I recently published a blog about HMRC's new EIS and SEIS guidelines. Since I wrote this, the crowdfunding platforms have met with HMRC to discuss the potential limitations these guidelines might present for companies looking to raise money through crowdfunding.
As a result of this meeting, an agreement was made and an update issued.
HMRC has been very clear that they don't want to discourage crowdfunding in any way, so they expedited the update before the old guidelines could have a negative effect.
So, what happened exactly?
HMRC found that were being inundated with speculative advance assurance applications. Companies were applying just in case they needed it in the future - taking up HMRC's time and causing delays for companies who genuinely needed to raise funds imminently.
As a result, HMRC started to ask for proof that the applicant intended to fundraise soon and that it was likely to be successful - including asking for evidence of lead investment, or a sponsor.
Crowdfunding platforms asked HMRC whether they would be considered a sponsor. The answer was no - since so many campaigns either failed to make it on the platforms, or failed to fund even if they did. This obviously made the crowdfunding industry incredibly nervous, since SEIS and EIS have been a catalyst behind the incredible success of equity crowdfunding in the UK.
HMRC didn't intend for their new guidelines to have this negative effect - so they arranged a meeting with the platforms to come to a new agreement.
What do the updated guidelines say?
The updated guidelines now have a clear space for crowdfunders.
‘Companies that have never raised an investment under one of the tax-advantaged schemes (the SEIS, EIS, VCTs or SITR) must demonstrate their intention, and their likely success in raising the money, by providing information about their prospective investors… [Applicants] must have engaged with individuals or business promoters who have agreed their investment plans are viable and are likely to attract investors'
Specifically in relation to crowdfunding, a company must provide the following:
‘...evidence, for example letters or emails, to demonstrate that the company has engaged with and begun the screening process with the platform. It is not enough for the company to show it has approached a platform; there must be confirmation that the platform accepts the company may be a viable investment for its customers and that further engagement is underway.'
So in essence you must show you are being seriously considered or have begun initial screening for listing by a crowdfunding platform. Most platforms have a selection process to ensure there is a degree of quality in the proposition, and that due diligence has been carried out.
Is this good for the industry, or bad?
I wasn't as upset as many people in the industry were about the new guidelines, because I feel that the overall success rates in the industry are lower than they should be. I felt all campaigners should be well prepared and have lead investment lined up in advance - the increase in success rates would be worth it.
However, the other side of the argument is that crowdfunding is all about democratising the start-up scene - so anything that potentially stifles opportunities is bad. Even worse would be over-regulation, or over-curation by experts, which equates to too much reliance on a few individuals who don't necessarily know how the market will respond.
So I think the new updated guidelines present a good balance. However, I would have liked to see approval being more likely when companies have evidence of other lead investment, as well as being accepted onto a crowdfunding platform.
Any other thoughts?
When the new guidelines were initially published, I predicted that they would be good for the sector as a whole as it will encourage campaigners to be well-prepared. I do think this will still be true, because it will make a company think before they submit their advanced assurance, and it will free up HMRC to respond to genuine applications faster.
However, my advice to anyone looking for crowdfunding is still to line up as much as you can before you launch your campaign, because it can't hurt your application to have both platform approval and lead investors. And it will undoubtedly improve your chances of success.
Sponsored post. Copyright © 2018 John Auckland, crowdfunding specialist and founder of TribeFirst