Concerns around being SEIS/EIS compliant in early stage investment brings a daily stream of enquiries into Seedlegals HQ despite there being a raft of information about this online and a HMRC helpline for those of you who really get stuck. I pondered this today (as I watched Federer warm up against Raonic for what looks like a good match at Wimbledon) and decided that the only possible reason the enquiries keep on coming in is because despite the wealth of advice in this area, everyone is simply petrified of breaking the rules, owing the taxman, upsetting investors and ultimate death (okay, I was just checking you were still with me. You are; great, nobody will die)!
Let’s look at the SEIS/EIS legal completion process starting with some facts.
First fact – You can complete an SEIS/EIS round on the same day BUT you can’t issue SEIS/EIS shares on the same day – this is not my rule, I’m good but I do not wield this sort of power.
What does this mean for you? Great news – you don’t need two agreements, you don’t need two board minutes, you won’t be having two nervous breakdowns; you just need the correct process building into your legal documents and an understanding of how to collect the funds.
Second fact. You can’t issue the SEIS/EIS shares unless you have received the investment money first. This means it needs to be recorded as received on the company bank statement on a date on or before the date which is showing on the SEIS/EIS investor’s share certificate.
Third fact. SEIS shares must be issued before EIS shares.
So let’s work this back over. The hypothetical round closes (the legal documents are all signed off properly) on May 1st. The legal documents say that when the round closes, the SEIS investors must pay their funds to the Company immediately (I can cover when you can receive funds earlier than the round close date another time). As a founder, if you do nothing else on May 1st you should be reminding your SEIS investors of this super important obligation by dropping them a gentle email with the following subject heading: TRANSFER FUNDS NOW.
If they don’t transfer the money on May 1st, you can’t issue their SEIS share certificate, you should refrain from asking the EIS investors for their money and you can’t issue any EIS share certificates and that’s on you for being pants and not communicating this process step in advance.
You then start to see the notifications from the Company bank account (we have built in an SEIS only bank account option on the SL platform for those of you who are super cautious about properly ring-fencing SEIS funds) and eventually all SEIS monies are received between May 1st (yeah) and May 5th (boo). You issue share certificates for the SEIS investors and date them May 5th.
New Balls Please.
On May 6th you can ask your EIS investors to open their cheque books (this sounds better than “wire funds” so I’m keeping it in for dramatic effect) and move forward with the issuance of EIS share certificates once EIS funds have been received.
Game. Set. Match
Can you see now why lawyers split the receipt of monies from SEIS/EIS investors into these tranches so that you can be sure all SEIS monies are received and SEIS share certificate issued BEFORE you move on to receipt of EIS investor funds and issue of EIS certificates. That way no investor gets harmed during the growth cycle of the company.
Process my friends, it’s just a matter of proper process and luckily for you the Seedlegals team have this all covered on their platform. Now then, you may be pleased to hear Federer won, anyone for Pimms?