Around £200 million of small business investment is under threat from proposed regulatory change that captures venture capital funding.
The majority of firms expect venture capital to almost dry up as a crackdown on unregulated collective investment schemes (UCIS) by the Financial Services Authority (FSA) captures venture capital and Enterprise Investment Schemes (EIS).
Most leading venture capital firms are ‘concerned’ about the impact of the new rules, according to research by venture capital group Bestinvest. The firms polled account for around 60% of funds raised for investment in small businesses every year through venture capital and EIS schemes.
The problem is an FSA consultation paper proposing to ban UCIS and similar unregulated funds from general investors and to only offer them to high-net-worth individuals. The thinking is less wealthy investors may not fully understand the product and the risks of their investment.
While the paper does mention venture capital, they appear to fall within the definition and unlike investment trusts they have not been specifically exempted from the proposal.
Small business investment
The survey revealed managers are bracing themselves for a reduction in VCT fund raising of at least 75%.
The management groups also indicated that as few as 25% of the businesses they have financed have the option of going elsewhere – which could lead to a potential annual shortfall of £200 million for investment in small businesses.
Jason Hollands, Bestinvest managing director for business development, said: “It is clear from our survey that VCT managers are highly concerned about the potential impact of this proposal on their ability to raise new funds.
“This in turn could choke off a valuable source of funding for small enterprises at a time when bank lending remains scarce and the UK is trying to claw its way out of recession. These are the sorts of businesses we need to succeed to get the UK economy moving again.”
VCT managers are perplexed
The firm also voiced how investment managers across the market are confused by the terms of the FSA consultation.
Dan Tubb, Head of VCTs, at Bestinvest said: “Managers are perplexed as to why VCTs were not exempted in the proposals. VCTs share many of the characteristics of investment trusts which have specifically been exempted from this proposal, such as independent boards and built-in shareholder safeguards.
“In addition they are traded on the secondary-market which would remain wholly outside the scope of these proposals. We therefore believe it is right for VCTs to continue be available to those retail investors who either take appropriate advice as to their suitability or who choose to make their own decisions, and not become the preserve of only the richest investors.”