Corporate Venturing

What is 'corporate venturing'?

The term 'corporate venturing' covers a range of mutually beneficial relationships between companies. The relationships range from those between companies within the same group, through those between unrelated companies, to collective investment by companies in other companies through a fund. The companies involved may be of any size, but such relationships are commonly formed between a larger company and a smaller independent one, usually in a related line of business.

The larger company may invest in the smaller company, and so provide an alternative or supplementary source of finance. It may, instead or as well as,

• make available particular skills or knowledge, perhaps in technical or management areas, which a smaller company would otherwise not have access to, and
• provide access to established marketing and distribution channels, or complementary technologies.

In addition to any financial return it receives from an investment the larger company may gain a competitive advantage by

• being able to make better use of its own resources, and
• gain access to
  • research or development, or other work in an area it is interested in
  • new ideas
  • a more entrepreneurial culture.

Forming corporate venturing relationships can be a way for large companies to develop and broaden their business without acquiring other companies, and a way for small companies to grow faster than they otherwise would. A typical outcome would be the development of a new product or process, perhaps involving an exclusive licensing deal between the two companies.

Corporate venturing is well established as a growth strategy in the United States. In the United Kingdom (UK) it is currently more limited, being found mainly in areas such as biotechnology, telecommunications and information technology. The Corporate Venturing Scheme (CVS) is intended to encourage corporate venturing involving equity investment in the UK.

An overview of the Corporate Venturing Scheme

The CVS is aimed at companies considering direct investment, in the form of a minority shareholding, in small independent higher-risk trading companies or groups of such companies. It provides tax incentives for corporate equity investment in the same types of companies as those qualifying under the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) scheme. The incentives are available in respect of qualifying shares issued between 1 April 2000 and 31 March 2010. The aims of the Corporate Venturing Scheme (CVS) are to

• increase the availability of venture capital to small higher-risk trading companies from corporate investors, and through this
• foster wider corporate venturing relationships between otherwise unconnected companies.

The tax reliefs available are

• investment relief - relief against corporation tax of up to 20% of the amount subscribed for full-risk ordinary shares, provided that the shares are held throughout a qualification period
• deferral relief - deferral of tax on chargeable gains arising on the disposal of shares on which investment relief has been obtained and not withdrawn in full, if the gains are reinvested in new shares for which investment relief is obtained
• loss relief - relief against income for capital losses arising on most disposals of shares on which investment relief has been obtained and not withdrawn in full, net of the investment relief remaining after the disposal.

A summary of the main rules

There are rules applying to

• the investing company - the company making the equity investment
• the issuing company - the company receiving the investment
• the investment process - the issue of shares to the investing company by the issuing company, and the use of the money raised by it.

A number of the rules must be satisfied throughout the 'qualification period' related to the shares. The qualification period related to the shares is a period starting with their issue and ending

• immediately before the third anniversary of the issue date where the qualifying trade for which the funds have been raised is already being carried on, or
• immediately before the third anniversary of the date on which the trade commences where the company issues the shares to raise money for a trade which is not already being carried on.

If a company is carrying on research and development from which a qualifying trade will be derived or will benefit, this activity will be treated as carrying on a qualifying trade.

The investing company

The investing company must not be party to any arrangements for purchasing shares in another company which are conditional on the purchase of shares in the investing company, and throughout the qualification period must

• not own more than 30% of the issuing company, nor be able to exercise control of the issuing company
• exist wholly for the purpose of carrying on non-financial trades, or if it is a member of a non-financial trading group, exist wholly for the purpose of carrying on non-financial trades, investment (or other non-trade businesses), or be the parent company.

The issuing company

When the shares are issued the issuing company

• must be an unquoted company and must not have made any arrangements to become a quoted company
• must have gross assets of no more than £15 million immediately before, and £16 million immediately after the issue (if the issuing company is the parent company of a group, this test is applied to the group as a whole).

Throughout the qualification period the issuing company must not be a member of a group of companies, unless it is the parent company of the group, and must not be under the control of another company.

At least 20% of the issuing company's ordinary share capital must be held by individuals other than directors or employees (or their relatives) of an investing company, or any company connected with it.

An issuing company which is not a group member must exist wholly for the purpose of carrying on one or more qualifying trades (broadly, all but certain lower-risk trades) and either be carrying on a qualifying trade or be preparing to do so.

Where the issuing company is the parent company of a group, the business of the group as a whole must consist wholly, or to a substantial extent, of qualifying activities. At least one company of the group must exist wholly for the purpose of carrying on one or more qualifying trades, and either be carrying on a qualifying trade or be preparing to do so.

The investment process

The subscription for shares must be wholly in cash, for full-risk ordinary shares, which are fully paid-up at the time they are issued.

The money raised from issuing the shares must be used for the purposes of a qualifying trade, or for research and development intended to lead to or benefit a qualifying trade, within 12 months of the issue of the shares. Where it is to be used for a trade, which is not being carried on at the time the shares are issued, it must be used within 12 months after the date on which the trade commences.

There are also restrictions on the issuing arrangements for the shares, so that they do not include arrangements that provide protection to investors against the normal commercial risks attached to investing in the issuing company.

Using the Corporate Venturing Scheme

A company, which is considering raising money through the CVS, can get advance clearance from us that, at the time the shares are issued, the conditions of the CVS (except those that apply to the investing company) will be, or are for the time being, met in relation to the proposed issue of shares.

Once the shares have been issued to the investing company, the issuing company provides us with a statement on form CVS1 confirming that the conditions of the CVS (other than those applying to the investing company) are, for the time being met in relation to the shares. If we are satisfied with that statement, we will then authorise the issuing company to provide the investing company with a certificate, so that the investing company can claim investment relief (and, where applicable, deferral relief).

To be able to provide this 'compliance statement' the issuing company must have been carrying on the trade (or, where appropriate, research and development) for which the funds were raised for at least four months.