Serious concerns have been raised about a plunge in funding available to early-stage companies following regulatory changes to who may invest in start-up businesses.

Experts say increases to the angel investor threshold now in effect as part of the new Financial Promotions Act will also dramatically reduce diversity in the early-stage investment pool with particularly acute knock-on effects for female and ethnic minority business founders, as well as those based outside of London. The new criteria for assessing an individual’s ability to gauge investment risk now hinges on earning a minimum of £170,000 annually, versus £100,000 previously.

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Based on latest government income figures from 2020-21 this will slash the total number of eligible investors in Scotland from 60,000 to 17,000, a decline of almost 72%. The number of female investors will decline by a heftier 75%, from 14,000 to 3,500.

Andrew Noble, partner at Edinburgh-based venture capital firm Par Equity, said he sympathises with the reasoning behind the changes which are meant to protect investors who can’t afford to lose their capital. However, the unintended consequences will be considerable.

According to Mr Noble these include an immediate contraction in money flowing through the Enterprise Investment Scheme (EIS), which was introduced by the government in 1994 to help small companies raise funds for growth.

Because angels typically invest locally and back founders who they identify with, this will cause a disproportionate reduction in the number of angels who are based in northern parts of the UK. Mr Noble is therefore concerned about the reduction in capital available to Scottish technology companies in general, as well as young firms headed by founders from under-represented communities.

“There are proportionately fewer women earning more than £175,000 versus £100,000, which means there will be fewer female angel investors ready to back female tech entrepreneurs,” he said, adding that this is also the case for ethnic minorities.

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Gemma Stuart is in the process of organising a fundraising in the vicinity of £300,000 to expand Edinburgh-based Gut Wealth, which makes digestive health supplements designed specifically for the one in 20 UK adults who suffer from irritable bowel syndrome and other undiagnosed gut health issues.

She is aiming to increase her existing subscriber base in the coming year and also develop new products, but is extremely concerned about the impact of the Financial Promotions Act.

“I plan to raise investment in 2024 for my health business Gut Wealth and in very real terms, my pool of eligible investors will immediately shrink by over 70% in Scotland,” she said.

“The messages we get from Westminster as small business owners don't match their actions with this policy change. They talk of small business being the backbone of our economy but this change will not only damage investment opportunities here and now in Scotland but the ripple effect in our economy will be felt for decades if less individuals can angel invest."

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Ms Stuart highlighted research which has shown that women currently launch businesses with 53% less capital than men. Meanwhile, the British Business Bank reports there has been no improvement in the share of venture capital investment received by female founders during the past decade, with the figure still standing at just 2%.

“While we should be concerned about this for Scotland, as a female founder too, looking at the decline in women who would be eligible to be angel investors across the UK is a stark reality that this well-meaning policy change has failed to see the impact on businesses and investors outside the London bubble,” she said.

Lynne Cadenhead, women’s advocate and investor relations director at Tricapital Angel Investors, said the group supports the general principle around implementing a system that ensures people are genuine business angels and fully understand all the risks associated with unregulated investment.

“However, we have significant concerns about the level of personal details requiring to be disclosed [under the new regulations]”, she said. “This may discourage people from engaging with the business angel process and further strangulate crucial access to finance for high growth companies during the ongoing cost-of-business crisis.”