Don't invest unless you're prepared to lose all your money.

These are high-risk investments and you are unlikely to be protected if something goes wrong.

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Risk summary for non-readily realisable securities which are shares:

Last updated: 31 March 2024

Estimated reading time: 2 min

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

1. You could lose all the money you invest

If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail.

2. You are unlikely to be protected if something goes wrong

Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here or via the following URL link: https://www.fscs.org.uk/check/investment-protection-checker/.

Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here or via the following URL link: https://www.financial-ombudsman.org.uk/consumers.

3. You won’t get your money back quickly

Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.

The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.

If you are investing in a start-up business, you should not expect to get your money back through dividends. Start-up businesses rarely pay these.

4. Don’t put all your eggs in one basket

Putting all your money into a single business or type of investment, for example, is risky. Spreading your money across different investments makes you less dependent on anyone to do well.

A good rule of thumb is not to invest more than 10% of your money in high-risk investments. Read more about it here or via the following URL link: https://www.fca.org.uk/investsmart/5-questions-ask-you-invest.

5. The value of your investment can be reduced

The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.

These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

If you are interested in learning more about how to protect yourself, visit the FCA’s website here or via the following URL link: https://www.fca.org.uk/investsmart.

Please find the PDF version here.

About SEIS

SEIS was established over 10 years ago and remains strong to this day.

The Seed Enterprise Investment Scheme (SEIS) was introduced in April 2012 to encourage investors to make investments in start-ups and early-stage companies. The SEIS Scheme enables qualifying companies that have been trading for less than two years to raise substantial capital to grow and develop their business. This was achieved by the UK Government, which offered significant tax reliefs to UK investors as incentives.

Under SEIS, qualified UK investors will benefit from

50% Tax Relief
100% Capital Gains Tax relief
50% Capital Gains Tax exemption for chargeable gains reinvested
100% Inheritance Tax relief (within the £1M allowance from 6 April 2026)
Loss Relief

For more information on any of the topics below, have a look at Sapphire's Learning Centre or MoneyLab Blog.

A company must meet the conditions listed below to qualify for investment under SEIS, both at the time of the investment and throughout the three-year minimum holding period. If the company doesn't meet or maintain these conditions, the company will not qualify:

The first commercial sale occurred within the last three years or has not yet occurred.
Have fewer than 25 full-time employees.
Carry out a qualifying trade.
Gross assets less than £350,000.
Have not raised investment through the Enterprise Investment Scheme (EIS) or from a Venture Capital Trust (VCT).
The company cannot control another company, except for a qualifying subsidiary.
The company cannot be controlled by another company, meaning that another company should not own more than 49% of the company’s shares. Another company must not have controlled the company since the company's date of incorporation.
Not listed on a recognised stock exchange, excluding the Alternative Investment Market.
A permanent establishment in the UK.
Maximum £250,000 SEIS investment.
Be able to demonstrate growth and development in the future.
Shares will be full-risk ordinary shares with no preferential arrangements in place.
There must be no capital preservation provisions, such as joint venture partnerships, in place.

To qualify for SEIS, a company’s first commercial trading date must be within the last three years, or the company must not be trading yet. Companies can use either the date of commencement of trade, when revenue was generated, or the date the business began marketing its product or service.

In the SEIS application, HMRC will ask for both the date of incorporation and the company's first commercial trading date, if applicable. If the company has not yet begun trading, state this in the application and indicate that the investment raised will be used for preparation to trade. If HMRC has any reason to doubt the dates the company began trading, it will look for information both in the documents provided and what is available online.

There are no exceptions to the three-year rule under SEIS; if the company has been trading for more than three years, it will not qualify for SEIS. However, the company may be eligible for the Enterprise Investment Scheme (EIS).

Before the company issues shares, it must have fewer than 25 full-time employees to qualify for SEIS. HMRC will confirm the number of full-time employees the company has at the time of investment; they will look at its PAYE payroll scheme to determine this.

