Advance Subscription Agreements: How they work and how to ensure SEIS/EIS compliance

Advance Subscription Agreements: How they work and how to ensure SEIS/EIS compliance

* Please note that this article has been reviewed following HMRC’s new guidance on advance subscription agreements dated 30 December 2019. For reference, the EIS guidance can be found here and SEIS guidance here

Formalising an equity investment can take a lot of time and involves effectively setting a valuation for the company. With the availability of the seed enterprise investment scheme (“SEIS”) and enterprise investment scheme (“EIS”) tax reliefs investments for start-ups, startups are raising greater amounts of private capital than ever before and advance subscription agreements are becoming increasingly popular as a quick and easy way to raise money without necessarily agreeing a valuation with investors.

What is an advance subscription agreement?

Investment into a company via an advance subscription agreement (“ASA”) is a form of equity investment, rather than a debt investment, because the monies being invested cannot be repaid to the investor as cash. The ASA constitutes an agreement that while the subscription monies are paid at the outset, the shares relating to the investment will be calculated and issued at some point in the future. An investment via an ASA can be made SEIS/EIS compliant due to the fact that i) the investor’s funds are at risk from the outset and ii) the investor cannot demand the return of their investment because the money paid must be converted into shares in the company.

An SEIS/EIS compliant advance subscription agreement template can be downloaded at our shop. If you are otherwise raising money in the usual way, then a normal subscription agreement can also be purchased here.

Why use an advance subscription agreement?

ASA’s provide a useful way for investors to obtain benefits of a convertible debt structure, without the confines of the more traditional convertible loan note (“CLN”). Investment via a CLN is becoming less common in England and Wales because they allow the investor to be repaid their investment prior to the investment converting into shares and the investor cannot therefore claim SEIS/EIS tax relief.

Advance subscription involves an investor transferring funds to a company in return for acquiring a right to acquire shares at a future date (usually the next qualifying funding round). Deferring the valuation process for several fundraising rounds allows the company to raise money faster. Investors often benefit from a higher return on their investment as they usually receive a 10-30% discount to the price per share in the next funding round to compensate for their advance transfer.

HM Revenue & Customs (“HMRC”) is reluctant to release official guidance on ASA compatibility with SEIS/EIS tax relief. However, HMRC has granted SEIS/EIS tax relief for investments via ASAs on many occasions.

The investor must not have any connections with the company that they are investing in for two years prior to the date of their investment, or three years after the date of their investment. ‘Connection’ in this context is not defined but is thought to mean any person entitled to acquire more than 30% of the ordinary share capital in the company.
What should an advance subscription agreement include?

A well drafted ASA will usually include the following key provisions:

  • An option for the investor to request that their investment be applied towards the issue of shares on a non-qualifying round.
  • A long-stop date to ensure the investment is applied towards the shares regardless of the funding outcome. In order for the advance investment to be a genuine subscription for shares and qualify for SEIS/EIS tax relief, HMRC have confirmed in their latest guidance dated 30 December 2019 that the long-stop date is not expected to be more than 6 months from the date of the agreement. The long-stop date should be linked to a long-stop conversion price, which is the price per share that is used for the conversion if there is no funding or exit event to provide a third-party valuation of the company.
  • Limited warranties to add protection to the company as in reality, smaller investments to early stage companies are unlikely to require heavy negotiation on warranties.
  • Cap on maximum value at which the advance investment will convert into shares. This is so that if the company is successful in achieving a high valuation at the next funding round, the investor does not end up with an unexpectedly low share value.
  • A qualifying threshold which sets a minimum size for the round that will trigger conversion, otherwise an investor may wish to wait until another larger investment is made, if a certain funding round is particularly nominal.

In the event that the company does not deliver the returns that investors would have anticipated, the ASA can include provisions to allow the company to improve performance and avoid the frustration of a down round. A company may be able to justify issuing shares at a higher price if it has managed to attract further investment at a higher share price before the long-stop date.

Other considerations when negotiating an advance subscription agreement

The company should carefully consider any other events which would trigger the conversion of advanced funds to shares, in addition to qualifying rounds or the long-stop date, such as the sale of the company.

The company should also consider shareholder pre-emption rights, particularly if shares are going to be issued and allotted in subsequent funding rounds as the existing shareholders may need to waive their right of first refusal.

New investors should consider the terms of the articles of association of the company that they are investing in and the shareholders agreement (if any) as the investor will be subject to these documents once the company has issued and allotted the new shares to the investor.

This area of law is relatively new and is continuing to grow and develop. In our experience is it important for investors and companies to receive specialist legal advice in relation to investments via ASAs and SEIS/EIS tax relief. NB (especially for investors), while we find that advance subscription agreements are becoming increasingly popular, we often find that the startup never gets around to actually issuing the shares that are subject to the subscription monies already paid. In one case we saw recently a startup was wound up, but as the shares were never issued and no EIS 1 compliance statement filed the investors were unable to even claim EIS loss relief – leading one investor to term such fundraising mechanisms as a ‘non-transparent hoodwink’!

For all new clients, we offer a no-cost and no-obligation call of up to 20 minutes to first discuss your matter and requirements before confirming a scope of work and quote. This can be arranged by sending your details together with an overview of your matter through our contact form.


On 30 December 2019, HMRC added new guidance to the relevant Venture Capital Reliefs Manuals pertaining to Advance Subscription Agreements (“ASAs”) and how they interact with the SEIS and EIS regimes.

For the SEIS, you can find HMRC’s new guidance in VCM33025.

For the EIS, HMRC’s new guidance is contained within VCM12025.

HMRC’s new guidance is identical for both SEIS and EIS, and the main points to note are as follows:

  • The more complex the ASA, or the longer the period between the advance purchase and the issue of shares, the higher the risk that the rules to qualify for SEIS/EIS relief will not be met.
  • The ASA must not function as an investment instrument that offers other benefits, such as investor protection.
  • The subscription payment must not be in effect a loan.
  • The company will need to demonstrate how the timing and terms of the ASA fits into its business plan and planned expenditure on growth and development.
  • The issue of shares must be for the purpose of growing the business, not simply to satisfy the ASA itself.
  • If the company wishes to apply for advance assurance it should do so before the ASA is entered into. If advance assurance is applied for with an ASA already in place, HMRC will now reject the application on the basis that the advance assurance service is a discretionary, non-statutory service and their standpoint is that advance assurances are not mandatory in order to obtain EIS relief. HMRC seem to be of the view that an investment is as good as made when entering into an ASA, so there is no need to consider an application in advance, and instead the company should rely on the SEIS1/EIS1 compliance statement submission at the appropriate point following the share issue.

In addition, the guidance states that HMRC will not consider ASAs suitable for SEIS and/or EIS unless the agreement:

  • Does not permit the subscription payment to be refunded under any circumstances;
  • Cannot be varied, cancelled or assigned;
  • Bears no interest charge; and
  • Has a longstop date (expected to be no more than 6 months from the date of the agreement).

Please note that we have amended the ASA template available for purchase from our e-commerce shop to reflect HMRC’s new guidance.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2023. 

About Jonathan Lea

Jonathan is a specialist business law solicitor who has been practising for over 18 years, starting at the top international City firms before then spending some time at a couple of smaller practices. In 2013 he started working on a self-employed basis as a consultant solicitor, while in 2019 The Jonathan Lea Network became a SRA regulated law firm itself after Jonathan got tired of spending all day referring clients and work to other law firms.

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