Don’t clip the wings of fledgling angel investors - Andrew Noble

The recent proposed adjustments to the angel investor threshold by the Treasury were set to mark a notable shift in early-stage investments in the UK, hitting those belonging to underrepresented groups the hardest.

The Treasury had planned to update the angel investor threshold, determining who can receive investment information on high-growth UK startups. These new regulations, belonging to the Financial Promotions Order (FPO), would determine who can be approached for capital investment by regulated and unregulated entities, and consequently raise the bar much higher for investors to qualify.

We welcome the government’s decision to reverse these proposed changes in the Spring Budget and recognise the crucial role of angel investors, particularly in areas that are typically underserved by investment. By doing so, we’ve avoided the potential impact of implementing a policy with damaging consequences.

While I sympathise with and understand the intent behind the proposed changes – especially as they looked to safeguard investors who can’t afford to lose their capital – the unintended consequences of these revisions must not be ignored.

Localised investments play a major role for startups (Picture: John Devlin)

The consequences

FCA-regulated firms, like Par Equity, already have to apply suitability and appropriateness tests when promoting products to clients. What this means is that unregulated companies, such as pre-seed and seed stage start-ups raising capital from individuals, would have been hit the hardest.

If the changes were adopted by the FCA, then it would have resulted in the immediate contraction of the Enterprise Investment Scheme (EIS) Fund market, which would be cause for concern. Not only would this restrict inflows into funds managed by VCs nationwide, it would more acutely impact regions outside of London, where VCs have a greater reliance on EIS qualifying capital. Localised investments play a major role in supporting and fostering early-stage companies, and this contraction would be disproportionately felt across Scotland and the North of the UK, hindering growth and economic development here.

These changes would also pose a challenge for first-time VC funds, intensifying the already exclusive nature of the industry. Raising the capital required would become an uphill battle, further putting up barriers that prevent the entry of new players in an industry that flourishes on innovation and unique perspectives.

​Andrew Noble, Partner at Edinburgh-based VC firm, Par Equity

The impact it would have on new angel investors is also concerning. By raising the financial bar for qualification, we would risk hindering the incoming stream of individuals hoping to build experience and networks that are crucial for success. Angel investors often identify with founders in their region, and these changes would result in a disproportionate reduction of angels based in Scotland and the North of the UK. This would not only diminish available capital, but also negatively impact underrepresented groups, particularly female investors.

In Scotland alone, there would be a staggering 75 per cent decrease in eligible female investors due to the raised income threshold. This reduction in available capital for startups in regional markets would pose a legitimate threat to diversity within the UK startup ecosystem. These trends expand to the North East of England and Northern Ireland, where an even smaller percentage of women would qualify, significantly limiting opportunities for female entrepreneurs in these regions. There would be a similar decrease for other demographics, with ethnic minority representation in the angel investor community also likely to suffer, affecting the already underrepresented founder community.

At Par Equity, we are committed to supporting innovative startups in Scotland and the North of the UK, evidenced by our recently launched institutional Series A fund. A key aspect of this new fund will see a significant portion of its profits directed towards ecosystem building initiatives across the North of the UK. It’s now more important than ever to continue to place a real focus on supporting early-stage businesses in these regions, to contribute to improving representation in the tech sector. We encourage government and regulatory bodies to consider the second order effects of their policy decisions – public and private sector collaboration is needed to unlock social and economic impact in Scotland and the North of the UK.

Andrew Noble, Partner at Edinburgh-based VC firm, Par Equity – winner of UKBAA’s Angel Group of the Year 2021 and 2023