VCM0012

Written evidence submitted by Brown Rudnick LLP

1.         Introduction

1.1                Brown Rudnick LLP is an international law firm with offices in Boston, New York, Washington, D.C., London, Paris, Orange County, Hartford, and Providence. Our lawyers practise across the full spectrum of the venture capital market, focussing on equity investments and corporate venturing in the United Kingdom, the United States and Europe. In particular, we regularly act for companies and investors in high growth sectors such as technology and life sciences. We have one of the UK’s most active cleantech / energy transition practices, hence the focus on these sectors contained within the statements below.

1.2                The views and comments contained herein are those of Brown Rudnick LLP and do not represent the views of any of our individual clients.

  1.       Proposed increase to annual SEIS and EIS investment limits

2.1                The Enterprise Investment Scheme (EIS”) and Seed Enterprise Investment Scheme (SEIS) have played a key role in encouraging investment in early stage companies and enhancing UK innovation since inception in 1994 and 2012 respectively.

2.2                However, since 2018 there has been a reported 18% decline in seed-stage deals in the UK[1] and a decreasing number of new companies using EIS, with only 22% of the total EIS investment between 2020 to 2021 being raised by companies using the EIS scheme for the first time[2].

2.3                It is clear that the investment limits for SEIS and EIS have become outdated and are in need of urgent review, particularly in light of current inflationary pressures, to help qualifying companies benefit from the schemes. The current investment limits for each of the schemes are set out below as follows:

2.3.1         EIS: a total of £5 million can be invested into a company within any 12 month period and a maximum of £12 million during its lifetime (including amounts received from other venture capital schemes); and

2.3.2         SEIS: a total of £150,000 can be invested into a company during its lifetime.

2.4                It is noted that the increase in the annual EIS investment limit for companies from £2 million to £5 million from 2012 to 2013 attracted significant investment, with the amount of funds raised almost doubling in the tax years ending 2013 to 2015[3]. It is our view that a material increase to SEIS and EIS investment limits would have a similar impact on current fundraising levels and we encourage the committee to consider increasing the investment limits to the thresholds as set out below:

2.4.1         EIS: increase to a total of £10 million that can be invested into a company within any 12 month period and a maximum of £20 million during its lifetime (including amounts received from other venture capital schemes) for qualifying companies operating in cleantech and energy transition technologies sectors (“Climate Tech”).

(a)    Climate Tech provides positive environmental impacts across a variety of industries and develop solutions to global environmental issues. Given the importance placed on companies operating within Climate Tech, increased support should be offered to help such companies develop and prosper from an early stage.

(b)    Climate Tech companies typically have higher start-up capital requirements than other early stage companies, often driven by extensive R&D costs, and are therefore often in need of higher levels of investment.

(c)    The application of higher EIS investment limits to qualifying companies within cleantech and energy transition technologies sectors will help mitigate against any potential threats to tax revenues as opposed to introducing such increase for all qualifying EIS companies.

(d)    Given the exclusion for EIS relief for all companies engaging in energy generation and / or fuel activities from April 2016, enhanced support for Climate Tech companies would offer a boost to this sector (particularly in the context of the current energy crisis).

2.4.2         SEIS: increase to a total of £300,000 that can be invested into a company during its lifetime.

(a)    £150,000 is simply too low to be impactful for technology or life sciences companies. We consider that increasing the investment limit to £300,000 would expose SEIS qualifying companies to higher levels of investment without presenting a significant threat to tax revenues.

  1.       Relaunch of the Future Fund for Climate Tech Companies

3.1                The Future Fund scheme, introduced by the UK government to support early stage high-growth companies facing financing difficulties following the outbreak of the COVID-19 pandemic, proved to be a popular initiative with nearly 1,200 high-growth companies obtaining convertible loans before the matched funding scheme concluded in February 2021[4]. The scheme not only helped numerous tech companies to survive the perils of the pandemic but also helped to stimulate their development with Future Fund scheme companies converting their loan notes as part of their London initial public offerings (such as our client Libertine Holdings Plc in December 2021[5]).

3.2                Furthermore, the success of the Future Fund scheme has given rise to the creation of similar commercial products (for example, the convertible loan note products offered by Saturn Investors[6]), which conveys how popular convertible debt financings remain for early stage companies and investors.

3.3                Given the continued appetite for both investors and early stage companies to utilise convertible loan investments, we encourage the committee to consider a relaunch of the Future Fund scheme (to exist alongside the current “Future Fund: Breakthrough” scheme, which is not available to smaller UK companies) on the following basis:

3.3.1         early stage companies eligible to participate in the scheme should be limited to companies operating in Clean Tech sectors (for the same reasons as detailed in paragraph 2.4.1 above); and

3.3.2         the Future Fund should be granted the right to invest in future funding rounds and/or provide further funding to scheme companies. The Future Fund is current prohibited from “following its money”. Such right would be utilised by the Future Fund at its discretion, which would help to protect and reinforce the Future Fund’s investments as well as the prospects of scheme companies.

  1.       Conclusion

4.1                The above changes would help to catalyse the increase in Climate Tech investment in the UK and also improve long-term energy security, as British based companies develop innovative solutions to the climate crisis.

 

June 2022

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[1] https://www.growthbusiness.co.uk/seed-enterprise-investment-scheme-must-be-overhauled-say-experts-2560316/

[2] https://www.gov.uk/government/statistics/enterprise-investment-scheme-seed-enterprise-investment-scheme-and-social-investment-tax-relief-may-2022/enterprise-investment-scheme-seed-enterprise-investment-scheme-and-social-investment-tax-relief-statistics-2022

[3] Ibid.

[4] https://www.thetimes.co.uk/article/rishi-sunaks-1bn-future-fund-pumps-cash-into-over-30-failures-rsvtwdvkp

[5] https://www.investegate.co.uk/libertine-holdings/rns/intention-to-float-on-aim/202111300833210195U/

[6] https://www.saturninvestors.com/co-investing-and-convertible-loan-notes/