Venture capitalists are urging financial regulators to clear up confusion over the future of the tax efficient investment vehicles that fund start-up businesses.
New rules proposed by the Financial Services Authority (FSA) will ban unregulated collective investment schemes (UCIS) and related investments because the regulator fears unsophisticated investors do not understand the risks involved and could lose too much money.
Instead, only wealthy investors will have access to schemes like venture capital trusts (VCT), the Enterprise Investment Scheme (EIS) and small cousin, the Seed Enterprise Investment Scheme (SEIS).
The Association of Investment Companies, the trade body that includes venture capital schemes, is concerned the unclear wording of the FSA proposal may damage investment plans of start-up firms.
The proposal does not mention venture capital trusts (VCT) by name, but they do fall under the UCIS definition as they are close-ended investments.
FSA reasoning is flawed
The FSA proposals give several reasons for a ban on UCIS for most investors –
- UCIS follow complex or opaque investment strategies
- Investments are high risk or speculative
- Underlying assets are difficult to value.
- The way UCIS are structured and run are unfamiliar to many investors
The AIC reckons 106 VCTs with total assets of £2.5 billion were running at the end of October 2012, and talk of a ban on promoting is injecting uncertainty in to the market.
Director general Ian Sayers claims the FSA proposal is flawed and reasons for the ban do not apply to VCTs.
“Preventing advisors from making recommendations to retail investors on VCTs is a very big concern for our industry,” he said.
Vague and impractical proposals
A spokesman for wealth management firm BestInvest said that VCTs have similar characteristics and safeguards to investment trusts, which are to be excluded from the restrictions, and that rules for these trusts were changed this year to reduce the risk to investors.
The FSA has also come under fire from Apcims, the trade body for wealth and discretionary managers, saying the proposals have not been properly thought through.
In addition, they say, the term ‘close substitutes’ to define other investment vehicles to be banned is ‘so vague as to be impractical’ and will impose a serious restriction on financial advisors giving investment expertise.
Despite the arguments, the worry is start-up businesses that cannot raise funding from banks or other traditional sources are on hold until the FSA clarifies the wording of the proposals for venture capitalists.