Advance Subscription Agreement - Why raise investment this way?

Here at ISQ, we’re often asked about the various ways of raising crowdfunding investment. One of these options is an Advance Subscription Agreement (ASA). So firstly, let’s explain what an ASA is. Quite simply an ASA is an agreement between the business and the investor for an equity investment where instead of setting the price and issuing the shares now, the shares are issued and the price set for those shares at some point in the future. 

The advantage for the business is it means they can attract investment without having to set a valuation here and now. The assumption is that by the time they come to issue the shares, the business would have demonstrated growth and development to support a higher valuation than would otherwise have been possible. 

The attraction for the investor is that in return for deferring the valuation and share issue, they will receive a discount on the price at which the shares are ultimately issued. A discount of 20% is typical, although this can of course vary case by case.  

Both of the UK’s major crowdfunding platforms, Crowdcube and Seedrs, offer the opportunity to raise investment in this way. While they use slightly different terminology here and there, such as Convertible Investment, they are broadly the same type of approach. Instead of showing equity on offer, investment is called for in multiples of a fixed amount, for example, £10. 

Do be aware that a Convertible Loan Note, while similar, is debt-based rather than equity and is usually repaid in cash, whereas an ASA, being an equity investment, cannot be repaid in cash. Another important distinction is that while an ASA can -in the right circumstances- qualify for SEIS/EIS, a Convertible Loan Note cannot. 

If you do consider going down the ASA path, there will be some other terms you’ll need to understand. For example:

Trigger Event - This determines what will cause the investment to convert to equity. Typically that could be subsequent to a successful crowdfunding campaign or even an IPO. 

Longstop Date - This is the latest date that an ASA must convert to equity. If the trigger event hasn’t happened, then the ASA will convert to equity based on the default valuation. 

Default Valuation - This is the pre-agreed valuation that the ASA will convert to equity in the event the longstop date is reached. 

Valuation Cap - This is the pre-agreed highest valuation that would apply at conversion to equity. This can be especially attractive to investors if a subsequent investment round takes place at a valuation higher than the cap.  

Author: Richard Mojel - Commercial Director ISQ