your capital raising journey is a Term Sheet.
Generally speaking, term sheets are not legally binding. However, this doesn’t take away the importance of the document itself, which is why it’s a common document used in small businesses and startups.
Term sheets are a good way to set out the key commercial terms of your capital raising arrangement. It often acts as a stepping stone for your legally binding contracts or long form contracts later down the track.
Either way, it’s always important that all parties (you and your investors) are 100% clear on the terms you’ll be agreeing to moving forward, especially where lots of financing is involved!
Top Up Round
If you’re in the startup space, a Top Up Round is likely to sound familiar.
A Top Up Round is used to top up shares in between funding rounds. However, during this process, you need to have the right documents in place to protect your startup against key risks and ensure you do it all correctly.
At Sprintlaw, we offer a Top Up Round package to assist your business. It includes:
- Preparing board resolutions, shareholder resolutions and a SH01 Form for a top up round
- Preparing draft Share Certificates to issue
- Phone consultations with a Sprintlaw lawyer
Capital Raising Package
If your business is after more general legal help during your capital raise, we also offer a Capital Raising Consult package.
As part of this package, our experienced startup lawyers can guide you through your options and help you decide on the next steps so you can confidently move forward with your investment preparation.
Please note that this package does not include any formal written advice, or any tax or industry-specific advice.
Need Legal Help?
These key changes to the SEIS regime can affect your business’ capital raise and how you approach it. To ensure your business is both legally compliant and protected moving forward, it’s wise to chat to an experienced startup lawyer who can guide you through your options in light of these amendments.
If you need help with your capital raise, reach out to our friendly team and they can connect you with the right lawyer. You can reach us at 08081347754 or [email protected] for a free, no-obligations chat.
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