Innovation Companies are a Great Opportunity for SMEs

The Parliament has passed the legislation for Early Stage Innovation Companies (ESIC).  This is a great opportunity for small/medium enterprises that have developed a new product, process, service, marketing or organisational method, to be able to raise capital.

To be an ESIC, the company needs to have been formed in the last 3 years, however it could’ve been formed in the last 6 years, subject to some additional tests relative to expenditure.

The total annual expenditure of the company has to be $1M or less and the total assessable income has to be less than $200,000.  If a company has obtained grant funding from the Accelerating Commercialisation Grant, that grant is not included in the assessable income.

There are 2 ways that companies can satisfy the requirements as an ESIC:

The Gateway Test

This is a 100-point innovation test relating to:

• Research and development expenditure.
• Has the company been a participant in the Accelerating Commercialisation Grant?
• Has the company participated in an accelerator program?
• Has the company already raised $50,000 in equity capital from arms-length investors?
• Has the company registered any patents or plant patents in the last 5 years?
• Has the company registered any innovation patents or registered designs in the last 5 years?

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The Principles Based Test

This test applies if the company is generally focused on developing for commercialisation one or more new or significantly improved products, processes, services, marketing or organisational methods and the business relating to those products, processes, services, marketing or organisational methods have a high growth potential.

The company should also be able to demonstrate that:

• It has the potential to be able to successfully scale that business.
• It has the potential to be able to address a broader than local market, including global markets, through that business.
• It has the potential to be able to have competitive advantage for that business.

Retail investors (who are not sophisticated investors) can invest up to $50,000 per company per annum.

There’s no restriction on the amount of investment that a sophisticated investor can make.  A sophisticated investor is a person who an accountant certifies has net assets in excess of $2.5M or, for the last 2 financial years, has earned in excess of $250,000 income per annum.

There’s a CGT exemption for investors in ESICs if they hold the shares for more than one year and less than 10 years.  There’s a 20% investment rebate to a total of $200,000 available.

The investor must disregard any capital loss from its investment until after the 10th anniversary of the issue of the shares.To be able to successfully raise capital, companies that aspire to be deemed to be an ESIC will need to prepare for investment readiness.  This involves understanding the market, summarising the Intellectual Property that’s owned by the business, preparing a business plan, budgets and cashflow forecasts, a commercialisation strategy and a share valuation.

Companies will need to make key appointments, including Company Directors, Company Secretaries, CEOs and CFOs.

There are number of people who can help companies classified as ESICs and then help with the capital raising process.  These are entities including Bistorque Pty Ltd, a company that has a team of experts who can assist in the principles based test for the company.  Business Angels Group and Founders Forum are interested in assisting companies to raise capital.Accountants who are proactive in involvement with assisting clients with business advisory services will be able to assist entities in the planning and getting investment ready process.

Find an Accountant/Adviser

If you would like to find an accountant who can offer the types of services mentioned in this edition, generally known as business advisory services, please utilise the Find an Accountant/Adviser directory within the ESS Small Business’ website.  Please visit www.esssmallbusiness.com.au and click on “Find an Accountant/Adviser” menu tab.  All you need to do is to type in your postcode and the system will then show you accountants in or near your postcode who offer a wider range of commercial services to small/medium enterprises.

ESS Small Business contains other free articles and articles for sale, prepared by approximately 20 other businesses, on a wide range of small/medium enterprise matters.

ESS Small Business also presents webinars, free of charge, covering a wide range of small business matters.  These webinars are also recorded and are available for viewing.

We will be releasing a new product package for sale within ESS Small Business' website in about 2 weeks' time, titled “Early Stage Innovation Companies for SMEs”.  We will be finalising material on the other new company, Crowd Funding Equity Companies, as soon as the legislation is passed by the Senate.

Whilst you are on the ESS Small Business’ website, why not have a look at the offerings from a wide range of business people who are able to assist small/medium enterprises?

If you have any questions on any aspect of ESICs, or services that accountants can offer, please don’t hesitate to contact us.