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SEIS/EIS funding changes hurting UK games studios

How new government rules have created a catch-22 problem for developers, suspended a £150 million fund, and damaged investor confidence

Changes to how companies are approved for SEIS/EIS funding are hurting the creative industries, including video games developers.

Historically, studios seeking finance via either Seed Enterprise Investment Scheme or Enterprise Investment Scheme would present themselves to HM Revenue & Customs to secure advance assurance (AA) -- something they can use to calm investor concerns and prove their eligibility for SEIS/EIS.

A significant increase in the number of advance assurance applications meant HMRC struggled to process them all in timely manner, so on March 15, 2018, new changes to the SEIS/EIS rules were implemented. Three key changes caused problem for games (and indeed other creative) firms.

Firstly, project-based applications were banned with companies expected to show a growth business plan of three to five years. Secondly, no more applications for AA with only speculative investors -- you needed names and addresses of committed backers. Thirdly, the 'risk to capital' requirement meant businesses had to demonstrate how investors' money was at risk.

Ella Romanos, Fundamentally Games

Fundamentally Games founder Ella Romanos says that not only has this triggered "a big shift in how SEIS/EIS can be used", it has also shown the HMRC is now "paying very close attention to applications from creative industry -- film, TV and games -- companies in particular."

The result is significant delays or even outright rejections for games firms applying for advance assurance. Nick Gibson, director of Games Investor Consulting, says this has created a "theoretical catch-22 problem" for developers.

"To secure investors, they need to provide assurance that their investments would qualify for SEIS/EIS but it can't secure that AA without these investors' commitment," he tells GamesIndustry.biz. "In practice this is less of a problem for small firms, who now simply have to make their AA applications at a later stage once their prospective investors have been identified. [It's] far more of a problem for SEIS and EIS funds whose constituent investors are numerous and can vary from investment to investment. These funds can no longer secure AA and so can no longer provide assurance to these investors that their investments would qualify for SEIS/EIS."

"The film and TV industries have been very active in lobbying the government on this matter. In our view, the games industry needs to become much more active"

Ella Romanos, Fundamentally Games

UKIE CEO Dr Jo Twist says the government's changes were intended to "make sure that qualifying investors who were using the schemes were definitely third parties, who had no intention of running the company related to the project". But Authentic Media Group CEO Adam Betteridge warns that delays to the AA process can "potentially threaten the investment [developers] are seeking to raise".

"Investors may get fed up waiting, or may run out of time if they need to invest within the current tax year," he says. "Because of the new requirement for investor interest to be evidenced prior to the application being sent in... [developers] now have to approach investors first, and then expect them to wait for all the time it takes for their application to be processed."

Betteridge says one games firm he knows applied for AA back in June 2018 and is still waiting. Rejections, he adds, are even more of a problem. While the HMRC argues that advance assurance is option, Betteridge says that "with all the uncertainties involved, most investors now require seeing it prior to making an investment".

These changes are also making things harder for investment funds themselves. Two weeks ago, Ingenious Media announced it was suspending all creative industry EIS funds -- including the games-specific Ingenious Play -- due to the impact the new rules have had on investor confidence. Betteridge, who has done some consulting work with Ingenious, tells us the firm "typically raised between £100 million to £150 million per year for the creative industries", but now this source of finance has been suspended.

Adam Betteridge, Authentic Media Group

"The impact of this announcement is only just starting to be felt, but as one of the largest funds in these sectors, it is a stark and very worrying example of the extent of the problem," says Betteridge. "Similarly, other smaller funds have reported the challenges they are experiencing engaging with the new SEIS/EIS regime. And numerous individual investors have told us that due to these uncertainties they are now less willing to invest prior to advance assurance being received, ultimately making it more difficult and time consuming for developers to raise funding."

Gibson remains more optimistic, believing these hurdles to be "certainly surmountable", and notes that: "In practice, there really weren't that many dedicated SEIS and EIS games funds to begin with -- although we know several new ones that are still looking to enter this market with different approaches to Ingenious."

He goes on to stress that it is advance assurance that has become harder to secure, not that SEIS/EIS has been cut off completely. Developers can still get investors lined up first, which will improve their chances of qualifying for either scheme.

Theoretically, this issue could be alleviated by the UK government pouring more resource into HMRC to help meet that increased demand for advance assurance, but Betteridge observes that there's a broader problem that needs to be addressed.

"Improving the understanding amongst the relevant officers at HMRC of how each of the creative industries work [would help], and specific sector guidance could be issued by HMRC to explain their expectations more clearly," he says.

"It is important that government recognises the unique ways in which the games sector operates, in particular how it differs to the other creative industries. For example, unlike many film companies, games companies on the whole tend to be growth companies with the intention to scale over time. This is particularly true if, as is increasingly common, they have a service-based business model. Even if their business model is more product-oriented, the vast majority of games companies usually intend to make multiple games over time."

"The impact of this announcement is only just starting to be felt, but as one of the largest funds in these sectors, [Ingenious] is a stark and very worrying example of the extent of the problem"

Adam Betteridge, Authentic Media Group

Romanos adds: "To date, the film and TV industries have been very active in lobbying the government on this matter. In our view, the games industry needs to become much more active in its lobbying of the government on this matter, and ensure that our collective voices are heard alongside them."

UKIE's Twist assures that the trade body is already doing all it can -- in fact, when the changes were first made, it published a guide explaining how this might affect games firms.

"We are working with Government and officials to try and improve the situation especially around some clarity in the process," Twist says. "We are calling for more advice, and clearer guidance for example so that firms are better equipped to make successful applications."

Gibson, meanwhile, is keen to remind UK developers that, while changes like this may seem to damage investor confidence, our nation "does not do badly when it comes to investment" -- although he admits "it could do much better."

"There are undoubted funding gaps in particular in the range of around £0.5 million to £2 million, with only a small handful of early-stage VCs sufficiently interested in and knowledgeable enough about the sector to consider investing in it," he says.

"The UK is not alone in having this funding gap but in some other countries, governments have stepped in to help out. In Finland, for example, the Tekes/Business Finland grant and loan fund has been instrumental in providing an early stage financial base for many of its most successful companies including Supercell. This has helped to precipitate a world-class ecosystem of games innovation, investment and success that has resulted in huge returns for the Finnish economy. There is no direct equivalent in the UK and since the vast majority of UK games companies that try to raise VC finance at this stage fail to do so, growth at this stage is often bootstrapped, challenging or simply impossible."

Nevertheless, Romanos and Betteridge are keen to reopen this potential source of funding. The pair are currently conducting a survey to gauge both awareness of this issue and the impact it has already had to better enable them to lobby government.

"We're keen to hear from as many businesses as possible, but it's particularly important that we hear from those who have successfully received SEIS/EIS advance assurance from HMRC at any point since March 15, 2018, as well as those who have had, or are currently experiencing, issues. The more games businesses who reply, the more powerful this process will be."