Investment representation: Overview, definition, and example
What is an investment representation?
An investment representation refers to a statement or warranty made by an investor in a transaction (typically involving the purchase of securities) to affirm that they are acquiring the securities for their own investment purposes and not for resale or distribution. This representation is often included in securities purchase agreements to ensure compliance with securities laws, particularly those governing private placements.
For example, an investor might represent that they are a "sophisticated investor" or "accredited investor" under applicable laws and understand the risks associated with the investment.
Why is an investment representation important?
An investment representation is important because it protects issuers from liability by ensuring that investors understand the nature of the securities they are purchasing and comply with securities laws. It confirms that the investor is acting within legal bounds, such as not engaging in unregistered public resale, which could violate regulations.
For issuers, it provides a layer of legal protection by demonstrating that the securities are sold in accordance with regulatory requirements. For investors, it clarifies their understanding of the investment and their obligations.
Understanding investment representation through an example
Imagine a private company sells shares to an individual investor. The purchase agreement includes an investment representation where the investor affirms that they are acquiring the shares for long-term investment purposes, not with the intent to resell. This helps the company comply with private placement exemptions under securities laws.
In another example, a venture capital firm invests in a startup and represents in the agreement that it is an accredited investor under U.S. securities laws, meaning it has sufficient financial sophistication and resources to evaluate the risks of the investment.
An example of an investment representation clause
Here’s how an investment representation clause might appear in an agreement:
“The Investor represents and warrants that it is acquiring the Securities for its own account, for investment purposes only, and not with a view to or for sale in connection with any distribution of the Securities in violation of applicable securities laws. The Investor further represents that it is an accredited investor as defined under the Securities Act of 1933 and acknowledges that the Securities have not been registered under applicable securities laws.”
Conclusion
An investment representation ensures compliance with securities laws and protects both issuers and investors by clarifying the purpose and nature of the investment. For issuers, it reduces liability and ensures that securities are sold within regulatory frameworks. For investors, it confirms their understanding of the risks and restrictions associated with the investment. Including a clear investment representation clause in agreements promotes transparency, legal compliance, and trust in securities transactions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.