What is an Advanced Subscription Agreement?
An Advanced Subscription Agreement (ASA) is an agreement between an investor and a company, often an early-stage company, under which the investor pays in advance for shares that will be allocated at a later date in the next funding round.[1]
The cash investment converts into a share subscription based on the share price valuation at the time of the next funding investment:
- Most funding rounds have a funding target set for that round of investment and if the target is reached, the shares will be issued at the funding round price (or sometimes at a discount to the price) which may be capped and have a floor); or
- if such target isn’t hit by a long-stop date (typically 6 months, particularly if the investment is SEIS or EIS qualifying), the investment will automatically convert into shares at the then current market valuation.
- The cash investment is not refundable to the investor in any circumstances and no interest can be charged on the cash investment. These are the key differences between an ASA and a convertible loan note.
Why should I use an Advanced Subscription Agreement?
They are a quick and easy way for an early-stage business to raise finance and for an investor to invest because they are short, uncomplex agreements (especially when compared with long-form investment agreements).
For investors, shares issued under an ASA are often offered at a discount to compensate them for investing early and before terms of funding round documents are clear (and in place).
For startups:- ASAs avoid the need to set a share value at a very early stage, which is difficult to do and can be imprecise.
- The initial ASA funding can be used to grow the business and increase the company valuation/share price at the next funding round.
Do Advanced Subscription Agreements affect SEIS/EIS eligibility?
HMRC sees ASAs as compatible with SEIS/EIS provided the following criteria is met:
- Funds can never be returned to the investor (and cannot be a loan).
- Shares must always be issued within six months of investment.
- The Company must meet the normal SEIS/EIS eligibility requirements.
- The investment sums cannot accrue interest.
- The investor protections in the ASA should be very limited and contain no additional perks.
- The ASA cannot be varied, amended or transferred.
Key considerations when using an Advanced Subscription Agreement
Funding round targets:- Investors should seek to ensure that the fundraising target is not too low as this may mean their investment converts into shares when the company is underfunded.
- Companies should seek to ensure the fundraising target is not too high as this may prevent conversion even when significant investments have been received.
Discount on fundraising share price: Companies should seek to strike a balance between a discount that attracts early investors and not pitching such discount too low that the rounds are oversubscribed and equity is given away too cheaply.
Companies need shareholder approval for the funding round, including entering into ASAs.
Investment documents: The terms of the investment will be set out in a Shareholders Investment Agreement and also the Articles of Association of the company but these might not be available at the time of the cash investment. In this case, investors may wish to understand what the key terms of the investment will be.
Professional advice: Companies and investors should seek legal and tax advice as early as possible when considering any fundraising round, particularly as regards investment agreements and S/EIS compliance. Errors made at this stage are difficult, if not impossible, to fix further down the line.
SMB is a full-service law firm with an exceptionally regarded Corporate, Commercial and Finance Team, which acts for a range of clients including startups, serial entrepreneurs, high net worth individuals, retail and manufacturing businesses, media and tech companies and international private equity houses; the team advises on all aspects of businesses, including corporate, commercial, franchising and licencing arrangements, finance and banking documentation.
[1] Note, in the US, ASAs are also referred to as and are very similar to: (1) SAFE agreements, short for simple agreement for future agreement; and (2) KISS agreements, short for keep it simple securities agreement.
.png?width=2000&height=318&name=SFC%20Logo%20%2B%20Title%20x%20web%20(white).png)
.png?width=600&height=296&name=Young%20talent%20(1).png)
