What is an Advance Subscription Agreement?
An Advance Subscription Agreement (ASA) is a financial arrangement between an investor and a company, often a startup or early-stage business. Under this agreement, the investor pays in advance for shares that will be issued at a later date, typically during the company’s next funding round.
The investment is converted into shares based on the share price at the time of the next funding round:
- If the funding target is met, the investor’s advance is used to purchase shares at the agreed funding round price (sometimes at a discounted price, which may be capped or have a floor).
- If the funding target isn’t met by a long-stop date (typically six months), the investment will automatically convert into shares based on the current market valuation.
Importantly, the cash investment is non-refundable, and no interest is charged on the investment. These differences set ASAs apart from convertible loan notes, making them a unique option for early-stage funding.
Why Should I Use an Advance Subscription Agreement?
Advance Subscription Agreements are increasingly popular for both early-stage companies and investors, thanks to their simplicity and efficiency:
- Quick and simple for startups: ASAs are shorter and less complex than traditional investment agreements, enabling companies to raise finance faster.
- Attractive for investors: Investors can often secure shares at a discount for taking the early-stage risk, especially before the detailed terms of a funding round are set.
- Benefits for startups: ASAs avoid the challenge of setting a share value at an early stage, which can be speculative and difficult. Additionally, the initial funding can help grow the business and increase its valuation in the next funding round.
Do Advance Subscription Agreements Affect SEIS/EIS Eligibility?
ASAs can be compatible with SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme), provided certain conditions are met. These include:
- Funds must never be returned to the investor (and the agreement cannot be structured as a loan).
- Shares must be issued within six months of the investment.
- The company must meet the standard eligibility requirements for SEIS/EIS.
- The investment cannot accrue interest.
- The ASA should not provide additional investor protections or perks.
- The ASA cannot be amended, varied, or transferred once executed.
Key Considerations When Using an Advance Subscription Agreement
Companies and investors should consider several key factors when structuring an ASA:
- Funding round targets: Investors should ensure the fundraising target isn’t set too low, as this could result in their investment converting when the company is underfunded. Conversely, companies should avoid setting targets that are too high, which might prevent conversion even if significant investments have been made.
- Discount on fundraising share price: Companies should find a balance in setting a discount that attracts investors without diluting equity too much.
- Shareholder approval: Companies must secure approval from shareholders for the funding round and for entering into ASAs.
- Investment documentation: While the terms of the investment will be set out in a Shareholders Investment Agreement and the company’s Articles of Association, these documents may not be available at the time of the cash investment. Investors should understand the key terms before proceeding.
- Professional advice: Both companies and investors should seek expert legal and tax advice early in the process, especially with respect to the ASA, funding round agreements, and SEIS/EIS compliance. Errors at this stage can be difficult or impossible to fix later on.
