A subscription agreement is an application by an investor for joining a limited partnership.
Agreements are essential to lay down regulations and policies. Running a business without them is next to impossible as an agreement is necessary to create a solid foundation. This is also true for investors and entrepreneurs, as they too have to lay the base for their collaboration, making sure no one backs away without consequences
The organization decides to sell a particular amount of shares for specific rates, and the subscriber in return promises to purchase the shares for predetermined rates. This piece will delve deep into what a subscription agreement is, helping you understand why it is important and how it works.
In most limited partnership companies, the general partner tends to manage said partnership’s entity, and introduces limited partners with the help of a subscription agreement. For those who don’t know, candidates are the ones who subscribe for becoming limited partners. So, after fulfilling the traditional requirements, general partners contemplate on whether or not they should approve the candidate. This is where the subscription agreement usually comes into play.
What is a Subscription Agreement?
A subscription agreement is an application by an investor for joining a limited partnership. The role of limited partners is quite different to that of regular partners. They assume the role of a silent partner and offer capital, which is more often than not, a one-time investment. Also, they don’t have any material participation in terms of how the organization operates. Consequently, they generally have very little say in regards to the partnership’s day-to-day procedures and operations. But the good part about this is that their exposure to risk is also quite minimal.
The exposure of losses in the business for every limited partner is limited to the initial investment of the partner. The agreement to enter the limited partnership defines the overall sophistication, investment experience and the potential partner’s net worth. Generally, the securities and exchange commissions’ rules govern the subscription agreements.
The stipulations lay the groundwork for the method to conduct the offering, along with the quantity of material information required by the organization to offer the investors. As more limited partners enter an offering, the general partners get the existing partner’s consent before making any amendments to the subscription agreements.
Speaking in broad terms, partnerships are essentially business agreement among multiple people who possess the business’ personal ownership. If you look at any subscription agreement sample, you will notice that the taxes are not applicable for partnership entities. Instead, the profits and losses flow through and reach every partner. The partners will only pay taxes for the distributive share applicable for the taxable income, depending upon the partner agreement.
Why is a Subscription Agreement Important?
For organizations that require extra funding, these agreements are particularly useful as they allow them to obtain funds without asking venture capitalists for help or making the company go public. Investors step foot into limited partnerships, meaning that they will remain silent partners.
When Do Most Companies Utilize Subscription Agreements?
Private companies mostly use this form of agreement when they are looking to increase capital through private investments. They can do this by selling the ownership of the company or its shares without worrying about registering with the Securities and Exchange Commission. Organizations that posses private placement memorandums may also plan on including subscription agreements for attracting more investors.
It does not matter if you are a business or a private investor that seeks to invest in private companies, having a well-defined subscription agreement in place will define every subscription agreement detail, such as the share’s price or the amount decided on. What’s more, this agreement also safeguards investors against other organizations by adjusting the deal’s terms, ensuring they are favorable.
So, when a company decides to sell shares or stocks, it saves investors from getting cold feet right before they enter the deal. Needless to say, this agreement is a tried and tested way to ensure every one stands by fixed transactions.
Pros and Cons of Subscription Agreement
While this agreement can be highly beneficial for multiple parties entering an investing agreement, it also has some cons associated with it. Let us discuss by listing the pros and cons of share subscription agreements. Knowing these advantages and disadvantages will help you make a well-informed decision about what to enter in your organization’s agreement, and what to stay away from.
Let us discuss some of the main advantages you can get from this type of agreement:
- Since this is a limited partnership, the liability tends to be very limited
- You can always cut down on the amount of time the silent partner will need to dedicate
- When it comes to share subscriptions, you can always sell stocks without worrying about registering them with the SEC. Otherwise, it could be an immensely costly and time consuming endeavor
- The investment’s multilateral approach will not be applicable here. The reason for it is that it is a single-time investment
The main drawbacks you may from this type of agreement are as follows:
- You cannot return the invested amount back to investors
- There is an absence of voting rights when it comes to this type of agreement. You just have to trust the directors and promoters for growth
Benefit and Drawback of Not Utilizing Share Subscription Agreements
In case an individual is not sure about investing, they can always try investing in public companies, offering smaller amounts. Investing with share subscriptions, on the other hand, requires larger sums of money, which a lot of investors are not ready to give.
