Advanced Subscription Agreement EIS: What You Need to Know
The Enterprise Investment Scheme (EIS) is a government-backed program that encourages investment in early-stage companies by providing tax incentives to investors. Under the EIS, investors can claim income tax relief on up to 30% of their investment, as well as capital gains tax relief on any gains made when selling their shares.
One of the ways in which companies can raise funds through the EIS is through an advanced subscription agreement (ASA). An ASA is a contractual agreement between the company and the investor that allows the investor to invest money in the company at a future date, with the price of the investment agreed upon at the time of the agreement.
ASA vs. Traditional Equity Investment
In a traditional equity investment, an investor purchases shares in a company at a fixed price, and the investor becomes a shareholder in the company. However, in an ASA, the company and the investor agree on a future price for the investment, and the investor does not become a shareholder until the future investment date.
This means that the investor is not immediately exposed to the risks associated with being a shareholder, such as fluctuations in market value and potential dilution of shares through future fundraising rounds.
Benefits of an ASA
An ASA can offer several benefits to both the company and the investor. For the company, an ASA can provide a quick and easy way to raise funds without the need to go through a time-consuming and costly equity fundraising process.
For the investor, an ASA can provide the opportunity to invest in a company at a lower valuation than would be possible through a traditional equity investment. This is because the future price of the investment is agreed upon at the time of the agreement, and if the company performs well, the investor can benefit from the increase in value without having to pay the current market price.
ASA and EIS
An ASA can be structured to qualify for EIS tax relief, which can provide further benefits to both the company and the investor. For the investor, EIS tax relief can provide up to 30% income tax relief on the investment, as well as capital gains tax relief on any gains made when selling the shares.
For the company, EIS tax relief can make the investment more attractive to potential investors and can help to speed up the fundraising process.
An advanced subscription agreement can be a useful tool for companies looking to raise funds through the Enterprise Investment Scheme. By agreeing on a future price for the investment, an ASA can provide benefits to both the company and the investor, while also qualifying for EIS tax relief.
As with any investment, it is important to carefully consider the risks and benefits before entering into an advanced subscription agreement. Working with an experienced tax advisor or investment professional can help to ensure that the investment is structured in a way that meets your goals and objectives.