SeedLegals introduces SEIS/EIS SAFE for US companies raising investment from UK investors

SEIS and EIS investments fuel the early-stage UK startup ecosystem. For those not familiar with the terms ‘SEIS’ and ‘EIS’, they are tax relief schemes which allow UK taxpayers (it’s a deduction against tax paid to the UK) to claim a tax deduction of 50% (for SEIS) or 30% (for EIS) of their investment. Further, the investors pay no capital gains tax when selling their shares after three years, and they can write off their investment if the company fails.

What few people realise is that those investments don’t have to be into UK companies, they can be into foreign companies as well, provided that the foreign company has registered as a foreign entity in the UK (more on that below). It might seem strange that UK taxpayers should subsidise investments into non-UK companies – quite possibly this dates back to EU treaties that required such local tax subsidies to apply across EU members – but it still exists, and it’s still available.

If you have a US company and you’re looking to raise investment from UK angel investors and SEIS/EIS funds, you’ll greatly increase your investability by being able to offer SEIS/EIS to those investors.

Since US companies would mostly be raising investment from US investors, the most common scenarios would be UK companies that have done the ‘Delaware flip’ continuing to want to tap into their UK investor network, or perhaps offering follow-on investments to existing UK shareholders. Or it could simply be US companies tapping into the UK’s vibrant angel investor ecosystem.

To be able to offer SEIS/EIS to investors, there are a number of things a US company will need to do – we’ll cover those in detail below – but the starting point is to be able to offer an SEIS/EIS compatible SAFE.

The YC SAFE isn’t SEIS/EIS compatible

Most early-stage US investments are made using Y Combinator’s popular SAFE. Apart from its post-money valuation cap conversion which almost nobody understands (we do – on SeedLegals, our platform handles all the maths when you convert your SAFE), it’s easy to set up and use.

But the Y Combinator SAFE isn’t SEIS/EIS compatible, and if you use a standard YC SAFE to take an SEIS/EIS investment and HMRC (the UK’s tax authority) ask to see the SAFE when reviewing your SEIS/EIS application, the investor’s SEIS/EIS deductions could be disqualified.

There are two reasons the standard YC SAFE fails SEIS/EIS requirements:

1. There’s no longstop date
   The SEIS/EIS requirements say that an advanced subscription agreement (i.e. an agreement to send money before shares are issued, a SAFE being such an agreement) needs to have the investment convert into shares within at most six months of the date of the agreement. The YC SAFE has (bizarrely, any UK investor would say) no longstop date – it could be a decade or even never that the investor gets their shares – so the YC SAFE fails HMRC’s SEIS/EIS longstop requirement.
2. The investor needs to get ordinary shares
   The YC SAFE has the investor getting some form of Preferred Stock on conversion, but the SEIS/EIS rules require that the investor gets Common Stock or, as we say in the UK, Ordinary Shares.

Introducing the SeedLegals SEIS/EIS SAFE

SeedLegals’ SeedFAST agreement is the UK equivalent of the YC SAFE, a very popular way of raising investment ahead of a future funding round.

Many/most UK investors would be familiar with our SeedFAST, it’s the market standard. But it’s constructed for English law, and to match the way it will convert in a future UK funding round.

So, for US companies we took YC’s SAFE and amended it to include the requirement longstop date and Common Stock provisions. Then we added clear labelling and guidance for HMRC to explain the SEIS/EIS compatibility, so that when they review it they know immediately that the SEIS/EIS requirements are covered.

We also include messaging at the top of the SAFE explaining to the investor exactly which sections are amended compared to the standard YC SAFE, in line with YC’s requirement that the SAFE be unmodified other than as noted.

How to create your SEIS/EIS SAFE on SeedLegals

You can create your SEIS/EIS compatible SAFE on SeedLegals easily in a few minutes:

• Log into SeedLegals
• When prompted, set up your US company on SeedLegals
• Select the Jurisdiction as US (Delaware)
• Set the currency to US$
• Go to Shares to create your cap table (even if you enter just the total number of existing shares)
• Go to Raise then under Start new select SeedFAST

You’ll be prompted to enter the investor details, the investment amount, and all the other deal terms (cap, discount, etc). Easy.

