New regulation around angel investment poses considerable threat to North East business

New regulation around angel investment poses considerable threat to North East business, according to commercial legal firm Square One Law.

The firm warned that recently introduced legislation – brought in under the Financial Promotions Act on 31 January - threatens to completely wipe out the number of eligible female angel investors in the region and reduce eligible male angel investors by almost 70 per cent. The threshold for “high net worth individuals”, the formal term for angel investors, required an annual income of £100,000 or net assets of £250,000. However, the new thresholds for the ‘angel investment’ criteria will be hiked to require annual earnings of £170,000, or net assets of £430,000.

Those failing to meet new criteria may no longer be able to benefit from attractive tax relief schemes and benefits, which act to incentivise start-up investment for angels paying tax in the UK. The two main schemes being the Enterprise Investment Scheme (EIS) (encouraging investment in early-stage, higher-risk businesses) and the Seed Enterprise Investment Scheme (SEIS) (designed for investment in very early seed or start-up stage businesses).

The changes were proposed in 2021, with an increase in people looking to invest savings made during the pandemic. HM Treasury became concerned existing safeguards were not sufficient to ensure investors understood the risks of their investments. Regulation governing angel investment exists to ensure investors comprehend risk and don't overcommit capital to high risk and/or illiquid businesses.

It's claimed the Treasury update has missed the relevance mark for the current investment market. A proven record and experience in investing now proves to be of little merit, with the focus shifting to one’s level of wealth when determining an ability to assess risk.

Vanessa Saleh, corporate solicitor at Square One Law, said: “The rationale behind the changes may be well-intentioned to protect investors, but the impact of applying it could be incredibly damaging for North East start-ups, scaling businesses and the wider economy.

“These changes significantly reduce the pool of those who previously qualified as angel investors, and risk almost completely wiping out eligible women investors altogether while making it more difficult for women-owned companies to obtain investment. Worst impacted will be the regions outside of London, with the North East potentially hit the hardest where income levels are significantly below the national average.” 

The new legislation will particularly impact on start-ups and those looking to scale pre series 1 raise. These businesses have traditionally relied heavily on private investors – especially in recent years with spiralling interest rates and inflation affecting cashflow and ability to obtain affordable debt funding. Women-owned businesses, in particular, rely on angel investors as access to venture capital funding can be difficult.

“Only last year, we saw substantial reduction in venture capital funding compared to the previous year,” added Vanessa. “And statistically only 2% of venture capital funding in the UK went to women-owned or women-led businesses – another worrying trend”.

Concerns from the business community have been raised directly with the UK Government, including an open letter from the Start-up Coalition – made up of nine independent angel investor organisations - about the impact of these changes, with fears already fuelled by a fall in start-up investment over the past year.

Together with “high net worth” individuals, angel investors also include “sophisticated investors” with experience in investing in unlisted companies. With technological advances and the rise of online investment platforms like Crowdcube and Seedrs, more are qualifying as "sophisticated investors" and this category is also being reclassified.

 
Previously those who did not meet the high net worth salary thresholds but had made one unlisted investment in the past year could qualify but the new threshold is now directors of a company with a minimum turnover of £1.6m, having at least two years of experience in private equity, or being a member of an angel syndicate for six months or more.

Square One Law managing partner, Gill Hunter, said: “Angel investors are essential to many growing companies, especially in the North East where access to finance can be challenging.

“For the North East to potentially lose all of its eligible female and two thirds of its male investors is unthinkable. The legislation seems to ignore the regional and demographic differences in the earnings and net worth of individuals and we need incentives to encourage investment, not steps to curtail it.

• By Mark Adair – Correspondent, Bdaily
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