When going ‘in reverse’ is a good thing
April 23, 2024 | Hugo Silva
Angel investing has been one of the most significant drivers of innovation in the modern world. According to Investopedia “the term originated in the Broadway theatrical world, where plays were often financed by wealthy individuals rather than formal lenders and payments were due only when and if the production was a success.”
Image generated by Canva depicting an Angel Investor
While most of the focus goes towards founders and VCs, angel investors (typically ‘High Net-worth Individuals’ — HNWI) are more silent partners that not only provide investment but valuable advice to founders and management teams.
I have personally always thought that one of the best things about the UK tech landscape was its EIS/SEIS (Enterprise Investment Scheme/Seed Enterprise Investment Scheme) schemes, which incentivises private individuals (angel investors) to fund fledgeling companies by giving them generous tax breaks (namely income tax relief of up to 50% on SEIS and 30% on EIS). Granted, tax breaks of any kind tend to be frowned upon by the general public, but this scheme has received little to no opposition.
Since the introduction in the UK of EIS in 1994 and SEIS in 2012, circa 40,000 companies have received more than £22bn in private investment via these schemes alone, with roughly £2bn a year since 2014, showing how much popularity this scheme has secured over the last decade. The scheme has also even inspired other countries to follow suit:
Incredibly, in 2023, the UK government approved legislation that improved these schemes by allowing a larger lifetime allowance for SEIS investment, as well as broadening the eligibility scope — meaning more companies were eligible to receive even more private capital. It was a prime example of a piece of legislation that had worked well so far and the changes only improved upon it.
Image: The UK’s Financial Conduct Authority updated the Financial Promotions Order in 2023
Yet in a surprising turn of events, the UK’s Financial Conduct Authority (FCA) decided to update the Financial Promotions act, which was last reviewed almost 20 years ago. The update significantly changed what the UK government considers to be HNWI, by changing annual income minimum threshold from £100k to £170k and net assets from £250k to £430k — a HNWI is someone that falls under those criteria and that can then, be allowed to become an angel investor. The decision cause an uproar within the UK’s tech community, and rightly so.
Before we get into the details of how this change can impact the UK’s tech scene and, generally, innovation, it is important to understand why this change came to be. Firstly, the FCA are increasing efforts to better protect everyday investors who may meet the “professional investor” threshold but are still “retail investors” (e.g. they do not have the means or background to execute full due diligence exercises) and increasing these limits is a way to guarantee that less people are exposed to the pitfalls of private investment. Secondly, as mentioned above, these requirements were last reviewed almost two decades ago and, as with any piece of legislation, they need to be updated — especially when affecting such a high-pace industry.
As such, and while the reasoning behind this last review is understandable, the execution was not considerate. This great article by Roxanne Sanguinetti and David Fogel of Alma Angels goes into great detail on all the impacts that these changes will cause but I would like to focus on the single most important of all — exclusion. Not only does the new update mean that less individuals will be considered HNWI’s (and, therefore, potential angel investors), but it also significantly affects the diversity of our HNWI pool. On average, we would see a more than 70% decrease in the number of female HNWIs who would qualify to become angel investors, and in some cases like Northern Ireland and North East of England, virtually no female would be considered a sophisticated investor.
Naturally, this caused the UK tech scene to address Chancellor Jeremy Hunt, in an open letter that had the goal of reversing these changes.
Led by Alma Angels, with the participation of the UK Business Angels Association, Startup Coalition, InvestHER and many others, the letter address all the points above and more, particularly specifying that female and underrepresented founders ‘will be hit the hardest’.
The uproar worked: the original decision was reversed, and as of 27 March 2024, we are back to the previous standard. This is not the first time that the tech industry has stood up to fight for measures and policies that drive innovation; roughly a year ago some of the most prominent VCs urged the UK government to find a solution for the crisis around Silicon Valley Bank (which culminated in arguably the best outcome possible).
From our perspective, there are still a lot of issues to be solved around private investing, tech start-ups, VCs and angels — ‘accountability’ has become on of the main driving forces in the last couple of years.
Nevertheless, here at Pi Labs, we are proud to be part of a community that strives for innovation and where going backwards can sometimes help us going forward.
