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Stephen Crowe answers
your common ESIC questions

General ESIC Questions

ESIC Hub’s list of common misconceptions about being an ESIC.

Misconception No 1. In order for a company to qualify as an ESIC it must have high growth potential.

No.  Once a company meets the early stage test it can qualify as an ESIC if it meets the 100-point innovation test, which is unrelated to its growth potential.  To qualify as an ESIC it is NOT necessary for a company to have high growth potential.

Misconception No 2. You need to be a start-up company to qualify as an ESIC.  

No. An existing company that has been operating for years can be an ESIC. It is okay for the company to have ceased or interrupted its trading in those years too.

Misconception No 3. A company already requires the backing of a private equity or venture capital firm to qualify as an ESIC.   

No.  Investors who are family and friends, as well as the big end of town, can be considered when assessing a company’s ESIC status and benefits.

Misconception No 4. A company founder cannot receive the ESIC tax benefits on their shareholding.

No. If the founder pays for new equity and owns no more than 30% of the company (inclusive of associates), he/she can qualify as an early stage investor and receive the ESIC tax incentives.

Misconception No 5. If I go online and complete the ESIC Predictor my company will be advertised on a public list and available to everyone to see.

No. Any information provided to ESIC Hub is kept confidential, treated securely and managed in a respectful environment governed by professional and ethical rules and obligations of independent professional associations, and the Privacy Act.   We are like doctors and lawyers.

When you are ready to dance on the capital raising stage, we know the routine. In the meantime, our focus is on getting you ESIC Ready and the ESIC Predictor is the shoe that fits.

An Early Stage Innovation Company (“ESIC”) that meets eligibility criteria under Australia’s income tax laws.  A good example is an Australian-private company incorporated in recent years. Your company would generally need to be younger than your teenage children.

ESIC Indicators for your company:

  • a demonstrated innovation (as contained in a patent, R&D tax registration, accelerator program and such); or
  • high-growth potential for a new business offering with the potential to address a broader than local market.  Be bold and think global markets.

An ESIC is an Early Stage Innovation Company. In order for a company to qualify as an ESIC it must have high growth potential, be able to scale, address a broader than local market, and have competitive advantages.

The government has recently passed legislation that provides tax incentives for investments in ESICs. Investments in ESICs may be eligible for a 20% tax offset, and gains on the sale of an ESIC investment may be CGT free if shares are held for between 1 to 10 years.

As a business, ESIC status makes you a more attractive investment and lets investors know you are a promising new company. Take our ESIC Predictor Pre-Assessment to see if you may qualify as an ESIC.

Early Stage Company

No. Being ESIC ready is open to all innovators, business creators and those looking to grow their existing business, not just your neighbour who spends each week dreaming up the next big game changer and telling you about its high growth potential.

An existing company selling products and/or services to customers, earning an income and even making a profit can qualify as an ESIC.

It is essential an Early Stage Innovation Company (“ESIC”) meets eligibility criteria under Australian tax laws. A company that satisfies the early-stage test and either the 100-point innovation test or principles based test will qualify as an ESIC.

The concept of investment risk is not used to qualify an ESIC.

ESIC benefits can flow to those who have spent time building a business from scratch, testing it in the market, saving costs wherever they can and eking out a living. ESIC benefits are open to all sectors of the economy, not only those with high-growth potential.  

Connect with ESIC Hub to access the ESIC benefits.

Accelerator programs are designed to boost Australia’s innovation performance and create connections between research, science and business.

The ESIC investment framework introduced as part of the government’s National Innovation and Science Agenda (“NISA”) strengthens the connection with accelerator programs and benefits those who dare to imagine, collaborate and innovate with Accelerator programs.

If the company has completed or is undertaking an eligible Accelerator program it will obtain 50 points, be half-way towards meeting the 100 point innovation test and one step closer to being ESIC Ready.

If you haven’t already completed our free online ESIC Predictor, now is a good time to discover your ESIC Status.

No. In making your decision about accelerator programs and which is appropriate, the ESIC tax rules only recognize a program that:

  • Provides time-limited support for entrepreneurs with start-up businesses;
  • Has a selection program that is open, independent and competitive;
  • Has a demonstrated track record of providing accelerator programs for entrepreneurs for at least 6 months; and
  • Has been completed by at least one cohort of entrepreneurs.

Participation in an eligible accelerator program offers the bonus of contributing 50 points towards the 100-point innovation test.

Accelerator programs are recognised in the government’s National Innovation and Science Agenda (“NISA”) and play an important role in boosting Australia’s innovation performance and creating collaborative relationships between research, science and business.

They offer you access to skills, experiences and credibility often not attainable elsewhere on commercial terms reflecting your early-stage financial circumstances.

ESIC Hub advocates for all accelerator programs and acknowledge their significant contribution to the early-stage community.  If you have capital raising plans and aspirations, consider whether your chosen accelerator assists in contributing points towards achieving ESIC ready status. Ask ESIC Hub.

Being an ESIC unlocks new avenues to capital and accelerates your new funding. From 1 July 2016 being an ESIC is important because investors in your early stage company will receive government mandated tax incentives to invest new equity capital into your venture. This broadens your investor community beyond the angel and venture capital investors traditionally reserved for the privileged few. Your family, friends, employees and suppliers who invest in your early stage company can also obtain the tax incentives if your company qualifies as an ESIC.

You need to qualify as an ESIC. An ESIC is a dynamic and progressive status. A clean canvas is often a good starting point because this allows us to advise you on the best route to operating in this new ESIC environment. We have the knowledge, resources and experience to take you from start to finish.

