The fundraising process can be a long, draining, and often mind-boggling journey. Along this path, first-time founders are likely to encounter a myriad of new legal and financial terms and phrases. An Advance Subscription Agreement (ASA) is likely to be among them. In this blog, we’ll demystify ASAs and address some of the frequently asked questions posed by early-stage founders.

What are ASAs?

At its core, an Advance Subscription Agreement (ASA) offers an alternative means to raise capital. It enables investors to make what is essentially an equity investment in a company, with the actual shares issued and priced at a future date, typically at a discounted rate. Put simply, it’s akin to an investor pre-paying for shares to be allotted later.

Why do companies use ASAs?

Companies often turn to ASAs when aiming to raise capital—not debt—without the formalities and associated costs of a full-fledged funding round. They might do so because:

  • They’re between funding rounds but need to raise funds in the interim
  • They’re looking to raise capital swiftly
  • It’s advantageous for founders since the valuation is deferred

When does the ASA convert?

Typically, the ASA becomes convertible into shares following a designated ‘trigger event’. While this event is often the next funding round, both parties usually need to define what constitutes a funding round for the ASA’s conversion purposes.

Further to this, a ‘longstop agreement’ would be included which effectively means if there’s no trigger event (i.e. a fundraise) that causes the shares to be issued by a certain period, they will still convert. The price at which they will convert if this longstop agreement date is reached is often referred to as the longstop price or default valuation.

So whilst an ASA doesn’t negate the need for any valuation figure to be arrived at, this default valuation differs from the firm valuation that would be arrived at during a full funding round. As well as considering the absence of certainty in business performance and market conditions at the long stop date, the valuation will also require negotiation between both parties to ensure the investor is sufficiently rewarded and the company is incentivised to achieve a trigger event.

It’s crucial to highlight that if an investment qualifies for EIS/SEIS, HMRC is unlikely to grant advance assurance if the longstop date exceeds 6 months. This assures investors that shares will be allotted within a specific timeframe, independent of any funding rounds.

Discounts & Valuation Caps

Investments into any early-stage business always come with risk, but with ASAs, there’s also the risk that the early investment helps the business achieve a higher valuation at the trigger event. Therefore, to help reward and protect the former tranche of investors, the ASA is likely to include:

  • A discount – when the shares are issued to the initial ASA investors, it’s common that they are issued at a discounted share price on the valuation as a reward for the earlier investment. These discounts are commonly between 10 – 30%.
  • A valuation cap – to help protect the earlier investors’ investments from dramatic valuation rises, a maximum valuation cap is commonly agreed on. This effectively means that the ASA investors will benefit from any upside above this valuation cap and have protection against over-dilution.

Can investment via an ASA still qualify for EIS/SEIS?

Yes, but the ASA needs to be structured correctly to qualify. HMRC has guidance on both EIS and SEIS that clarifies how the ASA must be structured to still qualify for the tax relief, including that the agreement must:

  • Permit the subscription payment to be refunded (as may be possible with convertible loan notes)
  • Be varied, cancelled or assigned
  • Bear any interest change, and;
  • Be open-ended without a longstop date

Where companies wish to apply for advance assurance, they should do so before the ASA is entered into. HMRC will then consider the terms of the agreement when providing an opinion on whether the investment and issue of shares would qualify for EIS/SEIS.

However, HMRC also states that they expect the longstop date to be within 6 months from the date of the ASA. Beyond this, HMRC is unlikely to be able to provide advance assurance on the basis that future conditions including within the ASA may not accurately reflect the actual conditions at the time of the eventual share issue.

What’s the difference between an ASA and convertible loan notes (CLNs)?

If you’re fundraising, you’ll likely have also heard about Convertible Loan Notes (CLNs), so how do they differ? The main difference between an ASA and a CLN is that an ASA is solely an equity agreement and there’s no option for the investment to be repaid in cash (i.e. as a debt agreement). However, with a CLN, there is the flexibility of this to be repaid in cash or for equity to be issued. This key distinction also creates two other differences:

  • EIS/SEIS Eligibility – As there’s the option of the investment being repaid as cash under a CLN agreement, HMRC doesn’t deem that the capital introduced is ‘at risk’ and therefore, unlike with an ASA, even where shares are issued via a CLN, they won’t be EIS/SEIS eligible.
  • Interest Payable – As an ASA is purely an equity instrument, no interest is paid on the initial investment which often isn’t the case with a CLN.

What next?

Drafting an ASA necessitates a balanced approach, ensuring protection, incentivisation, and rewards for both investors and current shareholders. A tailored strategy should be adopted, considering the existing company’s objectives, shareholder goals, and existing legal documentation like the articles of association and shareholders’ agreements.

If you need support on your fundraising journey, reach out to us on 0845 606 9632 or email Beyond advisory, accountancy, and tax assistance, we collaborate with many legal partners to ensure we can deliver comprehensive support.