Big Week for Small Cap Investing: The Budget, EIS / VCTs & Private Investors

Over the past week, I witnessed a number of significant events with regard to small cap investing in the UK. Firstly, the 2011 budget, though heavily leaked to the press beforehand, was finally announced. Secondly, I attended several meetings with early-stage companies with which I am involved either as an investor or advisor. First, the budget - here are the most relevant points for the small company investor. The 2011 budget recognised that although ambitious SMEs are going to be the key engine of growth and creation of worthwhile jobs, they are generally poorly served by the capital markets. In order to encourage private investors to help fill this vacuum, the provisions relating to the Enterprise Investment Scheme (EIS) are going to be made more generous:

- EIS income tax relief will increase to 30% from April 2011.

- From April 2012 the amount an individual can invest in EIS shares will increase to £1 million; the amount a company can raise in EIS funds will increase from £5 million to £10 million in a 12 month period; the limits on qualifying companies will increase from 50 to 250 employees and from gross assets of £7.5 million to £15 million.

- Measures will be taken to ensure that EIS and VCT investment funds flow to entrepreneurial companies. The VCT scheme is under pressure in this regard. Solar power feed-in tariffs were added to the list of unacceptable business activities.

Back in the world outside Westminster, I had meetings with a number of companies which conform to LCFR's investment template. Brainjuicer (LON:BJU) and Plastics Capital (LON:PLA) from AIM, and two unquoted companies, Axon (an investee of Hygea VCT, a fund which I am a director of - www.axonuk.org) and Nanosight (an investee of London Capital Finance's Trafalgar Partnership - www.nanosight.com). These companies are all illustrations of the UK entrepreneurs’ ability to develop and build microcap multinationals based on products that address global unmet needs. Not only do such companies provide worthwhile jobs and help to strengthen the sustainability of the economy, but they can also make attractive acquisition targets viz. the recent bid by Pearson for Education Development International a few weeks ago.

To further prove the point about the role of private investors in early-stage company investing, I recently received feedback from a potential institutional investor about a technology business with which I am involved. In its official rebuff, the investor stated that it would be interested in investing once the company in question had demonstrated that it had sales traction. This is not an atypical response from institutional investors - it illustrates how if we relied solely on them for funding early stage businesses we would still be living in caves!

London Capital Finance (www.ldncap.com) raises funds for companies, a number of which provide qualifying investors with opportunities to obtain EIS relief. If you are interested in receiving details of such companies, please contact me.