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In the dynamic world of finance and investment, savvy entrepreneurs and investors are increasingly turning to Advance Subscription Agreements (ASAs) to fuel the growth of promising startups. However, diving into such agreements without a thorough understanding of the key considerations of an ASA to qualify for EIS and SEIS relief, can be risky. In this blog, I present a checklist for Advance Subscription Agreements, shedding light on six crucial points to keep in mind when dealing with an ASA.
What is it?🔎 🕵️
ASAs are sometimes used to raise funds for a company quickly, at a time when the value of shares cannot be easily ascertained. An ASA enables investors to pay subscription funds into a company at an early stage, with the shares to be issued at a later date.
The What-You-Need-To-Know Checklist ✅
- Mind the Longstop Date 📆: One of the first things to examine in an ASA is the longstop date. It's essential to ensure that the longstop date does not extend beyond six months from the date of the agreement.
- Avoiding Loan Agreement Pitfalls 📊: ASAs are intended for equity investments, not loans. It is crucial to scrutinise the agreement for any provisions resembling a loan, such as clauses discussing refunding subscription payments or imposing interest charges.
- Guard Against Investor Protection Gaps 💂: Investors should remain vigilant regarding investor protection measures within the ASA. Ensure that the agreement does not contain provisions that could seek to hedge the downside of an equity investor's position. Watch out for potential pitfalls like liquidation preferences, board swamping rights, and ratchets.
- Stability in Agreement Terms 🏛️: Investors should verify that the ASA is not subject to variation, cancellation, or assignment terms.
- HMRC Advance Assurance 💰: Prior to entering into an ASA, ensure that the investee company has obtained advance assurance from HMRC.
- Alignment with Business Plan 👓: HMRC will expect the investee company to demonstrate how the timing and terms of the ASA fit with the company’s business plan and broader strategic vision.
To conclude, by diligently following this six-point checklist, both investors and entrepreneurs can navigate the complexities of ASAs, ensuring that they are able to qualify for EIS and SEIS tax relief.
Sapphire Capital Partners LLP is authorised and regulated by the Financial Conduct Authority (FRN: 565716). This article is a financial promotion and is intended for UK investors only. The content is for information purposes only and does not constitute investment advice or a recommendation to invest. SEIS and EIS tax reliefs depend on individual circumstances and may change. The value of investments may go down as well as up, and investors may not get back the full amount invested. Past performance is not a reliable indicator of future performance. Investment outcomes can differ substantially, potentially resulting in the loss of all your capital invested. Shares in early-stage companies are illiquid: you may be unable to sell your holding for several years, if at all. Investors should not rely on this article as a basis for investment decisions and must consider the illiquid and high-risk nature of early-stage investing. No warranty as to future outcome is implied nor should one be inferred. Tax treatment depends on individual circumstances and may be subject to change. Investments of this type are generally not covered by the Financial Services Compensation Scheme or the Financial Ombudsman Service if the underlying companies fail.
