When Should you use an Advance Subscription Agreement?

October 6, 2022

As a start-up owner, your priority will be securing funding as quickly as possible. So, is there a way to raise funds quickly without all the paperwork or having to obtain a formal valuation? Three words: Advance Subscription Agreement. In this blog, we break down advance subscription agreements, when to use them, and their benefits. But, let's start at the beginning, with early-stage funding for businesses.

Early stage funding usually involves a company issuing new shares to investors in exchange for cash investment, known as equity financing. Equity financing is particularly popular among individual investors who want to take advantage of the Seed Enterprise Investment (SEIS) and Enterprise Investment (EIS schemes), which provide tax relief to those who subscribe for shares in early-stage companies, provided the relevant eligibility criteria are met.

A funding round tends to require a significant amount of legal paperwork, which can take time to negotiate and can be costly. You also need to agree on the company’s valuation with your investors, which can be difficult to ascertain during a company’s start-up phase.

So, is there an easier way? Let's dive in.

What is an Advance Subscription Agreement?

Under an Advance Subscription Agreement (ASA), an investor agrees to pay in advance for shares that they will receive at a later date. An ASA is usually a simple agreement which sets out the terms on which the investment, or the ‘advance subscription’, will convert into shares.  

An advance subscription usually automatically converts into shares upon the company raising an agreed level of funding during a future investment round, referred to as a ‘Qualifying Funding Round’.  This is often subject to an agreed longstop date so that the subscription will automatically convert into shares if a Qualifying Funding Round does not take place by that date. There may also be other circumstances in which the advance subscription converts into shares, such as a sale of the company.

There can be a separate ASA between each investor and the company, so ASA investors do not all need to sign up at the same time.

How do you calculate the share price on conversion?

If an advance subscription converts due to a Qualifying Funding Round taking place, the share price is usually calculated as a discount (around 10%-20%) of the share price payable by those participating in the Qualifying Funding Round.  

The ASA usually contains a fallback conversion price in the event that a Qualifying Funding Round doesn’t take place and the advance subscription converts on the longstop date. 

What are the benefits?

By using an ASA, a start-up owner can secure cash quickly without having to obtain a formal company valuation or spend time negotiating lengthy investment documentation between multiple parties.  

There is also an incentive for investors, as they get their shares at a discount and obtain a higher stake in the company as a result. 

However, an ASA is only appropriate when you anticipate that there will be a funding round in the next few months. You will also still need to agree on a fallback conversion price in the event that the longstop date is reached, so you probably won’t be able to completely avoid putting some value on the company.

Are shares issued pursuant to an ASA eligible for SEIS/EIS relief?

Unlike convertible loan notes, shares issued pursuant to an ASA can qualify for SEIS or EIS relief.  

HMRC has issued guidance confirming that an ASA will not be suitable for SEIS relief unless:

  • The subscription payment is non-refundable
  • The subscription payment is not a loan
  • The subscription payment does not bear interest
  • There is a longstop date for the subscription payment to convert into shares (not expected to be more than 6 months after the date of the ASA)
  • The ASA cannot be varied, cancelled or assigned to a third party

You can apply to HMRC for advance assurance that an advance subscription will qualify for SEIS/EIS tax relief.  This is not mandatory, but it may help to secure investment if you can provide confirmation to investors that their shares will qualify for relief (subject to meeting individual eligibility requirements). If you do wish to apply for advance assurance, this must be done before any ASA is entered into. 

Are there any regulatory restrictions on who can enter into an ASA?

Yes, financial services legislation contains a restriction on communicating an invitation or inducement to engage in investment activity, known as a ‘financial promotion’, unless the communication is made by a person who is authorised by the Financial Conduct Authority or the content of the offer has been approved by such a person. There are exemptions to this restriction, such as financial promotions made to certified high net worth individuals and sophisticated investors. 

Sending an ASA to investors is likely to constitute a financial promotion, so care must be taken to ensure that these regulatory restrictions are not breached and any supplementary documentation required to rely on an exemption is signed by the appropriate parties.  

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