EIS and SEIS Share capital issue

EIS and SEIS Share capital issue

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Hi,

I have a client wanting to raise £400K through funding between a mixture of SEIS & EIS thereby giving away 40% of the share capital of the company. They currently have the £150K in place for SEIS and want to proceed with this.

However, my issue is that currently the share capital is 100 shares of £1 each - after discussions with HMRC they have advised that I would need to issue shares to reflect the current position on the SEIS round which would be in the proportion of 15% to the SEIS investors and 85% to the owner manager. Which is all fine.

My problem is that when the additional £250K comes in for the EIS - I would need to issue further shares to the new investors. I had suggested issuing further shares to the current shareholders so as not to dilute their shareholding, however, HMRC have advised that the SEIS investors would be required to pay for these additional issued shares otherwise it would affect their SEIS tax relief. This clearly wouldn't be attractive to the current SEIS investors.

This being the first SEIS & EIS investment I have completed I was wondering if anybody had a different viable solution to this problem? I have read on a previous post that somebody issued all the shares at the same time - but not sure if this is possible given that only £150K has so far been invested and that 70% / 4 months of trading needs to have passed before EIS shares can be issued.

Your help would be greatly appreciated on this.

Thanks,

Darren 

Replies (7)

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By kaff
18th May 2016 13:59

You can't issue all the shares on the same day, but you can issue the EIS shares the day after the SEIS ones. The 70%/4 month rule you refer to, was abolished in FA 2016.

Can you establish exactly what it is that the SEIS shareholders don't want to dilute? -i.e just pure share numbers, or voting rights, rights to income, rights to capital? Then assuming it isn't just share numbers but is actually one or more of the rights carried by the shares, issue each round of investors with different share classes,reflecting the desired rights each class is to carry - always ensuring that no individual SEIS or EIS investor will have more than 30%, and that no class carries a priority right to assets on a winding up, or a priority right to income in a way that is prohibited by the investment schemes. (See HMRC's VCM12020). By "priority right" I mean an entitlement to receive assets before another class. Unequal entitlements are fine if there's no priority.

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By Stella Field
18th May 2016 14:23

First please explain what you mean by "currently the share capital is 100 shares of £1 each". Do you mean that the company currently has 100 shares in issue, held by the owner/manager; or do you mean the company has an authorised share capital of 100 shares of £1, in which case how many have been issued to the owner/manager?
If we assume the former, then simple number crunching means that 100 shares will dilute to being 60% of the shares in issue, therefore total share capital will become 166 shares. 66 share to be issued to raise £400,000 = an issue price of £6,060.60 per share. (And I assume that the company has a sufficiently large authorised share capital to do this, otherwise the first job is to increase the authorised share capital)
SEIS share round to raise £150,000 so issue 24 shares to SEIS investors. (24 x £6060.60 = £145,454)

No longer any requirement to spend 70% of the SEIS money before the EIS share issue. So next day issue 42 EIS shares at £6,060.60.
Remember to keep each EIS investor to below a 30% shareholding, i.e. 166 shares x 30% = no single SEIS / EIS investors cannot have 50 shares or more.

The SEIS investors know all along that they will diluted as further shares are issued.
I think that the bigger political problem is who gets the SEIS shares with their 50% income tax relief and who gets the EIS shares with their 30% income tax relief. Or should all of the external investors get a proportionate share of each?

If you are thinking of issuing shares at price £X to SEIS investors and on the same day owner manager subscribes for shares, then beware of Employment Related Securities, if he is subscribing at a lower share price.

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By darreross
18th May 2016 15:32

Really appreciate both of your responses on this.

I can understand now that how you would structure the share issue. The problem I have is that £150K is now in and the company wanted to issue the shares and SEIS now. But upon reflection and what you have advised below it is probably best to wait until all funding is in and then issue the shares accordingly.

Thanks for your help.

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Replying to darreross:
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By Stella Field
18th May 2016 15:52

How long between company getting the £150k and issuing the shares? I know that the rule is cash in before share issue, but you need to be careful of cash sitting around in the company for ages before the share issue. HMRC could then argue it was a loan to the company, which was capitalised into shares - no SEIS!

You also need to manage investor expectations - cash into company but no paperwork to confirm their investment!

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Replying to Stella Field:
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By darreross
18th May 2016 16:10

The client has advised that it might take up to 6 months to get the additional funding in.

I know it is some distance apart but can't really see how else this could be facilitated without the investor going cold.

The owner will manage the investors expectations they are just interested in getting their relief to be able to claw back for 5 April 2016 tax return - so will have until 31 Jan 2017 to get the certificates issued.

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Replying to darreross:
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By Stella Field
19th May 2016 15:50

If it is going to take 6 months between cash in and share issue, and in the meantime the company is going to spend the cash, then what is there to demonstrate that this is not a loan to the company? At the very least, get some board minutes in place stating that the company has received funds from Mr X etc. that are for a share subscription.
If the SEIS investors know up front that the company is looking to raise £400k and they are investing only £150k, then they know their shareholding is going to be diluted when the other £250k comes in - what is their problem with this!
Their real problem is if the company needs more funds in the future = more investors = more dilution.

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By Arbeiter
08th Dec 2016 19:07

Ok, this thread is a bit old, but ...

Why does Stelle Field mention authorised chare capital, especially to a newly formed company? This was removed years ago!

Also I don't read anything about pre-emption rights. T
he SEIS shareholders unless they have waived their pre-emption rights (if so where, how?) they are entitled to be offered new shares pro rata their shareholding at the SEIS round.

Also the question does not make sense when you say that HMRC states that SEIS shareholders need to pay for additional shares or otherwise it would affect their SEIS relief. Where do you get this from?

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