The only drawback of not utilizing share subscription agreements is that investors can sometimes take advantage of the information they acquired about management. This often prompts them to ask their partner questions, in case the investment happens through these agreements.
Subscription Agreement with Private Placements
Filling the agreement private placement form is a must for making sure an investment deal can move forward with complete harmony. The private placement agreement also comes in handy for disclosing the investment’s requirements in private and for encouraging the people making the investments to move forward. It is a vital part of private placement memorandums and is often present as the last part of the document.
Whenever a subscriber plans to invest in a private company, this agreement offers all the information necessary to make the deal happen properly. It could include the prices of shares being obtained, along with the amount of shares acquired. Here are a few more things that you will find in almost every subscription agreement sample:
- Legal language for explaining the important confidentiality provisions
- Regulations governing the agreement along with the subscriber’s requirements and rights
- The agreement private placement also requires subscribers to confirm that they were not solicited by the company and prove that they followed the proper procedures required for making the investment
Of course, one would want to gather and seek every bit of legal information for their agreement, it would still be best to try and keep the subscription agreement as straightforward and simple as possible. For instance, instead of outlining or repeating the disclosures mentioned in private placement memorandums, simplifying every term and condition would be a better idea to steer clear from vagueness and confusion.
While there is always some leeway that people can take for making their subscription agreement stand out to subscribers, it’s important to remember that this is a legal document/contract that must be properly vetted by the right legal counsel. For instance, it should highlight if the funds will remain in escrow until the organization receives a high amount of investment.
Subscription Agreement Key Terms and Clauses
Like every type of agreement, a share subscription agreement also has a list of important clauses and terms that are specific to it. Understanding their context in regards to an investment deal is important, as it will help you understand the regulations and policies that govern the agreement. Mentioned below, is a list of the most common clauses and key terms that you will come across:
- Indemnity and Warranty – Any party can indemnify other parties against costs, claims, damages, losses, and liabilities, in case they occur. If a party damages or breaches the contract because of wrong information in the representation and warranties clause, the process can be quite costly and time consuming.
- Restraint against Competition – This clause is quite important as it mentions that investors cannot compete with the organization in any way, shape, or form for a particular period. This clause is mostly present for safeguarding the company’s interest, making sure the investors don’t harm the company by competing against it.
- Conditions Precedent – This term is necessary for mentioning the condition necessary for making the contract functional, alive, and operational and is important for the investor, as well as the organization they are investing in. What’s more, this clause often contains a schedule, which has the condition’s complete details.
- Confidentiality – As the name suggests, this clause or term is to ensure that all parties involved remain confidential and avoid sharing information about the company’s dealings and its operations. Failure to abide by this clause results in unfavorable consequences for both parties.
Share Subscription Agreement vs. Shareholder Agreement
Like we mentioned earlier, there is a vast difference between a share subscription agreement and a shareholder agreement. Mentioned below, are some points that will help clarify these differences, letting you decide which one would benefit you the most:
- The share subscription agreement works as a document for when an investor joins an organization
- This agreement highlights that the company intends to sell a certain quantity of shares
- Share agreements are quite common in limited partnerships
- The subscription can always vary depending on a company’s various needs
- Shareholder agreements details the liabilities, rights, and details about the company’s shareholders
- A shareholder agreement also discusses things like voting rights and lock-in periods
Sample Subscription Agreement
A sample subscription agreement is quite handy for people who are new to subscription agreements. It offers a basic understanding of what most subscription agreements contain, although you can always add some details according to your company’s specific needs. Traditionally, the main headings discussed in this document are: introduction, services and access, payment and fees, rules, and privacy considerations.
Most companies, whether large or small, take some sort of inspiration from sample subscription agreements, after which, they add their own tweaks and changes to suit their operations. You will require this sample when your agreement is final and it’s time to put pen to paper to make sure everybody abides by the agreement. There are plenty of samples widely available on the internet and they can help you create a solid foundation for your agreement.
Interested to use Subscription Agreements for your Investors?
The presence of this type of agreement can save your company from hassles and roadblocks when entering an agreement with private investors. The information discussed in this piece will help you understand the fundamentals of this agreement, making sure you can create or adjust one as you see fit for your company. And equally important for your company is keeping subscription agreements updated in your Cap Table.
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