Budget changes free up EIIS to be a true boost for start-ups and investors

Budget changes free up EIIS to be a true boost for start-ups and investors

Financial advisers and fund managers have welcomed changes including a relaxation of rules on who may participate in the scheme, and how soon start-ups use the funds invested

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21st November, 2021

Plans to reform the EIIS (Employment and Investment Incentive Scheme) with a view to boosting investment in innovative indigenous SMEs, have been broadly welcomed.

On the whole, the changes introduced in this year’s budget are positive, Mary McKeogh, tax partner at McKeogh Gallagher Ryan, said.

“In addition to a few technical amendments, the main changes are a relaxation of the rules in relation to the ‘capital redemption window’ so that investors with a number of investments in a company over multiple years may redeem an investment for a year that is outside the compliance period (two years before and four years after the EIIS shares are issued), even though other investments may still be within their compliance period.

“This was a matter that created issues in the past where an investor invested in the same company over a number of years as they could not exit their earlier investments until the final four-year holding period for the last investment had expired.”

The requirement for the company raising EIIS funds to have spent 30 per cent of the funds before it could issue the EIIS Statements of Qualification to investors had almost been removed, she said.

“This is in line with the new ‘self-assessment’ approach whereby the company is required to self-certify the EIIS relief now, as opposed to applying to the Revenue Commissioners for the relief to be certified (as had been the case for investments prior to January 1, 2019). For investments from January 1, 2022 onwards, the Statements of Qualification can be issued immediately after the investment is made. There has been an extension of the range of funds that can now make qualifying EIIS investments.”

“The recent budget provided some positive news with the minister’s announcement of an extension of the scheme for a further three years to December 2024,” said Conor McKeon, head of corporate finance at Cantor Fitzgerald Ireland Corporate Finance Limited.

“Further positive changes include, specifically, the removal of the rule requiring 30 per cent of funds raised by an EIIS investee company to be spent before an investor can claim the tax relief, and the announcement of a relaxation of the rules around the ‘capital redemption window’ for investors.”

Conor McKeon, head of corporate finance at Cantor Fitzgerald Ireland Corporate Finance Limited. Picture: Nick Bradshaw

The finance minister, Paschal Donohoe announced in Budget 2022 that the Employment Investment Incentive Scheme (EIIS) would be extended for three years and amended to make it more attractive to investors. As part of reform measures, the scheme will be opened up to a wider range of investment funds.

The minister said the EIIS had the potential to become a real driver of investment in early stage companies and high-potential start-ups.

“In recent years, positive changes have been made to the scheme but it has yet to reach its potential,” he said. “Today, I am announcing an extension of the scheme for a further three years and I am also bringing forward a number of important improvements, the effect of which will be to make the scheme more attractive to investors to the ultimate benefit of companies in their start-up years and to the economy through job creation.

“I intend to open up the scheme to a wider range of investment funds and I am confident that this measure on its own will result in greater investment in early stage enterprises.”

“These changes should be viewed as positive,” said McKeon. “They represent a step towards making the scheme more user friendly from both a qualifying investee company and investor perspective.”

“The removal of the requirement for the qualifying company to have spent the first 30 per cent of capital raised before the tax relief being available to investors means the business can focus on using the EIIS capital in line with its business plan. It will not be under pressure to deploy it as quickly as possible, while from an investor perspective it allows them to claim their tax relief as soon as their investment has been made.”

Mary McKeogh, tax partner at McKeogh Gallagher Ryan. Picture: Tarmo Tulit

“The EIIS scheme is an important part of the funding ecosystem for Irish start-ups,” said the manager of Enterprise Ireland’s High Potential Start-Up Division, Jenny Melia. Raising early-stage finance is often a significant hurdle faced by new, ambitious companies and EIIS provides a framework for early stage companies to access the capital required to accelerate their business and create new jobs across Ireland.

“The scheme also offers private investors the opportunity of incentivised investment in higher risk but very exciting higher potential early start-up ventures looking to grow and scale globally.”

McKeon said EIIS was essential for early stage businesses as it allowed them to raise capital that might not otherwise be available in the guise of bank debt or even private equity.

“In recent years Cantor Fitzgerald has raised EIIS capital for a number of businesses which has enabled them to grow and mature from early-stage to medium sized businesses and seen them gain access to more traditional bank financing,” he said. “This is exactly what EIIS capital should do, along with the creation of new employment as these businesses grow.

“Greater flexibility around the ‘capital redemption window’ is a positive change which will allow investors to redeem capital after the minimum four-year hold period even where the investor may have participated in a follow on funding round with the same business in subsequent years.

“Ease of use both from an investee company and individual investor in my opinion would enhance the deployment of EIIS capital. The recent changes per the Finance Bill demonstrate intent by the Department of Finance to achieve exactly this and hopefully we will see the benefits of this in the coming years.”

McKeogh said her firm had noted a huge increase in the appetite for EIIS investments particularly in the last three years.

“We are fundraising for a solar project in Cork this year and this investment opportunity has been hugely oversubscribed such that we have had to turn away a substantial amount of investor funds. The range of companies seeking EIIS investment is quite broad. Our EIIS investment fundraising projects to date have focused mainly on the renewable energy sector but we have also been involved in fundraising asset-backed projects such a nursing home and a crematorium.

“In addition to fundraising for a project every year we assist many companies with the structuring of their company to receive EIIS investment and we find that the medtech companies are particularly active in the EIIS space.”

Given the current focus on climate change and the targets the Irish government is required to reach in that area McKeogh feels it is very important that the EIIS rules are drafted to facilitate collaboration with the Renewable Energy Support Scheme (RESS) rules that govern renewable energy projects. “We feel that there are huge synergies to be availed of between these two schemes,” she said.

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