FSA curb on investments could cut SMEs’ funds

The Financial Services Authority plans to include Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS) backed funds in guidance on investment vehicles that can be sold only to “sophisticated investors”, reports The Telegraph.

These funds, which offer generous tax reliefs to investors in return for backing high-risk and often fast-growing small companies, provided a combined £725m to small businesses last year, according to accountants Baker Tilly.

Michael Reeve, chairman of Octopus VCT, said the proposal “makes no sense at the political level” at a time when the Government is aiming to promote equity investments in small firms.

“Our government has been urging more investment into smaller companies and VCTs have been and should remain an important part of this policy. To allow the well-established part of this mechanism to be destroyed by the FSA would be irresponsible,” he said.

Stuart Nicol, who is in the process of establishing a VCT to invest in businesses set up by former soldiers, said that the proposal would be “very bad” for the sector.

“Someone can invest £3,000 in a VCT for very sensible reasons – like wanting a long-term investment and tax relief – and not be sophisticated. I’m effectively spending £250,000 on paperwork to set up a VCT and I’m only doing that because I want to involve ‘unsophisticated’ investors.”

He said the regulator “has to be careful they don’t restrict the ability to invest [solely] to the rich”. “In VCTs, the risks are well highlighted,” he added.

VCTs are investment trusts that invest in unquoted shares, usually in private companies although they can include some Aim and Plus market shares. The FSA plans to include them and EIS funds in its forthcoming guidance on so-called “unregulated collective investments”.

Tim Smith, an accountant at Baker Tilly, said: “There are serious concerns [that if VCTs and EIS funds] are not specifically excluded [from the guidance] it will significantly reduce this vital source of funding for SME companies, at a time when obtaining external funding, including bank finance, is still extremely challenging.
“Support to help SMEs develop and grow is crucial to the future of our economy.”

The FSA noted that it is consulting on the plans and welcomes responses, and said the proposals do not seek to ban retail sales but “only limit the extent to which firms may promote these products”.

Companies and investors have until November 14 to respond to the authority’s proposals.