On 30 December 2019 HMRC issued guidance on advance subscription agreements (ASAs) in relation to the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).
Typical use of ASAs
ASAs are commonly used when a company is raising money outside a funding round, so at a time when the value of the shares is not easily ascertained. An ASA allows investors to pay subscription funds to a company early, with shares in the company then issued at a later date (generally the next funding round, with the number of shares issued based on their value at that time).
There has always been some sensitivity around whether ASAs prejudice the availability of SEIS or EIS relief for investors. In particular, it is widely recognised that they need to be carefully structured so as not to give effect to a loan.
HMRC guidance – key points to note
The guidance sets out two new positions HMRC is now adopting:
Firstly, an ASA should have a longstop date of no more than six months. While it was widely recognised in the past that a sensible longstop date was required, a view among practitioners (albeit not commented on by HMRC) has been that up to one year should be acceptable. It is hoped that HMRC will not seek to apply its new rule of thumb to already existing ASAs, but we would strongly recommend that any new ASAs have a longstop date of no more than six months.
Secondly, if a company wishes to apply for SEIS or EIS advance assurance, it should do so before the ASA is entered into. This seems to be on the basis that the investment is effectively made when entering into the ASA, and so any subsequent assurance application would not have been made in advance.
HMRC guidance – less surprising points
The other aspects of the HMRC guidance are unsurprising. For instance, in order for the investors to benefit from SEIS or EIS relief, the ASA must not:
- bear an interest charge;
- permit the subscription payment to be refunded to investors under any circumstance;
- be varied, cancelled or assigned to another party; or
- function as an investment agreement that offers other benefits (such as investor protection).
The guidance also makes it clear that the issue of shares must be for the purpose of growing the business, and so the company will need to be able to demonstrate how the timing and terms of the ASA fit into its business plan and planned expenditure on growth and development.