Why is an Advanced Subscription Agreement a popular choice for funding?
What is an Advance Subscription Agreement (ASA)?
An Advance Subscription Agreement (ASA) is an agreement between an investor and a company. They are a useful mechanism for raising funds especially for start ups and early stage companies. A company can use ASAs to quickly bring in funding – essentially allowing investment through the injection of cash into the company ‘in advance’ of any shares being issued to the investor. The investor then receives their shares in a future funding round (usually when a specified minimum amount of funding is raised) or if the company is sold or at a specified “long stop date”.
Risks and Benefits of using ASAs
As with any investment, ASAs can carry their fair share of risk. Investors will need to be wary that once they have invested, funds are not recoverable and cannot be repaid under any circumstances and will not be interest-bearing. ASAs are not a form of debt instrument or a convertible loan instrument. It is important for those considering using ASAs to consider this before agreeing.
The main benefit for the investor is that the shares are usually provided to the investor at a discount (typically between 10% – 30%) compared to the price paid by the other investors subscribing for shares in the relevant future funding round.
Unlike with a convertible loan note, ASAs can allow investors to benefit from favourable tax treatment under the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) provided the ASA is properly drafted to allow for this. Caution must be taken in this regard and an investor must ensure that they have their advisers carefully review the ASA to ensure that they will get the benefits of EIS or SEIS if these benefits are desired. For example, a ‘longstop date’ is usually provided within the ASA and it must fall within 6 months of the date of the ASA to qualify as SEIS or EIS.
From the company’s and founder’s point of view, ASAs could put off other investors in a future funding round as they may not want to invest at the full valuation when the ASA investors are getting a discount and due to the discount, upon conversion of the ASA funds into shares, the founder’s shares are often being diluted more than they would otherwise be.
For the company a major benefit of ASAs is the speed at which it receives funding as they are often more quickly agreed and less heavily negotiated than other forms of investment. The company also does not need to incur the cost of being valued at the point of the cash injection (and in the case of start ups an accurate valuation is often very difficult at such an early stage of the company’s life cycle which can lead to low valuations). The valuation will be carried out later on when the funding round occurs pursuant to which the ASA funds convert into shares.
ASAs can be substantially useful but whether or not they are suitable should be considered on a case-by-case basis, as investment and the objectives of it can vary considerably. Both investors and companies should be aware of the benefits and risks of using ASAs as a method of funding, alongside other funding types to be able to decide whether it is the best fit for their business.
For advice on ASAs or other types of equity or loan funding please contact our corporate team.