Corporate Venturing

The investment

To be eligible for investment relief, an investment must meet requirements relating to

• the shares
• use of the money raised
• pre-arranged exits and investor protection, and
• the purpose of the issue.

The issuing company can apply to us for advance clearance that these requirements are met (see 'Using the Corporate Venturing Scheme').

The shares

The shares must be

• ordinary shares carrying no preferential rights to dividends or assets on a winding up, and no rights to redemption
• subscribed for wholly in cash, and
• fully paid up on issue to the investing company.

Requirements regarding use of the money raised

The money raised by the issue of shares must be used (except for any insignificant amounts used for other purposes) for either

• the purposes of a trade by reference to which the issuing company meets the 'trading activities' requirement, or
• research and development from which a qualifying trade will be derived, or which will benefit a qualifying trade (where any member of the group may carry on that trade).

The money must all be used

• within 12 months from the issue of the shares, if it is to be used for
  • a trade which is being carried on when the shares are issued
  • research and development being carried on when the shares are issued or carried on from the date the shares are issued
• within 12 months from the time when the trade begins, if the company is preparing to carry on a trade when the shares are issued (the trade must begin within two years of the issue of the shares)
• within 12 months from the time when the trade begins, or by the third anniversary of the issue of the shares, whichever is earlier, if
  • the money is to be used for a trade to be derived, or which will benefit, from research and development, and
  • the trade is not being carried on when the shares are issued.

Pre-arranged exits and investor protection

An investing company cannot qualify for the CVS if, in connection with the arrangements for the issue of the shares (the 'issuing arrangements'), there are also arrangements

• for a subsequent repurchase, exchange or other disposal of any shares in or securities of the issuing company
• for the cessation of any trade by the issuing company or a person connected with that company, including arrangements for the issuing company to be wound up
• for the disposal of a substantial amount of the assets of the issuing company or of a person connected with that company
• providing protection for persons investing in the issuing company against the normal commercial risks attached to making the investment
• the main purpose of which (or one of the main purposes of which) is the avoidance of tax.

'Issuing arrangements' includes arrangements under which the shares are issued to the investing company, and those made before the issue or in connection with it. If any information on pre-arranged exits is made available to prospective subscribers, arrangements made on or after the issue of the shares, but before the end of the qualification period, in accordance with that information are also covered.

Issuing arrangements do not include

• arrangements for the exchange of shares, or shares and securities, resulting in the acquisition of share capital by a 'clean' holding company (see the ' Special rules for one type of reorganisation')
• arrangements that take effect on a winding up, except where they provide for the issuing company to be wound up or where the winding up is not for commercial reasons.

Purpose of issue

The shares must be issued for commercial purposes and not as part of a scheme or arrangement whose main purpose, or one of whose main purposes, is to avoid tax.

Will the 'pre-arranged exits' rule apply if the intention is a flotation or sale of the issuing company in due course?

This will depend on the particular circumstances. Generally, the rule is unlikely to apply if a simple statement is made that the company's directors will be seeking flotation or a trade sale in due course, with no arrangements for this under way.

Do normal warranties and indemnities given in relation to the investing company's subscription for shares in the issuing company (e.g. warranties as to the accuracy of the accounts of the issuing company) infringe the rules on 'pre-arranged exits'?

This will depend on the particular circumstances, but normal warranties and indemnities are unlikely to infringe the rules.