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What is a subscription agreement?

A subscription agreement is a type of contract signed between a company and a private investor. The company agrees to sell a specific number of shares to the investor at a specific price.

The subscription agreement helps keep track of the number of shares sold at a certain price because it contains details such as the number of shares, the price at which each share is sold, and confidentiality provisions. It also specifies the rate of interest investors are guaranteed to receive.

Subscription agreements are most common with small companies and startups that don’t have the resources to take the company public or work with venture capitalists yet.

Why do you need a subscription agreement?

 

It establishes clarity

A subscription agreement clearly lays down the rights and liabilities of the individual investing in a company. It also elucidates the obligations of the company raising the money. This reduces the likelihood of misunderstandings or disputes between the parties.

 

It aids in conflict resolution

Because it clearly defines the rights and obligations of the parties, during times of misunderstandings, the terms laid down in the subscription agreement can serve as a guide for conflict resolution.

 

It improves compliance

A carefully authored subscription agreement ensures that the investment process is compliant with relevant laws and regulations. This offers legal protection and makes it easier for the parties entering into the contract.

What are the elements of a subscription agreement?

The nature and scope of each subscription agreement is different. However, they all have some common elements, such as:

Subscription details

Specifications regarding the type of subscription, such as the number of securities purchased, the type and class of securities being purchased, and the purchase price per security, are included in this element.

Confidentiality

The obligations of the involved parties to protect confidential information are discussed in this clause.

Parties

Details of the parties involved in the agreement, such as the issuer and the investor investing in the company, are listed in this clause.

Purchase terms

Terms and conditions regarding the purchase are listed under this clause. This could include details such as closing conditions, payment schedules, and delivery instructions for the securities.

Indemnification

This section outlines the obligations of the parties to indemnify each other against any losses, liabilities, or damages arising from breaches to the agreement or other specified events.

Conditions precedent

Any conditions, such as regulatory approvals, that must be satisfied before entering the agreement, are listed in this section.

Governing law and jurisdiction

This lists the law that will govern the agreement and the jurisdiction where any legal resolution will occur.

Signatures

This section contains the spaces for the signatures of the authorized personnel from the respective parties.

Frequently asked questions

  • Who typically uses a subscription agreement?

    A subscription agreement is commonly used by a company not listed on the stock exchanges and raises money through private investors. Private investors use the subscription agreement to present their application for a limited partnership in the company.

  • Is a subscription agreement a legally binding contract?

    Yes, all types of subscription agreements are legally binding documents that outline the rights and obligations of the parties.

  • Can a subscription agreement be modified?

    Yes, a subscription agreement can be modified or amended, but both parties should make any changes in writing and sign.

  • Do subscription agreements have an expiry date?

    Most subscription agreements do not come with an expiry date. The agreement usually lasts until the investor holds the shares of the company. The subscription may, however, outline provisions for selling or exiting the investment.

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