Young Companies Can't Raise Capital From The Public?

This is a MYTH!

In 2017, the Australian Government created the ‘Early Stage Innovation Company Status’ by making amendments to the Income Tax Act to enable small, young companies that have been undertaking ‘innovative activities’, to be able to raise capital from investors, with built in ‘encouragement’ to investors to invest in ‘qualifying companies’.

The Early Stage Innovation Company (ESIC) Status is clearly targeted at SMEs.

This week, we will discuss the opportunities for qualifying companies and the ‘encouragement’ that the government is offering investors, to invest in companies which qualify for the ‘Early Stage Innovation Company’ status.

Companies which have been incorporated under section 708 of the Corporations Act and who have undertaken innovative activities can be eligible.

The first test is the ‘Test Time Determinations’.  The three (3) components of companies that can apply are…

Company under three (3) years of age: expenses of less than $1M in the income year before the current year. Assessable income of less than $200,000 (excluding any grant funds from the Accelerating Commercialisation Grant) in the income year before the current year.  Not listed on a stock exchange anywhere in the world.

Company under six (6) years of age: across the last three of those income years incurred total expenses of $1M or less. Total assessable income of less than $200,000, (excluding any grant funds from the Accelerating Commercialisation Grant) in the income year before the current year.  Not listed on a stock exchange anywhere in the world.

Company registered on Australian Business Register in the last three (3) years: expenses of less than $1M in the income year before the current year. Total assessable income of less than $200,000 (excluding any grant funds from the Accelerating Commercialisation Grant) in the income year before the current year.  Not listed on a stock exchange anywhere in the world.

Does this sound like your company?

Towers Business Development can assist your company undertake ‘due diligence’ and documentation relative to the ESIC Status.

 The ‘Early Stage Innovation Company Status’ requires a company that has satisfied the ‘Test Time Determination’ to pass one of two subsequent tests:

• Gateway test, or
• Principles test

To qualify under the Gateway Test, the company has to aggregate 100 points by answering a series of questions.  These questions relate to:

• Research & Development expenditure undertaken by the company as a percentage of the company’s total expenditure.
• Received an ‘Accelerating Commercialisation Grant’?
• Completed or is undertaking an ‘Accelerator Program’?
• At least $50,000 has been paid for equity interests that are shares in the company by persons who were not associates of the company?
• Owns rights relating to a patent, standard patent, plant breeders right?
• Owns an ‘Innovation Patent’?

If the aggregate of points is 100 or more, the company is deemed to have ‘self-assessed’ under the Gateway Test.

Full documentation supporting the answers given to these questions must be maintained for future audit.

If the company does not achieve a 100 point score, it can then complete the Principles Test.

The Principles Test has five (5) questions which the company is required to submit supporting documentation for examination by the Australian Taxation Office (ATO).  If the ATO is satisfied that the company has supplied appropriate answers to the questions, they will issue a certificate indicating that the company has achieved the status of an ‘Early Stage Innovation Company’.  The five questions are:

1. Is the company genuinely focused on developing for commercialisation one or more new, or significantly improved products, processes, services, marketing or organisational methods?
2. Does this business have a high growth potential?
3. Can the company demonstrate that it has the potential to be able to successfully scale the business?
4. Does the company have the potential to be able to address a broader than local market?
5. Does the business have the potential to be able to have a competitive advantage?

Towers Business Development can assist companies in all aspects of the ESIC status.

The “Taxation Benefit” that Investors are eligible to receive if they contribute capital to a company as part of the company achieving the “Early Stage Innovation Company” status can be quite attractive for investors and the benefit for the company is that the company has received investors’ funds that the company might not have received if there was not an incentive from the Government built into the process.

Investors can qualify for two separate tax incentives:

• Taxation Offset calculated at 20% of the investment with a maximum offset available for a Sophisticated Investor of $200,000 and a Retail Investor of $10,000.
• If the Investor now Shareholder retains the shares that were allocated as part of the Early Stage Innovation Company status process for more than twelve months and less than ten years the Shareholder will be able to disregard any capital gain in relation to the shares that were allocated as part of the Early Stage Innovation Company Status Process.

This legislation was a key initiative of the Government to encourage investors to have a serious look at “Young Innovative Companies” that were seeking financial support.

Companies wishing to discuss investment with Investors will need:

• Business Plans outlining the company’s vision
• Predictive Accounting Reports – Budgets, Cash Flow Forecast, Projected Balance Sheets
• Share Price Calculation Summary
• Documentation relative to the Early Stage Innovation Company status. If the company has completed the Principles Test the documentation needs to be lodged with the Australian Taxation Office for approval and if the company was self-assessed under the Gateway Test the documentation is required to be retained to satisfy any subsequent audit.

Most companies will require assistance in this process.

EARLY STAGE INNOVATION COMPANY STATUS COULD HELP!

• The Early-Stage Innovation Company status could help because investors who invest when you are seeking the Early Stage Innovation Company status approval receive “Significant Taxation Benefits”.
• And, your company receives the funds to undertake further activities to enhance your prospects of “Scaling Up”.
• Want to know more? Visit our website towersbusiness.com.au or Telephone 1800 232 088 or email to arrange a complimentary zoom meeting

You can access our article “Early Stage Innovation Companies” by clicking here.

The Early-Stage Innovation Company legislation is unique in Australia in that investors are offered an “incentive” to invest in young companies aged under six years who have been undertaking innovative activities.  If your company fits that criteria this process gives you an advantage in raising capital because the investors can achieve an incentive which could be quite considerable if your company achieves greatness!

Most companies require assistance by an “Accounting Consultant” skilled in the requirements of the Early Stage Innovation Company Program and in producing the documentation required by both the Australian Taxation Office and Investors.

If you would like to have a discussion with Peter Towers. Managing Director and Founder of Towers Business Development and ESS BIZTOOLS please contact us – 1800 232 088 or email

For more information please visit our website www.towersbusiness.com.au