Unless investors looking for high returns have been hiding under a rock for the past few months, they should know that companies are pitching for their cash with the Seed Enterprise Investment Scheme (SEIS) and crowdfunding.
Although both schemes are aimed at raising start-up cash for entrepreneurs, some big differences separate them.
SEIS is a UK government backed scheme offering a range of tax breaks to qualifying companies in return for an equity stake.
Crowdfunding is typically when a pool of small investors offer funding to a start-up business in response to a pre-sale or development offer.
How SEIS works
Investors can input up to £150,000 cash into a three-year SEIS project in return for a stake in the share capital of the company.
In return, the investors pick up a 50% tax reduction on the first £100,000 injected into the scheme in the first tax year.
They also gain valuable capital gains tax breaks, including tax-free growth on the value of their investment and a 50% exemption on any assets sold to raise the SEIS stake money.
If the deal goes south, loss relief is available to set off against other income.
How crowdfunding works
Entrepreneurs put an online pitch together through a crowdfunding platform like Kickstarter.
Investors are typically invited to offer funding to the company or project at different levels which attract returns at different rates.
For example, a low investment might be rewarded with a web site mention, a T-shirt, merchandise or discount on buying a product or service.
Investors at a higher level might make a loan to the company or be offered shares.
Crowdfunding is likely regulated, by but investors receive little in the way of financial protection, no tax reliefs and no compensation if the deal goes wrong.
How they differ
Besides tax breaks, SEIS offers investors some control of the company which they are financing.
The investor generally negotiates a place on the board and has some input into how the seed cash is spent. A sophisticated SEIS investor would expect a business plan and a pre-planned exit strategy at the end of the three-year SEIS.
Crowdfunding is less formal and the projects may never come to fruition and have no set timescale for offering a return. Many investments are nothing more than donations to a cause.
Although the Financial Conduct Authority (FCA) lays down some safeguards for investors.
