A subscription agreement is a good option for companies that want to attract private investors without going public. It contains all the details about the transactions, such as the number of shares and price, as well as confidentiality provisions.
In a subscription agreement, the private investor agrees to invest in the business with a large sum. The company on the other hand uses the subscription agreement to keep track of how many shares have been sold and at what price.
Find out if a subscription agreement is a right option for your business or not as you read through this article.
What is a Subscription Agreement?
A subscription agreement is a mutual agreement between a company and an investor to buy the shares of the company at a consensual price.
It is an investor’s invitation into a Limited Partnership (LP). Here, the company agrees to sell a certain number of shares at a particular price, while the investor on the other hand promises to buy the shares at the agreed price.
A subscription agreement contains all the details needed for that business deal. More so, it is used to monitor shares that perform well, as well as share ownership, and control possible conflicts that may occur as a result of share payout.
The investor fills out a form that shows his or her suitability for investing in the partnership, and the terms of the agreement bind them all.
Some agreements include a specific rate of return that investors are sure to receive. That might be a percentage of the company’s net income, or it could be a specific amount in lump sums that are to be paid out on specific days.
Subscription agreements are most common with startups and smaller companies. They’re used when business owners don’t have the resources to work with venture capitalists or to take the company public.
Common types of investors that accept subscription agreements are; Friends and family investors, angel investors, and startup investors.
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How Subscription Agreements Work
Subscription agreements vary depending on the company that is involved and the reason it is being offered.
A well-organized and well-structured subscription agreement will include the details about the transaction, the number of shares being sold and the price per share, and any legally binding confidentiality agreements and clauses.
Furthermore, the subscription agreement that your company uses depends on its needs and size.
Follow these steps from contracts counsel to understand how writing a subscription agreement works;
- Decide to get your subscription agreements in writing
- Ensure your subscription agreements are simple
- Identify the agreement principals and investors correctly
- Write down all key details of the transaction
- Set the consideration obligations in stone
- Devise a safeguard in case a party wants to terminate
- Determine how you will settle disputes with investors
- Keep your negotiations and contracts confidential
- Hire securities lawyers to draft your subscription agreements
It’s okay to use the subscription agreement template online. However, you must ask an attorney to review your contracts to ensure that there are no mistakes.
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How Subscription Agreements are Regulated
A subscription agreement is a feasible option for companies that need funding but does not want to go public.
With this, Investors enter into a limited partnership, which means they become silent partners and are required to make a one-time investment.
This reduces the risk of the investment, but it also limits the contribution of the investors to the company’s decisions.
Generally, subscription agreements are covered by SEC Rules 506 (b) and 506(c) of Regulation D.
These rules clearly define the method of offering and the amount of information the companies can disclose to investors.
As new investors get into the partnership, general partners receive consent from existing partners before amending the subscription agreement.
Raising capital through a Regulation D investment involves meeting significantly less inconvenient requirements than a public offering. This allows companies to save time and sell securities that they might not otherwise be able to issue in some cases.
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Why are Subscription Agreements Important?
Subscription agreements are important for various reasons. Primarily, a company opts for a subscription agreement because it hasn’t grown to a point where it can attract venture capitalists or investment banks.
Additionally, they opt for a subscription agreement to raise money from private investors without registering with the Securities and Exchange Commission(SEC).
Investors on the other hand can protect themselves against companies by amending the terms of the deal.
As a company selling stocks or shares, this prevents an investor from changing his or her mind right before the investor gets into the deal. Having a subscription agreement will help solidify a promise into a fixed transaction.
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Subscription Agreements with Private Placements
When a company wants to raise capital, it will issue shares of stock for purchase by either the general public or through a private placement.
A private placement is a sale of stock to a limited number of accredited investors who meet the desired criteria.
According to the SEC, the desired criteria involve a particular level of investment experience, assets, and net worth.
Investors will receive a private placement memorandum as an alternative to the prospectus. The memorandum provides a less comprehensive description of the investment.
In most cases, a subscription agreement accompanies the memorandum. Some agreements outline a specific rate of return that the investor will receive such as a particular percentage of company net income or lump sum payments.
This structure gives the investors more priority as they earn a rate of return on the investment before company funders or other owners.
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Key Parts of a Subscription Agreement
The key parts of a subscription agreement include;
- Director’s resolution
- Outstanding shares
- Confidentiality clause
- Share ownership structure
- Shareholder’s resolution
- Payout terms
- Conditions precedent
- Minute books
- Indemnity and warranty
- Non-compete agreement
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Pros and Cons of a Subscription Agreement
Below are the good and bad sides of a subscription agreement.
Pros of a Subscription Agreement
A subscription agreement has the following benefits;
- Subscription agreements provide a way to sell stock without having to register securities with the Securities and Exchange Commission (SEC)
- It serves as an attractive investing opportunity for the market.
- A subscription agreement is generally a limited partnership without any personal liability.
- It is a one-time investment opportunity, unlike venture capitalist investing, which requires multiple investments.
- It has flexible terms and conditions.
- Since you are a silent investor, it doesn’t require much commitment from you.
- It offers the opportunity to invest early and watch your investment grow as the company grows.
- There is transparency among parties involved.
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Cons of a Subscription Agreement
Below are the disadvantages of a subscription agreement.
- In a subscription agreement, you do not have voting rights to help the business be more successful.
- Investors can lose money if the company doesn’t grow as expected.
- Its a one-time thing. This means that if you have invested your money, there is no way of collecting it back.
- It requires a large sum contribution instead of traditional equities that you can be buy with smaller amounts.
- Must uphold legal and fiduciary duties to other parties
- There is lack of oversight because the SEC is not involved.
- Lots of legal issues may arise if there is no proper counsel to examine and provide expert advice on the deal.
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How Do You Write a Subscription Clause?
Subject to the terms and circumstances hereof, Subscriber hereby agrees to subscribe for and purchase, and Company hereby agrees to issue and sell to Subscriber, upon payment of the Purchase Price, the Subscribed Shares at the Closing (as defined below).
Do subscription services constitute contracts?
There are other agreements that should be in place before a subscription-based service makes its first sale, even if the terms of service may be the most significant contract for subscription-based enterprises (yes, it’s technically a contract).
What Is a Subscription Agreement Canada?
The main contract in a private placement of debt obligations or equity securities between the issuer and the investor or substitute purchasers is the subscription agreement.
What Are the Three Types of Subscription?
As we’ve seen, ecommerce companies typically use one of three different subscription model types: curation, replenishment, or access.
Why Is It Called a Subscription Agreement?
A subscription agreement is a document that investors use to subscribe to a limited partnership. A percentage of the company’s shares are sold to the investor as part of the agreement at a predetermined price, and the investor is committed to purchasing those shares at that price in the future.
Are subscription agreements binding?
Both parties must execute a sales contract that is legally binding before the stock sale is complete. A corporate subscription agreement or stock agreement is what this is known as.
What is the purpose of a subscription?
Customers are billed repeatedly for a good or service under a subscription model. They decide how frequently and for how long they want to get each offer, and the majority of subscriptions provide them the flexibility to renew or cancel at any time. A subscription can be thought of as a contract between you and the customer.
Bottom Line
I hope this article carefully explains what a subscription agreement is and the benefits it holds for your business.
If you have any questions or suggestions, kindly let me know in the comments section.
Good luck!
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