When entering the investment, you can select whether it will be SEIS, EIS – which will automatically enable the SEIS/EIS additions described above – or no special tax treatment, in which case we’ll generate a completely standard YC SAFE.

Our SeedFASTs are priced to include free conversion in your next round or on the longstop date – that’s a huge plus to doing a SeedFAST on SeedLegals: you’ll save on legal fees at the next round. But we don’t do funding rounds for the US yet, so at the point you’re prompted to pay to unlock the SeedFAST, hit the chat bubble and we’ll agree a special rate for ‘SAFE only’.

When you’re ready, hit the chat bubble and our SeedLegals team will review everything for you, answer any questions, help with strategic and commercial queries, and anything else you need. We can’t offer legal advice in the US, so it’s unlimited product and commercial advice we’re offering, all included.

You can then share the document with your investor, everything can be e-signed on SeedLegals and you’ll get notified when the investors signs. Done! Welcome to SeedLegals!

Is that it? Anything else needed for the investor to get SEIS/EIS?

If you’re raising investment with a SAFE, then having a SAFE that’s compatible with the SEIS and EIS rules is a must-have, otherwise the investment fails the SEIS/EIS tests at the starting gate.

But that alone is not sufficient. For your investor to be confident that they’ll be able to claim their SEIS or EIS tax relief, and for you to deliver on that, there are a number of things you need to do:

1. Register your US company as a Foreign Entity with UK Companies House
   You’ll need to head over to the UK company registrar website to register your US company as a foreign entity. We’ve explained how in full in this article.
   Note that this is different to having a UK subsidiary. If you have a UK subsidiary that’s fine but not relevant, so don’t go creating a UK subsidiary for this purpose, it won’t help – you’ll need to register as a foreign entity. It’s free to do and takes an hour or two. You’ll want to check with your US accountant for any potential tax issues.
2. Get SEIS/EIS Advance Assurance
   How can your SEIS/EIS investors be confident that your company will be able to give them SEIS/EIS tax benefits? That’s what SEIS/EIS Advance Assurance is for. You give HMRC details about your company, a copy of the SEIS/EIS compatible SAFE, and HMRC respond by saying that, on the details provided, your company and the investments will qualify. You can then tell your investors that, ‘we have SEIS/EIS Advance Assurance’. This Assurance isn’t legally required, it’s to reassure investors. Most UK investors usually ask for it these days, and if their investment is in a US company they’ll likely demand it, so you’ll want to get that sorted before talking to investors. Good news: you can rely on SeedLegals to get Advance Assurance quickly – we now process over 35% of Advance Assurance applications.
3. Your next funding round needs to be SEIS/EIS compatible
   As we described above, your SEIS/EIS compatible SAFE will explain that the investment will convert into shares, either in your next round or within six months if you don’t have a new round by then. And the agreement will explain that the investor will receive Common Stock. So of course you actually have to honour those provisions, either as part of your next round, or by converting the SAFE and issuing shares at the agreed longstop valuation in six months if you don’t do a round between now and then.
4. After shares are issued, do SEIS/EIS Compliance
   When the investment has converted into shares, you’ll need to apply to HMRC to get the SEIS/EIS certificates for the investors, which they’ll use to claim their tax relief. When that time arrives, you can do EIS/EIS Compliance super easily on SeedLegals.

Is a SeedLegals SAFE right for you?

The SeedLegals SEIS/EIS SAFE lets you tap into the huge UK angel investor ecosystem to raise investment for your US company. As you can see, there’s more to it than simply an SEIS/EIS-compatible SAFE – this approach probably makes most sense for US companies with strong UK roots or an existing UK investor base, or US companies aiming to develop a UK market and gather UK investors as advocates. If that’s the case, you now have a solution- here on SeedLegals.