One question entrepreneurial investors have to weigh up is what to choose – crowdfunding or the Seed Enterprise Investment Scheme (SEIS)?
Both are alternative investment routes for start-up businesses but SEIS offers much more protection against risk.
SEIS is the ultimate tax wrapper for investors looking for financial safeguards, high returns and minimal risk.
Crowdfunding is more entrepreneur orientated, giving them more freedom over their businesses and the investor less financial protection.
Another problem with crowdfunding is pitching for funding on an open online platform can reveal too much to competitors who can take a deal and make a rush to market to kill the crowdfunder’s advantage.
Who’s in control of the cash?
Venture capitalists also view SEIS and crowdfunding pitches in different ways.
Professional investors know the directors of a SEIS company have to jump through a lot of hoops to get HM Revenue & Customs (HMRC) pre-approval for their project, so a SEIS is likely to have a business plan and been through some degree of due diligence.
Crowdfunding is often viewed as the place of last resort to find funding. Many of the investors dabble in small sums as a hobby for rewards rather than offer serious money for serious returns.
That’s where financial control comes in. Investors take an equity stake with a SEIS and experienced business people want a seat on the board and to be part of the decision making if their cash is at stake.
Crowdfunding does not necessarily allow investors that kind of financial control and sometimes no return on their cash.
Tax breaks
This enhances the financial control issue for investors – big investors will want to force a deal that gives them a hand on the purse strings and a say in how their money is spent.
For many, crowdfunding is more market research and a way to rack up pre sales and determine interest in a product than a straight business pitch like SEIS.
But the icing on the cake is tax breaks.
Crowdfunding offers no tax breaks – while SEIS comes with income tax and capital gains tax advantages and loss relief if the deal goes wrong.
For investors who like the idea of crowdfunding and want to spread their SEIS cash, several investment firms run SEIS funds that allow an outlay across several firms but still keep all the tax benefits of the scheme.
