The Enterprise Investment Scheme (EIS) is a tax-efficient way to invest in the new shares of small businesses, as well as giving much-needed capital to businesses that cannot get funding from traditional methods such as banks and venture capitalists. The UK Government introduced the scheme over 20 years ago to encourage domestic investors to support entrepreneurial UK companies whilst offering significant tax breaks to offset the generic high risk nature of early stage investing. The scheme, in recent years, has been relaxed to allow overseas businesses to qualify as long as they meet the qualifying conditions.
This occurs when a portion of the share capital in a company is placed with private investors before the IPO (Initial Public Offering) is scheduled to hit the market. Typically, these private investors in a pre-IPO placement are large private equity or hedge funds that are willing to buy a large stake in the company. The size of the investment means the price paid for shares in a pre-IPO placement is usually less than the prospective IPO price. The pre-IPO round will normally cover the listing costs of the IPO but may also provide working or expansion capital to strengthen the business prior to the listing.
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