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Ii) Business angel-led (Active Investor) ECFs

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    Passive   Active  
    Investors   Investors  
    & loans   Capital  
Capital & loans        
  Limited Partnership Capital    
    General Partner  
    (ECF) Manages  
SME 1 SME 2 SME 3 SME n  



A variant of the standard venture capital LP model might also be suitable for groups of business angels seeking to manage their own funds actively through an ECF. The structure outlined here assumes that all private investors have a right to participate in the day-to-day management of the general partner of the ECF.



(a) Structure of participation


As in the standard LP model, it is envisaged that the Government and private investors would all be limited partners in the fund, agreeing to advance non-interest-bearing loans to the partnership as required and making a nominal capital contribution (pro rata to their loan commitments and profit share).


The private investors would form a limited liability partnership5 (“LLP”) or limited company to act as the general partner, and this vehicle would manage the activities of the fund. The liability of the investors in their capacity as members of the LLP would normally be limited to the extent of their capital contribution to the LLP, which could be a nominal sum.


It is for applicants to specify the processes by which the general partner would make its investment decisions. The Government will require these processes to build in suitable safeguards that prevent investment decisions from being taken by a single investor acting alone.


(b) Remuneration to the general partner



5 A limited liability partnership, as distinct from a limited partnership, is a body corporate that is treated as a transparent vehicle for tax purposes. The main advantage of structuring the general partner as an LLP (rather than a limited company) is that the investors would not be employees or directors of the general partner, and so their interest in the LLP would not generally be an “employment-related security” within the meaning of Part 7 of the Income Tax (Earnings and Pensions) Act 2003.


Guidance for Prospective ECF Managers - 13


As in a standard LP fund, it is likely that the partnership would make regular payments to the general partner to meet the expenses incurred in managing the fund. Applicants should specify the level of these payments in their proposal, but it is envisaged that the costs of managing an angel-led ECF would be substantially lower than for an ECF operated by a third-party, FSA-authorised fund manager.


The Government does not envisage that there will generally need to be a carried interest for the general partner in the angel-managed model. The carry is offered in the standard LP model to strengthen the incentives for the fund manager to maximise fund profits. In this angel-managed model, the managers (as limited partners) already have a significant financial incentive to maximise the financial return.


(c) Taxation


The limited partnership ECF and an LLP general partner should both be tax-transparent vehicles, whereas a limited company GP is not transparent. The comments in section (i)(c) above, in relation to Part 7 of ITEPA, also apply to this structure.


(d) Government’s rights as a limited partner6


As with the standard LP model, the Government envisages that most decisions requiring investor consent would be taken only with the agreement of CfEL and a majority of private investors. CfEL will wish to have the right to remove the general partner (or to require an individual member of the general partner to cease their involvement in the management of the ECF) where the investment policy or other terms of the partnership agreement are breached, or where the general partner otherwise acts fraudulently, negligently or criminally.


The Government will also require a small number of additional protections in ECFs that are not being managed by an FSA-authorised person. The Government will wish to ensure that the checks that an FSA-authorised fund manager would normally conduct on investors, for example in relation to money laundering, are carried out. In addition, CfEL will only confirm its offer of funding where it believes that the investors in the ECF have the necessary experience and expertise to manage public funds responsibly. Similar due diligence checks will be applied to any investors who wish to join the ECF after first closing. However, CfEL‟s checks will be narrower in scope and purpose than those normally carried out by the FSA in their authorisation process, and should not be relied on by any other investors as a substitute for FSA authorisation.


(e) Interaction with the regulatory system


Following consultation7, the Government has made changes to the financial services regulatory system that enable an angel-managed ECF to exist without the need to have an FSA authorised operator and manager where certain conditions are met8. These conditions include:


6 CfEL will act on behalf of the Government in exercising or choosing to exercise these rights.

7 www.hm-


treasury.gov.uk/consultations_and_legislation/business_angel/consult_businessangel_index.cfm 8 Under previous regulatory rules, the limited partnership would itself be an unregulated collective

investment scheme, and the general partner (as operator) would have had to be FSA - authorised.


Guidance for Prospective ECF Managers - 14

the private investors should all be certified „high net worth individuals‟ or „sophisticated investors‟, as defined in the Financial Promotion Order 2001, at the time they make their commitment to the ECF;

the private investors should all be members of the LLP general partner, or otherwise have the right to be actively involved in the management of the general partner; and

the private investors should all have signed statements to the effect that they understand (i) the risks involved in this type of investment; (ii) that the ECF will not be subject to FSA regulation and will not therefore be required to comply with FSA rules; and (iii) that investors will therefore not have recourse to the protections afforded by the financial services regulatory regime.


If and when the ECF is promoted to potential investors as an investment proposition, the Financial Promotion Order 2001 will be applicable where the promotion is carried out by a non-FSA-authorised person. This permits certain types of promotion to be made without the need for the promotion to be approved by an FSA-authorised person, including promotions made to certified high net worth individuals and certified sophisticated investors. Following consultation, the Government has made changes to improve the operation of the financial promotion regime by introducing self-certification for high net worth and sophisticated investors.



Guidance for Prospective ECF Managers - 15


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