Being an ESIC is very achievable but doesn’t come easy, and if your ESIC plan is not implemented correctly, the negative outcomes are long-term and irreversible. This serves as a friendly reminder we are working within the confines of Australia’s tax laws… sorry

This is not uncommon in the early-stage community. The laws impose an obligation to assess your ESIC status at the time new shares are issued. Sadly, shares issued without an ESIC certification at the time of investment will most likely not qualify. However, for those who act quickly we may be able to assist in this tricky situation so please contact us.

Although the ESIC environment is new, its implications cannot be ignored. If your early-stage company raises capital from 1 July 2016 and becomes wildly successful, it would be natural to feel this is a great mutual outcome for you and your investors, right? Unfortunately, no.

Whilst you are still celebrating your monumental success, your investors’ legal team are busily drafting a series of legal proceedings seeking recovery from you for unexpected capital gains tax. Surprise.

If you do not properly navigate this new ESIC environment, you will be vulnerable to litigation and financial losses.

Work with us and our experienced and friendly team will eliminate these risks and provide a secure, regulated and independent environment for your startup.

No, in fact, it could be quite the opposite.

The 100-point innovation test is a cumulative points system, and you do not need to satisfy all of those criteria. For example, we have clients who are ESIC ready after meeting only 2 of the criteria.

You can also qualify as an ESIC by meeting the principles based test.

Spend 5 minutes using our free online ESIC Predictor let us calculate your 100-points entitlement and you will immediately see your self-assessed ESIC status.

Even if you are not currently an ESIC, this does not disqualify you from being an ESIC in the future. Your circumstances may change as early as tomorrow and we recommend you stay connected with ESIC Hub. Re-evaluate your ESIC status using the ESIC Predictor as often as needed, it’s free or just contact us.

Yes/No/Maybe/Depends.

Just another friendly reminder this answer is dictated by Australia’s tax laws, sorry. In the ESIC environment, your status is dynamic and is affected by a multitude of factors that can change daily in a business environment.

Each and every time you are planning to raise capital you will need to ascertain your current ESIC status, which may be different from the previous time and that may be good news for some and a surprise to others.

In the course of your business lifecycle, you may find yourself being ESIC qualified on 1 occasion or 1000 occasions.

Spend 5 minutes using our free online ESIC Predictor let us calculate your 100-points entitlement and you will immediately see your self-assessed ESIC status. A friendly reminder to use this function as often as you need to re-evaluate and to stay connected with the ESIC Hub team.

No. It is essential an Early Stage Innovation Company (“ESIC”) meets eligibility criteria under Australia’s income tax laws. A company that satisfies the early-stage test and either the 100-point innovation test or principles based test will qualify as an ESIC. The concept of investment risk is not used to qualify an ESIC.

An existing company selling products and/or services to customers, earning an income and even making a profit can qualify as an ESIC.

Being ESIC ready is open to all innovators, business creators and those looking to grow their existing business, not just your neighbour who spends each week dreaming up the next big game changer and telling you about its high growth potential.

ESIC benefits can flow to those who have spent time building a business from scratch, testing it in the market, saving costs wherever they can and eking out a living. ESIC benefits are open to all sectors of the economy, not only those with high-growth potential.

Ask ESIC Hub how to access the ESIC benefits.

Early Stage Investor

In essence the key concept here, the take-home message is, if you’re looking to raise capital, you need to be considering your ESIC status. What does that look like?

As we mention there’s three concepts. The key concept in terms of accelerated capital raising, the way to quickly raise capital, is to be ESIC ready. What we’ve done at ESIC Hub is created three concepts:

You’ll be ESIC ready that means that you’re ready to go and raise capital and engage in informed discussions with informed serious investors. We have investors connected at the hub that are looking for very good investment opportunities. The starting point is that they need companies that are ESIC compliant or ESIC ready….

Watch the video or read more…

So, we are now getting down to some detail and I’m glad for the question. Founders are potentially eligible as an ESIC investor; however, there are some rules, as you would expect around this stuff.

An ESIC investor, so a person contributing new capital into a company, can’t own more than 30% of that company to qualify for these ESIC benefits. So if you contributed capital and you owned less than 30%, as a founder, that is well and truly considered an eligible investment.

You have raised a very interesting question and that is, what is this ESIC stuff about?

ESIC is a dynamic status. It’s measured at a point in time and that point in time is when you issue shares. So if you guys are thinking about issuing share, you need to be ESIC at each time you issue shares, so it’s not a static status in that sense. It’s all in your circumstance, you would have to be ESIC on 30 June, your company that you’re investing in, and on 1 July. And they could be totally different outcomes. You could be one and not the other, not the one, and then the other. So it’s very much dependent on these circumstances on whether you’re ESIC or not.

Read more and watch the video

The new capital-raising regime in Australia is whether or not you are an early stage innovation company and that’s obviously a long word we’ve abbreviated that to be an ESIC.  At ESIC Hub what we’re doing is connecting serious innovators with serious investors. So we are providing an end-to-end solution for early stage companies looking for capital raising and investors in the new environment that we’re working within from the 1st of July.

The investment framework that the investors are now looking at is this investment world. It started on the 1st of July, it’s very early days, you’re going to start seeing a greater engagement and I guess chatting around this concept about that the significance is of the ESCI world. It’s in place, it had bi-partisan support, and it’s the new world for raising capital and the new investment framework for early stage companies.

The question came about what the tax breaks look like for an investor and I’m sure some of you guys potentially look at investment as well and they are significant. We’ve built a tax saving estimator so your parents, people who are looking to invest in your vehicle could be eligible for these tax breaks so I would encourage you to refer them to this website, there is a bar here where you can look at what your proposed level of investment is as an investor and you can play with this bar and say look…. ‘I want to invest $100,000 in my venture that’s been presented to me’ and it will automatically work out what some of those tax benefits are. Read More

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