The legal structure of an EIS fund is such that the ‘fund’ isn’t in fact a legal entity but a figurative or marketing term used for the portfolio of investments structure seen in EIS.
In order to qualify for EIS tax relief an investor must possess ownership of the shares in the company in which it invests, investment cannot be pooled (via a separate legal entity such as a fund) with other investors. The ‘fund’ is typically structured with: (i) a discretionary fund manager making the investment decisions; (ii) a custodian to safeguard and administer the assets of the ‘fund’; and (iii) a nominee, a non-trading subsidiary of the custodian, holding the legal title to the shares in the investee companies on behalf of the investor.
The custody agreement can either be between the manager and custodian where the investor gives the manager permission to enter into the agreement on his or her behalf, or the custody agreement can be a direct agreement between custodian and the investor. In practice, it is simpler for the agreement to be between custodian and manager to better reflect the contractual agreements and avoid the need for multiple signatures, and it means the investor remains the regulated client of the fund manager. This is the arrangement we will focus on for the purposes of this brief. The investor will need to see a copy of the custody agreement in both scenarios.
The custodian acts behind the scenes, receiving instructions and providing notices to the manager. When an investor chooses to invest, they will transfer their investment amount to the custodian and funds will be held until the manager instructs the custodian to invest. The custodian will arrange for the funds to be moved to the investee companies and the nominee will sign the legal documents, becoming the legal owner of the shares on behalf of the investor. Share certificates will be held and reported on to the FCA by the custodian. Any rights or votes attributable to the shares will be sent to the nominee as legal owner. The custodian will pass these onto the manager and will not act unless instructed to do so by the fund manager. The custodian will also typically assist with EIS3 certificates, managing the completion and signing of the forms and getting the original certificate to the investor.
Investors do not generally interact with the custodian, allowing the manager to provide a one-stop service to its Investors. Communications and reporting for the EIS fund will be provided by the custodian but will usually be white-labelled.
The FCA regulations governing the role of custodian and nominee are covered in client money and client asset rules (CASS) and conduct of business rules (COBS). The safeguarding of client money and client assets is high on the FCA’s list of priorities and therefore choosing a firm to carry out this function for your fund is key to successful operations and compliance.
To speak to Mainspring about custody and nominee services, please contact Natasha Head email@example.com or call +44 (0)7740 988170.