VCTs – too spicy for some?

The poor marketing of some VCTs shouldn’t be allowed to tarnish the image of a valuable source of enterprise capital, says SJ Berwin’s Simon Witney.

Last week, the UK’s Financial Services Authority (FSA) issued a “final warning” to promoters of venture capital trusts (VCT) – the UK’s tax advantaged, smaller company investment vehicle, described by the FSA as “a useful, if spicy” addition to investment portfolios. 

A recent FSA survey suggests that up to 40 percent of VCTs are now purchased directly by investors without the benefit of financial advice, with a substantial percentage being bought from discount brokers over the internet. The FSA warned brokers back in August that their websites needed to present a more balanced picture to prospective investors. After a recent follow-up survey of promotional websites, the FSA has concluded that some brokers are still overplaying the benefits and underplaying the risks of investing in VCTs.

Witney: VCT websites need to be FSA compliant

Investing in a VCT offers investors significant tax breaks, not least tax relief of 40 percent on the initial investment. Unsurprisingly, web-based promotions emphasise this benefit. Less well-publicised is the condition that shares must held for at least three years, otherwise the tax relief will be clawed back. 

VCTs also carry a higher level of investment risk. To qualify as a VCT, an investment company must invest at least 70 percent of its portfolio in unlisted or AIM-traded companies with a gross asset value of no more than £15 million (€22 million) at the time of investment. VCTs generally invest the remaining 30 percent on the money markets, but are able to make higher risk investments. The investment profile of a VCT clearly has the potential for high returns, but the FSA reminds brokers that “it is important that investors who acquire VCTs have a clear understanding of the risks as well as the benefits associated with investing in them”.

The British Venture Capital Association (BVCA) reacted quickly by emphasising the importance of VCTs for the UK’s enterprise economy. As the BVCA points out in its pre-budget statement, VCTs are one of the key sources of funding for smaller, high growth companies in the UK, raising over £2 billion (€2.9 billion) since 1995. 

It would be very unfortunate if the image of VCTs were tarnished, or such a valuable source of enterprise capital were reduced, because a small number of brokers are not ensuring that their websites are FSA compliant.

Simon Witney is a partner at SJ Berwin, a pan-European law firm with a specialisation in private equity. Further information on the firm is available at www.sjberwin.com.