Subscription Agreement

A subscription agreement assists private companies in selling shares without listing on a stock exchange. Instead, it is an agreement between a firm and an investor. It is a legal document that outlines terms and conditions. Company owners use this document to track the number of outstanding shares.

The agreement must comply with Securities and Exchange Commission (SEC) regulations in the US. As a result, these investors offer funds to become silent partners. Usually, these are one-time, lump-sum investments.

• The subscription agreement is a document signed by a company and an investor. A private investor purchases shares belonging to a limited company.
• In a share subscriber agreement, investors share only limited liability; the liability is limited to the amount invested in the company.
• But, after signing the share subscriber agreement, early investors have minimal rights. Liquidity is another major issue; If the silent investor wants to exit the partnership, someone must buy them out.

The subscription agreement is a contract between a firm and an investor. It contains terms and conditions, details of payment, account details, etc. Share subscriber agreements comply with the Securities and Exchange Commission (SEC) Regulation D, specifically 506(B) and 506(C). The regulation allows different types of companies to attract investors without registering with the SEC.

When a non-listed company is owned privately by current partners, it is referred to as a limited partnership or startup. When these companies want to raise capital but do not wish to get listed on stock exchanges, they invite private investors.

These investors participate in the share subscriber agreement and offer funds to become silent partners. Usually, these are one-time, lump-sum investments. Once the transaction is complete, silent partners are not expected to play any role in business operations. These investors share limited liability.

Limited liability is a business ownership structure that protects shareholders’ assets from losses and debts. The liability is limited to the amount invested in the company. As a result, early investors are not accountable for the firm’s losses and debts.

Thus, the share subscriber agreement gives prospective shareholders a head start—early investors. But it is a big deal if the startup makes it big. In that case, along with the firm, early investors also earn exponential returns.

However, there is a downside; early investors have minimal rights. Also, not everyone is financially capable of making a large lump sum payment. Liquidity is another major issue; If the silent investor wants to exit the partnership, someone must buy them out. Practically, that is not always easy. It takes time.

Let us look at some subscription agreement examples to understand the document better.

Example #1

Isaac is an investor; he is interested in buying shares of ABC Limited. ABC is not ready to register with SEC at the moment, though. But Isaac persists. Eventually, he enters a share subscriber agreement with the firm and becomes an investment partner.

The company sells 90 shares to Isaac—at a predetermined price. Isaac was able to persuade ABC Limited because they, too, needed funds. ABC plans to use the newly acquired funds for business operations.

Now the share subscriber agreement outlines obligations, offerings, and rights (of both parties). This way, there is transparency and clarity between parties.

Example #2

Advaxis, Inc. is a biotechnology company. In December 2022, Advaxis signed a subscriber and investment representation agreement with its CEO Kenneth A. Berlin.  In addition to being the president, and CEO, Kenneth is also an investor.

Advaxis sold ten Series E Preferred Stocks—at a par value of $0.001 per share—$1,000 per share in cash. The share subscriber agreement contains customary representation, warranties, indemnification rights, and obligations.

A sample of the subscription agreement template is as follows.

The following are the main components of the share subscriber agreement:

• Subscription
• Parties and purchaser details
• Applicable laws
• Counterparts
• Notices
• Procedures
• Transaction details
• Buyer rights

Now, let us compare subscription agreement vs shareholder agreement vs purchase agreement comparisons to distinguish between them.

• A subscription agreement allows companies to raise capital, whereas a shareholder agreement comprises investors' rights and obligations. In contrast, a share purchase agreement defines the transfer of shares from one party to another.
• The share subscription agreement is a legal document between a company and a private investor; it formalizes the private ownership of company shares. In contrast, a shareholder agreement is executed with all or a certain class of shareholders. In contrast, a purchase agreement is drafted between a buyer and a seller.
• The share subscriber agreement is usually used only by private companies. In contrast, the shareholder agreement protects the investment of different parties and is used with various ownership structures. On the other hand, the purchase agreement is proof of how many shares were transferred, and at what price.
• The share subscriber agreement outlines terms and conditions, the number of shares, and the price of the transaction. The shareholder agreement is more detailed; it even covers rights and responsibilities. In contrast, the purchase agreement is a brief document containing transaction-related details.

This article has been a guide to what is Subscription Agreement. Here, we explain it with its template, examples, and comparison with shareholder agreement. You can learn more about it from the following articles -

• Standstill Agreement
• Credit Agreement
• Non-Disclosure Agreement