This paper will outline what Early Stage Venture Capital Limited Partnerships (ESVCLP) are and the benefits for both investors and fund managers. In summary ESVCLP’s: 

• Help fund managers attract pooled capital, so they can raise new venture capital funds to invest in innovative early stage businesses; and 
• Provide investors with significant tax benefits including up front tax concessions, and flow through income tax and capital gains exemptions. 

WHAT IS AN ESVCLP?

 An ESVCLP is a limited partnership fund established with a general partner and with limited partners. It is registered with the Australian Government via Industry, Innovation and Science Australia pursuant to the Venture Capital Act 2002. The program is administered by the Department of Industry, Science, Energy and Resources and the Australian Taxation Office. 

The government has designed the framework so that the structure has a high degree of familiarity for foreign investors to investment structures which are more commonly seen overseas with a GP and LPs in comparison to unit trusts which are the most prevalent form of flow-through investment vehicle used in Australia. 

Importantly, the registration as an ESVCLP benefits both investors and the general partner. 

An ESVCLP allows for the pooling of $10m to $200m of new capital to be invested in eligible early stage investment companies. 

GENERAL PARTNER

The general partner is responsible for managing the operation of the ESVCLP and may also appoint an investment manager. 

The general partner must ensure that the ESVCLP only makes permitted investments and has a management team with the necessary skill and experience in venture capital and additionally has access to both capital and deal flow. 

Often the general partner is either a venture capital management partnership or a unit trust. This is to allow for the flow through benefits of the carried interest discussed below. 

The general partner is the entity which creates contractual obligations on behalf of the ESVCLP. 

ELIGIBLE INVESTMENTS

A registered ESVCLP is able to make early stage venture capital investments into companies and unit trusts which must be held for a minimum 12 month period. As the title suggests the investee entities must be: 

• pre-seed; 
• seed; 
• start-up; or 
• early expansion. 

TAX BENEFITS FOR INVESTORS

 Investors (both domestic and foreign) in an ESVCLP are known as limited partners and receive significant tax benefits. 

Limited partner investors in an ESVCLP are exempt from tax on their share of: 

• income and gains from eligible investments; and 
• income and gains from disposing of eligible venture capital investments. 

Limited partners also receive a non-refundable carry forward tax offset of up to 10% of the value of their contributions. 

TAX BENEFITS FOR GENERAL PARTNERS

General partners also receive significant tax benefits from managing an ESVCLP. The primary benefit is for the ability for the carried interest on the ESVCLP to be claimed on the capital account, rather than on the revenue account. 

HOW TO ESTABLISH AN ESVCLP

In order for an ESVCLP to be established, there must be the following: 

• a general partner; 
• between $10m and $200m of committed capital noting however that conditional registration is available if the committed capital is less than $10m; and 
• generally, no partner should exceed more than 30% of committed capital of the ESVCLP other than in certain limited situations. 

Additionally, the programme is also very specific in relation to the requirements of a qualifying partnership agreement. Some of the key attributes are that the partnership agreement must: 

• require that the partnership remains in existence for 5 to 15 years; 
• requires partners to contribute capital when required; 
• prohibits increasing committed capital except as provided for in the partnership agreement; and 
• provides the general partner with the power to require the partners to contribute their committed capital to the partnership. 

THE INVESTMENT PLAN

In addition to the above, another key requirement of the partnership agreement is the inclusion of the investment plan. Importantly, the investment plan must set out the partnership’s intended investment activities and demonstrate that the investment activities will focus on making eligible venture capital investments in early stage venture capital businesses. 

SKILLS AND RESOURCES

An application for registration as an ESVCLP must also establish and demonstrate sufficient venture capital management skills and resources of the key people involved. The submission of CVs is required including the proposed time allocation to the ESVCLP. 

CONDITIONAL REGISTRATION

An ESVCLP is able to obtain conditional registration without having the initial $10m, as the conditional registration can allow a period of up to 24 months for the committed capital threshold to be reached. If the conditional registration conditions are not met within the 24 month period the conditional registration will lapse. 

An ESVCLP is able to commence making investments during the conditional registration period, however, the tax benefits outlined above, will not be available until full registration is obtained. 

ONGOING OBLIGATIONS

The general partner has a number of ongoing obligations to ensure the continued status as an ESVCLP. These include: 

• ensuring that the fund only makes investments in eligible investments; and 
• submitting quarterly and annual reports of activity which includes descriptions of investments and disposals. 

WHAT ARE REGARDED AS ELIGIBLE INVESTMENTS

An ESVCLP must ensure that it only makes eligible investments. Broadly this requires: 

• the investment is in accordance with the investment plan; 
• an investment does not represent more than 30% of the partnership’s committed capital; 
• the investment be in an Australian business, subject to the exception that up to 20% of the partnership’s investments may be in foreign businesses; 
• the investment be for the new issue of shares, units or options which can include equity like convertible notes and SAFE notes; 
• the investee business must not have total assets of more than $50m; 
• at least 50% of both employees and assets must be in Australia; 
• have a registered auditor if the entity value is more than $12.5m; and 
• is unlisted (subject to special exemptions). 

Further to the above, the ESVCLP regime has restrictions on the nature and the type of businesses which are eligible businesses. Eligible businesses must not be businesses if their predominant activity is: 

• property development; 
• land ownership; 
• finance; 
• insurance; 
• construction or infrastructure; or 
• investments to receive rents, interest, dividends, royalties and lease payments. 

AFSL LICENCING

Generally, an ESVCLP will work with the holder of an AFSL. An AFSL is usually required for the issuing of interests in the ESVCLP. This is ordinarily achieved pursuant to an authorised intermediary deed with an AFSL holder who has the necessary authorisations for the making of such offers to obtain interests in the ESVCLP. 

Additionally, if the General Partner and the Investment Manager are not the holders of an AFSL, they would usually be appointed as authorised representatives by the holder of such an AFSL which would permit the general partner and the investment manager providing the necessary financial services. 

STAPLED FUNDS

It is common practice for many investment managers to establish a stapled unit trust to be run in conjunction with the ESVCLP. This then affords the investment manager with maximum investment flexibility as the unit trust is able to invest in opportunities that are not eligible ESVCLP investments and the ESVCLP makes all the investments which can have the benefits of the taxation concessions.

CONCLUSION

The Polar 993 Group is able to assist investment managers with the establishment of ESVCLP funds. This includes acting as an authorised intermediary for the issue of interests in the ESVCLP and for the appointment under Polar 993’s AFSL licence of the general partner and the investment manager as corporate authorised representatives. 

Additionally, should the investment manager wish to establish a stapled unit trust fund to be run in parallel with the ESVCLP, Polar 993 is able to act as the trustee of the unit trust. 

This presentation is issued by Polar 993 Pty Ltd (ACN 642 129 226) (AFSL 525458) and Polar 993 Advisory Pty Ltd (ACN 649 554 932) (AFSL 531197) collectively known as Polar 993. This presentation is provided to potential clients on a confidential, personal and private basis for use only by the recipient as a wholesale client under the Corporations Act 2001 (Cth) and should not be forwarded to others. It is indicative only and may be subject to change by the Board of Polar 993. The information contained in this presentation is of a general nature only and is not to be taken to contain any financial advice or recommendation, legal advice or taxation advice. This presentation is neither an offer to sell nor a solicitation of any offer to acquire interests or any other any investment. Polar 993, its directors, officers, employees, agents or associates, or any party named in this presentation does not guarantee the performance of any fund or any service. Past performance is not a reliable indicator of future performance.