There are size limits for companies which can qualify for EIS, although these are much less strict than for SEIS. The company must have gross assets of less than £15m before the investment, and less than £16m after the investment. It must also have fewer than 250 full-time equivalent employees (or fewer than 500 such employees if the business is a KIC). The “gross assets” test measures a company’s assets ignoring any liabilities or debts. So a company with assets of £20m and debts of £20m will have gross assets of £20m, and will not be able to attract investments under the EIS regime.
The company cannot be listed on a stock exchange and it must be independent (for example, not under the control of any other company, although it’s acceptable for it to be majority owned by an individual).
The company must also be able to demonstrate that there is a real “risk-to-capital” for all investors rather than merely aiming to preserve capital asset values. This condition was introduced to ensure that heavily asset-backed trades could not secure tax-favoured investment. EIS is designed to encourage investment in entrepreneurial businesses that carry real risk, which is where the Government feels that the tax reliefs can do most good. In addition, there is an express requirement that the purpose of the fund-raise is to raise money for a qualifying business activity “so as to promote business growth and development”. In other words, EIS money needs to be raised to promote the organic growth of the business (such as increasing revenues, customer base, product range). It cannot be used to acquire an existing business or prop up a business that is simply struggling for lack of working capital.
The company must also spend the money on the intended qualifying trade within two years of the investment (or, if later, within two years of starting to trade).