The company should include the number of employees in their cover letter as part of their application and whether they plan to hire additional employees following the investment. Be aware that directors, subcontractors, and consultants are not employees, so don't include them in employee numbers.

Companies must either exist to carry out a qualifying trade or be the parent company of a trading group that conducts qualifying trades. There must be no arrangements for the company to become a subsidiary of, or be controlled by, another company.

A trading group is a group that, directly or indirectly, owns more than 50% of the shares of each subsidiary held as a member of the group. Still, any subsidiary employing any of the money raised by the issue of shares must be a qualifying 90% owned subsidiary. Non-qualifying trading activities must not be a substantial part of the group's overall trade. HMRC classified substantial as 20% of the overall trade. Companies will have to demonstrate how their non-qualifying trade is not substantial in their application. Companies should determine whether they can stay below the 20% mark, as they will need to maintain this until after the three-year minimum holding period.

Most trades are qualifying trades for SEIS purposes, but the following are excluded:

Dealing in the land, in commodities, futures, shares, securities or other financial instruments;
Dealing in goods other than in the course of an ordinary trade of wholesale or retail distribution;
Banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities;
Leasing (including letting ships on charter or other assets on hire);
Receiving royalties or licence fees (subject to the exception relating to self-generated intellectual property);
Providing legal or accountancy services;
Farming and market gardening;
Holding, managing or occupying woodlands, any other forestry activities or timber production;
Property development;
shipbuilding;
producing coal and/or steel;
Operating or managing hotels or comparable establishments or managing property used as a hotel or comparable establishment;
Operating or managing nursing homes or residential care homes, or managing property used as a nursing home or residential care home;
Generation or export of electricity or power, both renewable and non-renewable;
Production of gas or fuel; and
Providing services to another person where that person's trade consists, to a substantial extent, of excluded activities, and the person controlling that trade also controls the company providing the services.

There must be no plans for companies applying for SEIS to be quoted on a recognised stock exchange. The Alternative Investment Market (AIM) is not a recognised stock exchange under SEIS; a company can be quoted on the AIM and qualify for SEIS investment.

One of the exits available to SEIS investors after the minimum holding period is to become listed on a recognised stock exchange. Once the company is listed on a recognised stock exchange, it is no longer qualifying; if it becomes listed on a recognised stock exchange, before the three-year minimum holding period, HMRC will claw back investors' tax reliefs.

Companies applying for SEIS must have a trade location in the UK, where a significant portion of their business is conducted. A company incorporated in the UK automatically meet this condition. However, non-UK companies must meet this condition in an alternative manner. Under SEIS, this means a company must either have a permanent location (branch/management location) or a UK qualifying agent (residing in the UK).

A foreign company must register with Companies House to set up a branch/agent in the UK. Foreign companies must complete a Companies House OS IN01 form and submit their constitution documents to register their branch or agent.

When issued, SEIS shares must be paid in full and into the company's bank account. When submitting the company's SEIS1 application, the company will also submit a copy of their bank statement demonstrating that the shares were paid in full before they were issued. SEIS qualifying shares must be full-risk ordinary shares with no preferential or redemption rights or carry special rights to company assets.

There must be no arrangement in place for capital preservation or pre-arranged exits for investors to recover their investment. Furthermore, HMRC will not accept any reciprocal arrangements.

The Risk to Capital condition was introduced by HMRC in 2018. This condition has two parts:

Growth and Development: The company must have the objective of long-term growth and development.
Significant Risk: There is a considerable risk that investors may lose their investment.

The Risk-to-Capital condition ensures that companies undertake the appropriate growth and risk that Venture Capital Schemes were created to support. Some factors to consider regarding this condition include the number of employees, company assets and the industry. A company should perform a SWOT analysis to assess its strengths, weaknesses, opportunities, and threats, providing a clear view of its risks to capital to HMRC.

