The Seed Enterprise Investment Scheme (SEIS Scheme) is one of the most widely used initiatives for helping very young companies raise finance. It offers attractive tax reliefs to individual investors who take a risk on start-ups. Although the scheme is mainly about tax and accountancy, it also raises important commercial law issues for founders and investors.
At JPP Law, we do not advise on the tax aspects of the SEIS scheme. If you need help with the accounting side, we can refer you to a specialist accountant. What we do handle is the legal framework around funding rounds, including shareholder agreements, articles of association, directors’ duties, and the commercial contracts that support the investment.
What is the SEIS Scheme?
The SEIS scheme was introduced in 2012 to encourage investment in seed-stage businesses. Under the scheme, a company can raise up to £250,000 in total from investors who, in return, benefit from tax reliefs such as income tax relief of 50% of their investment, exemption from capital gains tax on qualifying shares, and loss relief if the company fails. Not every business is eligible, and there are strict rules set by HMRC on qualifying trades, company age, asset limits, and how funds can be used.
The Legal Framework Around SEIS
When a business raises money through the SEIS scheme, it must comply not only with HMRC requirements but also with company law in England and Wales. Issuing shares is a formal legal process governed by the Companies Act 2006. If this process is not followed properly, the issue of shares may be invalid or expose directors to legal risk.
Key legal considerations include:
- Ensuring that the company has the authority to issue new shares under its articles of association.
- Recording the allotment of shares correctly at Companies House.
- Making sure the shares issued meet the SEIS definition of full-risk ordinary shares.
A failure to get these basics right can create difficulties for investors later on, especially if HMRC refuses tax relief because the share issue does not comply with the rules.
Shareholder Agreements and Articles of Association
Commercial law plays a significant role in managing the relationship between founders and investors. Before issuing SEIS shares, companies often need to update their articles of association and prepare shareholder agreements.
These documents deal with practical issues such as:
- What rights SEIS investors have in relation to dividends and voting.
- Whether founders can retain control of the business as further shares are issued.
- How decisions will be made if disputes arise.
- What happens if an investor wishes to sell their shares.
Without these protections, both companies and investors face uncertainty. Start-ups are particularly vulnerable to disputes if expectations are not managed through clear legal documents from the beginning.
Directors’ Duties and Investor Relations
Directors must remember that raising funds under the SEIS scheme does not change their duties under company law. Directors remain legally bound to act in the best interests of the company, to treat shareholders fairly, and to avoid conflicts of interest.
When presenting an SEIS opportunity to investors, directors must ensure that the information they provide is accurate and not misleading. If investors later claim that they were misled, the company could face legal claims.
Directors also need to manage relationships between SEIS investors and any future investors. A company that mishandles early-stage investments may find it harder to attract larger funding rounds later.
Commercial Strategy and SEIS
The SEIS scheme is designed for the very first stage of investment. Many businesses that succeed with SEIS go on to raise further funding under the Enterprise Investment Scheme (EIS) or through venture capital.
From a commercial law perspective, companies need to think ahead when accepting SEIS investment. Questions to consider include:
- Does the shareholder agreement allow for later funding rounds without giving early investors excessive control?
- Are share valuations set in a way that avoids conflicts with future investors?
- Will the structure chosen for SEIS investors fit with long-term commercial strategy?
Failing to plan for these issues can make later funding rounds more complicated and potentially discourage larger investors.
Dispute Prevention and Investor Confidence
Disputes between founders and investors are a common risk when funding rounds are not supported by clear legal agreements. Some common areas of conflict include dividend rights, voting powers, and restrictions on transferring shares.
Commercial law provides mechanisms to reduce these risks. Shareholder agreements, investment contracts, and properly written articles of association give all parties confidence that their rights are protected.
With robust legal frameworks in place, companies can reassure investors that their money is being handled transparently and that governance is in order. This can make the company more attractive to future investors and reduce the risk of disputes derailing progress.
Common Pitfalls in SEIS Investments
Even though the SEIS scheme is attractive, companies often make mistakes that have both legal and commercial consequences. Some of the most frequent issues include:
- Failing to follow the correct legal process when issuing shares.
- Allowing informal agreements with investors instead of formal legal documentation.
- Giving away too much control in shareholder agreements, making future rounds harder.
- Not considering directors’ duties when promoting SEIS opportunities.
- Overlooking the need for ongoing compliance during the three-year qualifying period.
These pitfalls can undermine both the legal and financial benefits of SEIS, leaving investors dissatisfied and companies struggling to raise further capital.
How JPP Law Supports Clients
At JPP Law, our role is to help businesses manage the commercial law aspects of funding rounds, including those involving the SEIS scheme. While we do not provide tax advice, we work closely with accountants to ensure the investment process is managed smoothly from both a financial and legal perspective.
Our services include:
- Drafting and reviewing shareholder agreements.
- Updating articles of association to accommodate SEIS investors.
- Preparing investment agreements that reflect both founders’ and investors’ interests.
- Advising directors on their duties and responsibilities when raising funds.
- Ensuring Companies House filings and other legal formalities are properly completed.
At JPP Law, we help companies create a strong legal foundation for growth while ensuring that SEIS investors are protected.
Speak To JPP Law
If you are preparing to raise funds under the SEIS scheme, it is important to consider the commercial law implications as well as the tax benefits. JPP Law can advise on the legal structure of your investment, prepare the necessary agreements, and refer you to specialist accountants for tax advice.
Contact JPP Law today to discuss your plans and ensure that your funding round is supported by the right legal framework.
