Subscription agreement: Overview, definition, and example
What is a subscription agreement?
A subscription agreement is a legal document in which an investor agrees to purchase shares or other securities from a company, fund, or issuer. This agreement typically outlines the terms and conditions of the investment, including the number of shares or units being purchased, the price per share, and the total investment amount. It also includes the investor’s acknowledgment of the risks involved, representations, and warranties regarding their eligibility to invest, and compliance with relevant laws and regulations. Subscription agreements are commonly used in private placements, mutual funds, venture capital investments, and other securities offerings.
In simpler terms, a subscription agreement is a contract that confirms an investor’s commitment to purchase securities from a company or fund and sets out the terms of that investment.
Why is a subscription agreement important?
A subscription agreement is important because it formalizes the investment process, establishing a clear and legally binding commitment between the investor and the company or fund. It helps ensure that the investor understands the terms of the investment and complies with applicable securities laws. Additionally, it protects both parties by specifying key terms, such as the amount being invested, the price of the securities, and the rights of the investor.
For businesses, a subscription agreement is essential for raising capital through the sale of securities. It helps ensure that all investors are treated fairly and that the company complies with relevant regulatory requirements. For investors, it provides a clear understanding of their rights and obligations in relation to the investment.
Understanding a subscription agreement through an example
Imagine an individual is interested in investing in a new startup. The startup offers a private placement to raise capital and provides a subscription agreement. In this agreement, the investor agrees to purchase 10,000 shares at $5 per share, amounting to a total investment of $50,000. The agreement specifies the payment terms, the rights associated with the shares, and any restrictions on transferability. The investor signs the subscription agreement, confirming their commitment to the purchase and acknowledging the risks involved in the investment.
In another example, an investor subscribes to a mutual fund through a subscription agreement, agreeing to purchase units of the fund at a certain price. The agreement outlines the terms of the investment, including how the units will be priced, the fund’s investment strategy, and the investor’s rights to redeem or transfer the units.
Example of a subscription agreement clause
Here’s how a subscription agreement clause might appear in a contract:
"The Subscriber agrees to purchase and the Company agrees to sell [number of shares] at a price of [price per share] for a total investment of [total investment amount]. The Subscriber acknowledges that they are aware of the risks involved in the investment, that they are an accredited investor as defined under applicable securities laws, and that they will comply with all legal requirements in making the investment. The Company shall issue the shares to the Subscriber upon receipt of the payment in full."
Conclusion
A subscription agreement is a crucial legal document that formalizes an investment commitment between an investor and a company or fund. It outlines the terms of the investment, ensures compliance with relevant laws, and provides clarity for both parties about their rights and responsibilities. For businesses, subscription agreements are essential for raising capital, while for investors, they ensure that the terms and risks of the investment are clearly understood.
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.