A new series of Dragons’ Den started earlier this month. The BBC programme has been running since 2005 and its popularity over the years has led to many of us being familiar with the concept of business start-ups pitching for investment from wealthy businesspeople.
Most early-stage companies don’t go on the telly as a way of getting investment and they look not for dragons but for angels. Angel investors are high net worth individuals or sophisticated investors with a background in business who take small equity investments in start-ups at an early stage in the company’s journey.
Angels do this in the hope that their investment will grow and the tax relief offered by the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme encourages individuals to invest in higher risk smaller companies because they can get generous tax relief on the investments made.
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It’s not just about making money though. Angels are often motivated by wanting to help start-ups who are working in sectors that they are particularly interested or experienced in and they offer more than just their money, helping start-ups with advice and contacts. Securing angel investment is a very important part of a company’s journey to growth.
To be an angel a person must be able to self-certify that they are either a high net worth individual (HNWI) or a sophisticated investor. Until the end of this month being a HNWI required an annual income of £100,000 or net assets of £250,000 (which can’t include equity in your house or pensions).
You could certify you were a sophisticated investor if you had made one unlisted investment in the past year or had been a member of a business angels syndicate for six months, or were a director of a company with turnover of £1m.
However, from 31 January 2024 the rules are changing. This is in response to a 海角视频 Government consultation on financial promotion (meaning a communication that contains an invitation or inducement to engage in a financial product or service).
Financial Promotions are subject to regulation by the Financial Conduct Authority (FCA) or Prudential Regulation Authority although there are some exemptions which allow unregulated businesses to communicate financial communications.
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Those exemptions include where the financial promotion is to HNWI individuals or sophisticated investors, and it is these exemptions that allow small companies that are not regulated to pitch to angels for investment.
The exemptions and the financial thresholds required have not been updated since 2005. Due to technology developments such as the ability to invest online through platforms such as Crowdcube and Seedrs (both of which are FCA regulated) more people have been able to meet the criteria for certifying as sophisticated investors.
As a result of the government consultation the thresholds are being increased and the criterion of having made at least one unquoted investment in the past year will no longer be applicable. From 31 January 2024 to be a HNWI individual you must earn £170,000 per annum or have net assets of £430,000.
To be a sophisticated investor you must be a director of a company with turnover of £1.6m or have been a member of an angel syndicate for the past six months or have been working in a professional capacity in private equity for two years.
Although the purpose of this change is intended to protect consumers, it makes angel investment only available to the richest in society, particularly in areas where earnings are lower. It also has a detrimental impact on female led businesses seeking investment because only 2% of venture capital funding goes to female founders, who therefore have to rely heavily on angel investment.
Obu, an angel investment platform designed for women (Overbeing Under Funded) points out on its most recent LinkedIn post that: “Less female investors mean less investment in female-led companies, which means less women hired and therefore less money into the hands of women.”
Entrepreneur and CEO Grace Beverley highlights the work of Obu in her most recent LinkedIn post and attaches data showing income and tax, by gender, region and country for the tax year 2020 to 2021. England had 737,000 men earning over £100,000 and 237,000 women whereas Wales had 17,000 men and 5,000 women. On the new threshold of £170,000 this falls to 291,000 men in England and 72,500 women. In Wales it would only be 4,500 men and just 500 women.
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Clearly this change is a big concern for start-ups in Wales, particularly for female led start-ups given the data on how little VC investment they get. It is also a concern for female angels and the relatively new angel syndicate of which I am a member called Women’s Angels Wales, known as WAW.
Development Bank Wales have said they are working with 海角视频 Business Angels Association to express their concerns to the 海角视频 Government about the impact of the changes.
In the short term, if you are interested in making angel investments but do not meet the certification requirements, joining an angel syndicate (provided their criteria for being a member does not require you to certify you are a HNWI or a sophisticated investor) is one way of being able to do so.
Bethan Darwin is a partner with law firm