Angel financing has become the primary source of external seed and early stage equity financing in many countries in Europe, as a result of the financial crisis, and in view of VC funds investing in much less risk-averse areas. However, the development of business angels markets has not been homogeneous in all EU Member States. In a supposedly “single market”, private “cross-border” investors in innovative companies are often penalised in other countries by national regulations, which do not offer them the same incentives on investment or exit as investors in their own national fiscal framework. Much more therefore has to be done in order to fully exploit this unique and increasingly important “asset class”, in order to foster the innovation and growth of new companies across Europe, and to enable angels to successfully invest cross-border to support the international market expansion of angel-backed businesses.
As part of its growth strategy for angel investing in Europe, and to facilitate cross-border investments, Business Angels Europe has identified providing business angels with a European Angel Investment Passport as one of its key policy developments. “Qualified” angel investors under this scheme would be granted a European Passport, which would allow them to follow their investee businesses when they plan to scale-up and expand into other European markets, and would make it easier to identify a syndicate of angels in another EU country willing to co-invest alongside the existing business angels, providing both equity capital and a soft landing in the target country. We spoke about the need for an EU directive, which would establish a Business Angel Investor Passport, with Philippe Gluntz, President of BAE.
‘Today angels tend to invest mainly in their own region or country for two reasons. Firstly, they get more opportunities locally, which is a sourcing issue’, Gluntz explained. ‘Secondly, they are not familiar with the legal and fiscal environment outside their home country, which is a regulatory issue. That's why the tendency has so far been to invest within their own borders. Generally the first round is sourced through angels in the region or country, who identify the market opportunity. However, as the company grows and wants to expand further into European markets, there is no current infrastructure for angel-backed businesses in one country to identify relevant angel investors in that country, whilst current fiscal frameworks do not “talk to each other”. This is not an issue in itself as long as start-ups do not become international very early.
‘Most start-ups are local at the beginning and expand nationally and internationally. In the second round angels encounter a number of issues inhibiting their participation. That's why the internationalisation of start-ups is an issue for angel investing, and we have to incentivise our angels to invest in start-ups outside their own region or country as they expand.
‘The UK Business Angels Association recently published a research study entitled “Nation of Angels” where they revealed a trend of UK investors who have started to invest overseas more often. According to the study, one in four angels look for investments outside the UK, which is a major shift from only a few years ago’, explained Gluntz. ‘However, in continental countries there is no significant interest in investing in other countries of the EU, excluding cross- border investments in neighbouring regions. So we need to find a solution in order to have a functioning single market and enable angel investors to follow their start-ups. At the same time we have to support start-ups to grow internationally.’
What does the introduction of a Business Angel Investment Passport entail?
‘It requires the development of a common accreditation or qualification system for business angels, which is required in some European countries. Similarly, criteria for the accreditation of start-ups, the potential targets for angel investing, like for example in Italy, where the target company has to be registered as an Innovative Start-up to enable Angels to obtain a tax deduction, should be identical across the EU. Angel investors could potentially qualify for fiscal incentives, should they meet the required criteria.
‘Furthermore, mutual recognition of existing fiscal incentives for business angels is key to ensuring they would invest freely across Europe. For example, the UK requires that investors using the SEIS/EIS incentives for investment can only invest in businesses with a substantial base in the UK, whilst angels in France can invest in companies based in any EU country. This possibility should be extended to all the countries of the EU. Ideally, a UK resident investing in an SME in Italy could benefit from the same fiscal incentives for innovative start-ups than if he were investing in the UK and vice versa – an Italian resident investing in the UK could benefit from same incentive as with an investment in Italy.’
How does the initiative of a European-wide investors’ registry match with overall fiscal harmonisation in the EU?
‘We do not have a solution to the issue today’, replied Gluntz. ‘You can invest in any company most countries of Europe without being inscribed in any register of “accredited angels”. This is required only in Anglo-Saxon countries, in particular in the UK, but under the UK Financial Markets Directive you can self-certify your status as either a “high net worth investor”, which requires investors to declare that they have €250k spare financial capacity, or as a “sophisticated investor”, able to demonstrate relevant financial or business experience to show your competence in understanding the risks of investment as an angel investor.’
This is different from the recently adopted Italian tax incentives for investment in innovative companies.
‘Yes. There is a registry of innovative start-ups in Italy. Investing in them brings tax deductions. There is similar regulation in Germany. But anybody can invest and benefit from tax incentives. It is only in the UK where the regulatory framework deals with the risk incurred by the target company. Furthermore, in Anglo-Saxon countries, for an investor to be eligible for tax deductions they should not be related to other owners of the target company.’
What criteria would you recommend?
‘The most important criterion should be based on the experience of the investor, if we want to deliver a directive on and incentivise angel investing in the EU’, Gluntz emphasized. He pointed at significant differences between countries in the level of wealth of investors. ‘It would be unacceptable in some countries to “exclude” some investors because of an insufficient level of revenue or wealth.
‘Experienced investors could have to prove they have a required minimum number of years of experience or that they have been trained. In addition, they could show they are a member of a network, delivering training, experience and peer support. All this can prove that you are not a “virgin” investor undertaking excessive risk.
‘There is an important aspect related to risk management’, said Gluntz. ‘If you invest in a company existing since 30 years , you assume some risk, but at least you have a track record that you do not have with a young company. The uncertainty is higher.’
According to Gluntz, criteria detailing the characteristics of the target company should not exclude considerations typical of the second round, where sometimes you take more risk than in the first round.
From the government’s point of view, in most cases eligibility for tax incentives is dependent on specific criteria, for example, that the target company is a start-up or at an early stage, has been trading for a minimum number of years or has a maximum size (of revenues or employees), or that it is innovative or knowledge intensive according to defined criteria. These criteria are relatively common in the UK, Italy, Germany or France, although there are specific criteria relevant to each country.
It is also important to note that an EU regulation is underway to restrict national tax incentives for start-ups more than 7 years old. This is the first instance of EU-wide regulation in this field. At BAE we will continue to work to ensure the growth of the potential for cross-border investment, notably to support scale-up and international market expansion. This will require that both tax incentives are able to “talk to each other” cross-border. We also wish to support the concept of the “Business Angel Investor Passport” which we feel will add confidence and transparency to the EU angel market, directly facilitating the motivation and trust needed for angels to syndicate investments cross-border.’
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