By Sandy Finlayson, MBM Commercial
The Business Angel market in Scotland has developed in a very different way and is based on a syndicate model which is very different from the networks. The syndicate model has much more in common with the model of "best practice" which has evolved in America and there is no reason why this model should not be adopted in England.
Investment in innovation must be a key strategy to get the country out of recession and it is essential that we do all we can to facilitate the allocation of more capital to the innovative new businesses upon which we must rely to restore economic growth. Most of this capital will have to come from Business Angels. The Government has realised this at a policy level and has done much to enhance the EIS tax breaks. However, the problems are largely caused by an inappropriate regulatory regime.
Under the Financial Services Act 1986 it was (unbelievably!) a criminal offence to give a Business Plan to somebody who was not an Authorised Person. After extensive lobbying over many years we finally ended up with the Financial Promotion Order 2005 (the "FPO"). However, the Regulated Activities Order ("RAO") which covers "dealing, arranging, managing and administering" investments leaves us in a regulatory environment which provides "form without function".
The "Scottish" model addresses all of the issues raised in the article within the constraints of the current regulatory environment in the following way:-
An "association" is established as a not for profit company with employee directors and a core of Investor Directors;
The association is entitled to receive Business Plans and the employee directors undertake due diligence (not a regulated activity);
The Investor Directors decide whether or not they wish to invest and, if so on what terms, with each making his/her own investment decision;
The investment proposal may then be circulated to other members of the syndicate, each of whom will have signed the relevant investor forms, granted a Power of Attorney to the directors and had the necessary KYC checks undertaken by solicitors;
The directors then finalise the legal documents as Attorney for the investors;
Investment Agreements contain all the usual investor majority/investor director provisions, positive and negative covenants and warranties and the Articles contain normal compulsory transfer, good leaver/bad leaver and drag along/tag along provisions;
All cash is handled by solicitors;
All investors make their own investment decision in respect of the initial investment, all subsequent Rights Issues and the final exit. However, a drag along provision operates on an exit so that, if the requisite majority are in favour of selling, the Company can be sold;
There is always at least one Investor Director with relevant domain experience and regular monitoring and reporting.
The Scottish Co-investment Fund is an integral part of the whole process. It was first established in 2003 and works extremely well as a public/private sector partnership. It plays an absolutely vital role in making scarce capital go further. The new Angel Co Fund is similar to the Scottish one and will hopefully do much to stimulate the early stage investment market in London
www.archangelsonline.com which was established in 1992 is the largest of these syndicates.
It now has about 130 members, a Chief Executive, 3 Investment Managers and an administrator. For the past few years it has been leading investments of about £10 Million per annum in approximately twenty deals and last year successfully returned about £50 Million to investors in three separate transactions.
Their directors are regularly in demand as speakers and panellists at entrepreneurship events, their members represent a wealth of senior business contacts which are invaluable for due diligence. Their investments are focused on information technology, medical devices and other high tech engineering and they always ensure that a Non-Executive Director and/or Chairman with relevant domain experience is appointed to the Board.
Today the Archangels support about a thousand graduate level jobs and their Portfolio Companies contribute significantly more to HMRC than the investors receive in tax relief. They are proof positive that this type of investment can and does work over the long haul for investors, companies, the wider community and the public purse.
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