Innovation has spurned a new wave of investment opportunities, with participation incentivised by government and industry policy, but the playing field for investors is not even.
This is for good reason. Many of today’s investing hot spots, such as Early Stage Investment Companies (ESICs) carry considerable risk, so their access and related benefits are mostly limited to sophisticated investors.
The risks, which must be carefully considered, are largely offset by tax incentives and return prospects.
As of 1 July, sophisticated investors that choose to invest in qualifying ESICs can claim a 20% tax offset (up to $200,000 p.a) based on their new investment.
They will also enjoy a modified capital gains tax (CGT) treatment, which allows qualifying shares to receive a CGT exemption for up to 10 years. This is part of the bi-partisan support for the National Innovation and Science Agenda, and will draw capital to Australia’s capital starved innovative companies.
But before you start looking for the next Mark Zuckerberg or Atlassian, it is worth considering the risks.
The premise of “angel” investing is that it is at the riskiest part of investment, but returns are expected to be 10x your initial investment. While this may sound attractive, there is of course significant risk – as some of these companies may fail.
Secondly, if you are relying on the Government’s generous tax incentives – you’d better make sure you have a valid sophisticated investor certificate, and ensure your company is a qualifying ESIC at the time of investment.
If you don’t have a sophisticated investor certificate, the ATO will view you as a retail investor, and any investment greater than $50,000 will disqualify you from the incentives. A very big disincentive if you think your company might generate significant gains.
If you are an entrepreneur seeking capital, it is best to ensure you meet the ATO’s early stage test and either the 100-point innovation test or the principles-based innovation test. For ESICs raising more than $2.5m or have more than 20 investors in a 12 month period, you will need to maintain a registry of your investors' certificates – otherwise risk the ire of ASIC. It’s a tricky field.
Before considering this type of investment it's important to first:
Cygura makes this process simple, by facilitating the process of investor accreditation and certificate sharing as well as maintaining a current investor registry for reporting purposes.
Finding the next unicorn is fraught with risk. But there are big incentives in place for those who can flex their sophisticated investment muscle.
* DeaLogic data in the last 10yrs ASX companies have raised $340b of capital, 50% was done in private placements to Sophisticated/Wholesale investors. Capital raised on avg at a 7.8% discount to market price, giving wholesale a $13b advantage to retail.