Financial difficulty occurs when a company is unable to meet its debts as they become due or when the liabilities of a company exceed its assets. HMRC will consider a company to be in financial difficulty if:

The company cannot pay their debts as and when they fall due.
The value of the company’s liabilities exceeds its assets, considering both its contingent and prospective liabilities (the “balance sheet test”).
The company has been trading for more than seven years, and over half of its subscribed share capital has been wiped out due to accumulated losses; it is considered to be in financial difficulty.

Companies should not mislead HMRC regarding their financial situation; otherwise, this may result in investors being unable to obtain the tax reliefs offered by the Scheme.

The company must be SEIS qualifying for a minimum of three years following the investment. If a company fails to meet any of the qualifying conditions, tax relief will be withdrawn, and companies may face litigation from angry investors.

Companies should understand that unless drastic changes occur when HMRC grants its qualifying status, it is unlikely that a company will suddenly cease to qualify for SEIS. Companies must tell HMRC if they believe they no longer meet the qualifying conditions within 60 days. HMRC will then assess the situation to determine the next course of action. HMRC will communicate their decision to the company, which should then share this with its investors. Should the decision not be favourable, companies can request that HMRC review it and/or appeal against it.

SEIS reliefs cannot be used as a tax mitigation or avoidance product; companies under SEIS must have a commercial purpose and not be set up solely for the benefits of tax-advantaged finance. Following the issuance of shares, there cannot be:

any protection for the investment or protection for the investor from risk
the intent to sell the shares at the completion of, or through the investment period
activities to let an investor benefit in a way the scheme does not intend
a reciprocal agreement where the companies invest back in an investor’s company to also gain tax relief

Investors must meet the following conditions to qualify as a SEIS investor:

Investors must be UK taxpayers.
Investors can invest a maximum of £200,000 in SEIS investments per tax year.
SEIS shares must be held for a minimum holding period of three years from the time of investment. Investors who divest before the three-year period will face clawback of tax reliefs.
Investors cannot have a connection to the company, such as being an employee, family member (excluding siblings), paid director, etc.;
Investors cannot hold more than 30% of the company’s share capital to qualify for SEIS;
Investors cannot qualify as SEIS investors if they have previously invested in the company.

The conditions listed above must be met to qualify for investment under SEIS at the time of the investment and throughout the three-year minimum holding period. If investors fail to maintain these conditions, they will no longer qualify and may lose and/or face clawback of the tax reliefs granted. Should an investor become ineligible at any point, they should inform HMRC as soon as possible.

A financial interest in the company is having more than 30% of the shares or voting rights in the company. This requirement applies two years before the subscription and three years after the issue. Any rights to shares and assets carried by an associate during a wind-up of trade will also be considered by HMRC. Associates include immediate family members, such as spouses, parents, grandparents, children and grandchildren (siblings are not regarded as connected parties by HMRC).

From low-level employees to company directors, if a company employs an individual, they are considered connected to the business and are therefore not eligible for SEIS tax reliefs. If the company employs an investor's associate, the investor will not qualify for tax reliefs; this applies for two years preceding the share subscription and three years following it.

The only exception to connected parties is for Business Angels. Relief will not be withdrawn if a business angel who was initially an unpaid director becomes a paid director.

Each application for SEIS typically takes a maximum of eight weeks to approve; however, they generally are returned much quicker than this. However, this can depend on whether HMRC has any questions about the application. HMRC may have questions seeking further clarification on whether a company meets one or more of the qualifying conditions, which can delay being granted SEIS advance assurance. Depending on whether a company goes through advance assurance, there are four stages to the process:

Advance Assurance

Companies applying for SEIS are not required to go through advance assurance. Still, it is recommended to ensure there are no surprises for a company or its investors when an investment is received. Not all companies will file for advance assurance, making a company more attractive to prospective investors. Advance assurance is essentially “pre-approval” from HMRC that the company meets the qualifying conditions. Before starting the application, a company should have the following documentation and information:

