What is an advanced subscription agreement?

An advanced subscription agreement, commonly referred to as an ASA, is a means of raising equity finance in advance of a whole round of investment.

Similar to a convertible loan, an ASA allows investors to receive a pre-agreed discount on shares in a subsequent funding round. ASAs are common equity agreements used when a company would like to raise part of a larger funding round in advance. For example, you may be seeking £500,000 of investment in total and chose to bring in £150,000 of that round under an ASA enabling you to draw down these funds whilst you raise the balance of the round.

What are the common terms of an ASA?

Typically an ASA will have three key terms to consider:

A pre-agreed target valuation for the entire round. ASA investors will then receive a 10-30% discount on this price
A longstop date. This is the date at which the ASA will convert to shares regardless of whether the company has closed the remainder of the fundraise at the target valuation
A longstop price. Should the investment convert to shares at the longstop date, rather than in the event of closing the remainder of the round, investors will receive shares at the pre-agreed longstop price

Are ASA investments eligible for SEIS/EIS tax relief?

HMRC have in the past been concerned that ASAs were in breach of SEIS/EIS criteria and deemed investments under ASAs too close to the terms outlined in convertible loans and therefore have meant that investments of this nature were not risky enough. *Remember – SEIS/EIS are tax relief schemes designed to encourage investors in early stage ventures by offsetting some of their losses which frequently occur when investing in early stage businesses. Read about SEIS/EIS here.

The latest guidance for ensuring that ASAs are eligible for tax relief was published by HMRC in April 2021:

An ASA must not function as an investment instrument that offers other benefits, such as investor protection. The subscription payment must not be in effect a loan.

The company will need to demonstrate how the timing and terms of the agreement fits into its business plan and planned expenditure on growth and development. The issue of shares must be for the purpose of growing the business, not simply to satisfy the agreement itself.

HMRC will not consider advance subscription agreements suitable for SEIS unless the agreement:

Does not permit the subscription payment to be refunded under any circumstances
Cannot be varied, cancelled, or assigned
Bears no interest charge
Has a longstop date (expected to be no more than 6 months from the date of the agreement)

How do I set up an ASA?

As with any other form of fundraising, once you have prepared your business to raise capital, you should engage a solicitor to draw up a tailored ASA to meet the needs of you and your business. Costs for this vary between £500-£3,000+VAT depending on the additional documentation and consultation you require from a solicitor. We’ve said it before, we’ll say it again, don’t use a template however budget friendly it may seem!

As investors, we’ve witnessed the horror stories first hand, had to unpick agreements that weren’t fit for purpose and ultimately withdrawn from deals because of poor management of legal documents at an early stage.