Advance Subscription Agreements & EIS: What you need to know

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 ✅

1. 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. 
2. 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.
3. 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.
4. Stability in Agreement Terms 🏛️: Investors should verify that the ASA is not subject to variation, cancellation, or assignment terms.
5. HMRC Advance Assurance 💰: Prior to entering into an ASA, ensure that the investee company has obtained advance assurance from HMRC.
6. 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.