A valid Unique Tax Reference (UTR) and a Company Reference Number (CRN).
Latest company accounts and any accounts for any subsidiaries, if applicable.
The business plan, including financial forecasts.
Details on how the company will use the funds raised under SEIS.
An explanation of how the company meets the risk-to-capital condition.
A schedule of all tax-advantaged investments received by the company, including the amount, date and scheme under which each investment was received.
An up-to-date copy of the Memorandum and Articles of Association, with a detailed explanation of any changes to be made.
Details of any shareholder agreement or any other subscription agreement the company intends to establish.
The latest draft of any prospectus, information memorandum, brochure or similar document relating to the relevant fundraising or offer to be issued to potential investors, if applicable.
Information on any financial support received by the company that constitutes EU State Aid.

Once a company has all the above documentation, it can then begin filing for the advance assurance with HMRC. Once this has been filed, HMRC may follow up with questions regarding the details in the application to ensure that all conditions are met and no disqualifying activities are occurring. If successful, HMRC will subsequently grant the company provisional acceptance of its eligibility for SEIS. Companies can then use this provisional acceptance to approach prospective investors and encourage them to invest.

SEIS1

Companies that apply for advance assurance will have a quicker and simpler application process when submitting their EIS1. This is due to having already provided the necessary documentation needed by HMRC, and will therefore only need to provide documentation for any changes in the business and the issuance of shares. However, if a company has not sought advance assurance before issuing shares, it will need to provide more information for its EIS1 compliance statement.

A valid Unique Tax Reference (UTR) and a Company Reference Number (CRN).
Latest company accounts and any accounts for any subsidiaries.
The business plan, including financial forecasts.
Details on how the company will use the funds raised under SEIS.
An explanation of how you meet the risk to capital condition
A schedule of all tax-advantaged investments received by the company, including the amount, date and scheme under which each investment was received.
An up-to-date copy of the Memorandum and Articles of Association, with a detailed explanation of any changes to be made.
Details of any shareholder agreement or any other subscription agreement the company intends to establish.
The latest draft of any prospectus, information memorandum, brochure or similar document relating to the relevant fundraising or offer to be issued to potential investors.
Information on any financial support received by the company that constitutes EU State Aid.
A bank statement showing that the shares have been paid in full.

The SEIS1 form must be submitted every time the company issues SEIS shares and should be submitted within two years of the shares being issued; otherwise, investors will not be eligible for their tax reliefs.

SEIS2

When HMRC approves the application, the company will receive an SEIS2, which is essentially confirmation from HMRC. This lets companies know that the shares they issued have been authorised, and SEIS3 forms can be issued to the investors recorded in the SEIS1 application.

The company must have spent at least 70% of the funds or traded for at least four months to be eligible to submit this application. HMRC considers the trading element to be making or attempting to make a sale.

SEIS3

Once a company receives confirmation from HMRC in the form of an SEIS2, it can then issue SEIS3s. The company uses the information from the SEIS2 document to complete the SEIS3 form, including the Unique Investment Reference (UIR) and the termination date for the shares. The SEIS3 form must be authorised by both a company representative and the investor before being submitted to HMRC.

Following the completion of the SEIS process, it is up to the SEIS qualifying company and its investors to stay qualifying throughout the three-year holding period. Furthermore, if the company raises additional investment through SEIS, it will have to do the SEIS1/SEIS2/SEIS3 process for each round of funding.

EIS

If the company qualifies for SEIS, it also qualifies for EIS. For more information on the Enterprise Investment Scheme (SEIS), look at Sapphire's EIS Pillar Page, Learning Centre or MoneyLab Blog.

Disclaimer

Please note that this is a condensed summary of the taxation legislation and should not be construed as constituting advice that a potential investor should obtain from their own investment or taxation adviser. The value of any tax relief will depend on the individual circumstances of investors.

Sapphire Capital Partners LLP does not give tax advice and recommends that you consult a tax adviser if you are in any doubt about any of the technical aspects of the SEIS legislation.