The parties should consider whether, in addition to an eligible funding round or expiry date, there are other circumstances in which the shares are to be automatically converted under the pre-subscription agreement, for example in the event of a sale of the start-up. Previously, HMRC had limited the long-term shutdown date to a maximum of 12 months after the ASA agreement – if it was to be used for SEIS or EIS investment purposes. Since then, however, new updates have been released starting in February 2020. The startup should remember that by entering into a pre-subscription agreement, a startup gives the investor the right to subscribe for shares, so that, as with any other share issue, the directors have the power to allocate the shares and do the pre-emption rights apply? Pre-emptive rights exist when existing shareholders of a corporation are granted a right of first refusal when a corporation issues shares, which means that the shares must be offered to existing shareholders before being offered to new investors. Therefore, it is important for a startup to know if the pre-emption rights apply and to take them into account within any time frame for the conclusion of the extended subscription contract. This pre-subscription agreement is intended only for investors domiciled in England, Wales or Scotland. This is due to the complexity of foreign-based investors (e.g. B complex tax implications). If an investor is based abroad, you may need to seek expert advice or the help of a specialized lawyer. The Company should carefully consider any other events that would trigger the conversion of advanced funds into shares, in addition to qualifying rounds or the expiry date, such as the sale of the Company. Tags: Early Subscription Agreement, SEIS/EIS Compliance Some points that startups and investors should consider when negotiating an advanced underwriting contract are: An advanced underwriting agreement is a 100% capital agreement. In addition, the guidelines state that HMRC does not consider ASAs to be appropriate for SEIS and/or EIS unless the agreement is reached: if you are in one of these warehouses, you have the option to raise financing through convertible debentures (CLNs), which are debt securities that can be converted into shares in the future.
Or you can follow the ASA route, which means you`ll receive subscription money for shares in advance, but your business would be valued in the next round of financing – and shares issued. In other words, under an ASA, an investor agrees to buy shares of your company (i.e., provide you with equity financing), but you don`t spend the shares immediately. For ASA investors, funds advanced under an advanced underwriting contract, unlike financing under a CLN, may be eligible for tax relief under the EIS and SEIS systems. Since the funds may have to be repaid to the investor under a CLN, the capital is not considered “at risk” and therefore does not fall under the EIS or SEIS. The investor also receives a discounted price for the shares once they are finally issued. If you are involved in investments, whether as a start-up or as an investor, you will likely encounter an extended underwriting contract. So, what is an extended subscription contract and what should you consider when entering into a subscription contract? Similar to a convertible loan, an ASA allows investors to receive a pre-agreed discount on shares in a subsequent funding round. ASAs are common share agreements that are used when a company wants to raise part of a larger funding round in advance. For example, you can search for a total of £500,000 in investments and choose to bring in £150,000 of that round as part of an ASA so you can withdraw those funds while increasing the balance of the tour. From an investor`s perspective, ASAs are slightly less advantageous than liquidated CLNs because bondholders rank higher than shareholders.
In addition, and unlike CLNs, funds advanced under an ASA do not bear interest. The ASA constitutes an agreement that, although the subscription funds are paid at the beginning, the shares related to the investment will be calculated and issued at a certain point in the future (e.B. in the case of a future equity financing round, a sale of the company or an agreed long-term date). Similar to a convertible bond, an extended underwriting contract is a way for a startup to get a quick injection of cash, as it is usually a relatively short deal that can be traded faster. However, an advanced underwriting contract may be preferable for a startup because, unlike a convertible promissory note, it is generally true that no interest is charged and an investor cannot claim their money. HMRC will not consider any pre-subscription contract appropriate for SEIS unless the agreement: The investor must be aware of the terms of any shareholders` agreement and articles of association to which he is subject once the investment has been converted and the shares of the start-up have been issued. The extended shutdown date should not exceed 6 months from the date of the pre-subscription contract. As part of an advanced subscription contract, the evaluation issue is postponed until the date of the next round of financing.