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06-11-2017 - - 0 comments
Revealed - the investing habits of EIS investors

Now that equity crowdfunding is firmly established in the funding ecosystem the EIS statistics are getting more interesting to analyse – especially the table on the amounts investors are allocating to the scheme each year.

The first big message that the volume growth in numbers of investors investing is mostly at the lower end of the market.  Compared with 2013-14, the numbers of investors in 2015-16 (once most claims have been filed) should show around 27% growth in the category of investors investing less than £25,000 per annum.  Of this the largest growth can be expected in those investing between £10,000 and £20,000.  We estimate the numbers investing up to £20,000 could reach a tad under 23,000 individuals and if similar growth rates continue for 2016-17 they could reach 25,000 or more.  This is useful insight for those studying the equity crowdfunding market as it suggests that the big numbers sometimes quoted for the size of the crowd is a long way from the numbers investing.

If you are fundraising there are some clues as to where investors cluster by amount they invest.  Raising in units of £25,000 to £50,000 will appeal to the most investors (over 5,000 invest this amount annually compared with 2,250 in the £50,00-£75-000 category).  If you are in the crowd little harm will be done if you set a minimum investment of £2,500 per investor. And with around 10,000 investors investing between £5,000 and £20,000 you should be able to do a sensible calculation about how many investors you will get into your campaign.

At the top end of the market the growth in numbers is also healthy. Those investing more than £200,000 a year has grown by around 20% over the last couple of years and we estimate around 1,600 people are now investing this amount annually.  What is telling is that in this category around 20% of filings are now being made in later years than the first year in which an investor can file.  Does this mean companies are facing challenges in getting their EIS 3 certificates to investors? 

Despite HMRC suggesting that the statistics on amounts being claimed may be off by around 5% due to its inability to add to these numbers, the EIS claims made under PAYE we still think there is a missing £400-500m between the amounts companies say is being invested vs the amount HMRC tells us is being claimed.  This is a large enough number that it is worthy of further investigation.  Is it that investors rolling over capital gains (from the sale of buy to let property?) do not realise they have to file an EIS3 certificate to claim the relief of they will not qualify?  Or is it that people with capital gains are claiming but do not have enough income tax to make a full claim? 

If the growth in EIS investing really is because of buy-to-let and second home property sales it begs the question about HM Chancellor’s strategy about super taxing such transactions. Possibly the tax relief through EIS.  I suspect we will see further growth in EIS investment as buy to let landlords look to EIS (and VCT) investment to shelter income generated from profits on residential property.

Regardless of my musings on the topic, wealth managers, IFAS and accountants should take note and encourage investors to make sure they make their claims.

The other interesting observation about the numbers of investors and volumes is our estimate that in 2015-16 the top 500 investors will each invest £450,000 or more to total £350m.  The 700 people below them will only invest around £225m.  However, the top 500 have only increased spending by around £25m in the last couple of years, but the next 700 have increased their spending by £50m in the same period!

There does seem to be a real problem with the sucking of investment into companies registered in London (note this is not necessarily where the operational business is geographically located).  Investment (even taking into account a grossing up of investment for late returns being filed by companies) for 2015-16 will be falling in North West, East Midlands and South East.  And it is basically flat in North East, South West and East of England.  This does beg the question whether there are companies setting up an office in London but actually using the funding elsewhere and possibly overseas.  It is permissible for an EU company that has a base in the UK and with UK tax payer investors to use the scheme even if the company is effectively generating its profits out of an overseas operation.   HMRC should investigate further now that half of investment under the scheme is into companies registered in London.

I will be doing more analysis of EIS and whether it is predicating an in balance in our economy in next month’s issue.

 

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