Advance Subscription Agreements: Ensuring SEIS/EIS Compliance for High-Growth Startups

Learn how Advance Subscription Agreements work and how to maintain SEIS/EIS compliance, providing early-stage companies with the stability and investment they need to thrive.

Introduction

For high-growth startups, securing early-stage investment is crucial for fueling innovation and scaling operations. Advance Subscription Agreements (ASAs) have emerged as a popular tool for startups to raise capital efficiently while ensuring SEIS compliance. This blog explores how ASAs work, their benefits, and strategies to maintain SEIS/EIS compliance, providing a roadmap for startups seeking investment through these schemes.

What are Advance Subscription Agreements?

Advance Subscription Agreements are a form of equity investment where investors commit funds to a startup with the promise of receiving shares at a future date, typically during the next qualifying funding round. Unlike traditional equity investments that require immediate valuation and share issuance, ASAs allow startups to defer these processes, streamlining the fundraising process.

Key Features of ASAs

• Deferred Valuation: Startups can postpone setting a company valuation until a subsequent funding round, often resulting in a more favorable valuation as the company grows.
• Convertible Structure: ASAs convert into shares based on predefined terms, usually incorporating a discount to reward early investors for their risk.
• SEIS/EIS Compliance: When structured correctly, ASAs can qualify under the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), offering significant tax reliefs to investors.

Benefits of Using ASAs for SEIS/EIS Compliance

For Startups

• Faster Fundraising: Without the need to negotiate a valuation upfront, startups can secure investment more quickly.
• Flexibility: ASAs offer flexible terms that can be tailored to fit the specific needs of the startup and its investors.
• Attractive to Investors: The potential for discounted shares in future funding rounds makes ASAs appealing to investors, enhancing the startup’s ability to attract capital.

For Investors

• Tax Reliefs: Investments made under SEIS/EIS through ASAs qualify for substantial tax reliefs, reducing the financial risk associated with early-stage investments.
• Discounted Shares: Investors typically receive shares at a 10-30% discount during conversion, increasing their potential return on investment.
• Aligned Interests: The structure ensures that investors are committed to the long-term success of the startup, as their investment converts into equity rather than being a debt repayment.

Ensuring SEIS/EIS Compliance

Maintaining compliance with SEIS and EIS regulations is essential for both startups and investors to benefit from tax reliefs. Here are critical steps to ensure ASA compliance:

1. HMRC Guidelines

Adhering to the latest HMRC guidelines is paramount. According to the updated guidance dated 30 December 2019, ASAs must:

• Avoid Refunds: The subscription payment should not be refundable under any circumstances.
• Non-Varyable Terms: ASAs cannot be varied, canceled, or assigned.
• No Interest Charges: The agreement must not bear any interest.
• Short Long-Stop Date: The long-stop date should not exceed six months from the agreement date.

2. Structuring the ASA Correctly

A compliant ASA should include:

• Conversion Terms: Clearly defined terms for converting subscription monies into shares during a qualifying funding round.
• Long-Stop Date: A specific deadline to ensure timely conversion.
• Cap on Conversion Value: Prevents investors from receiving a disproportionate number of shares if the startup’s valuation increases significantly.
• Qualifying Threshold: Sets a minimum size for the funding round to trigger conversion, safeguarding against nominal funding rounds.

3. Legal and Professional Advice

Given the complexity and evolving nature of SEIS/EIS regulations, seeking specialist legal advice is crucial. Legal experts can help draft ASAs that meet compliance standards and align with the startup’s growth plans.

Risks and Considerations

While ASAs offer numerous benefits, it’s essential to be aware of potential risks:

• Non-Issuance of Shares: There’s a possibility that shares may not be issued, leaving investors unable to claim SEIS/EIS reliefs.
• Startup Failure: If the startup fails before conversion, investors may lose their investment without any return.
• Regulatory Changes: Future changes in SEIS/EIS regulations could impact the compliance and benefits of existing ASAs.

Best Practices for Startups

To maximize the benefits of ASAs and ensure SEIS/EIS compliance, startups should:

• Maintain Transparency: Keep investors informed about business progress and funding plans.
• Set Clear Terms: Draft straightforward and compliant ASAs with defined conversion conditions.
• Focus on Growth: Use the raised funds strategically to achieve growth milestones that will lead to successful funding rounds.

Conclusion

Advance Subscription Agreements present a viable and flexible option for high-growth startups looking to secure early-stage investment while ensuring SEIS/EIS compliance. By understanding the structure, benefits, and compliance requirements of ASAs, startups can effectively attract investors and foster sustainable growth.

Are you a high-growth startup or an investor looking to navigate the complexities of SEIS/EIS investments? Join Oriel IPO today and access a transparent, commission-free platform designed to connect you with the right investment opportunities.