Subscription Agreements

Understanding The Subscription Agreement For Investors

A Subscription Agreement is a business contract that outlines the terms and conditions under which an investor (also referred to as a subscriber) agrees to make an equity investment in a company. The primary purpose of a Subscription Agreement is to stipulate the mutual obligations of the parties involved. For the investor, it sets forth the amount of equity they intend to purchase and the price they are willing to pay. For the company, it signifies an agreement to sell a specific number of shares or other equity interests at the agreed-upon price.

Subscription Agreements are most commonly used in private placements or other transactions that involve the sale of a company’s securities without a public offering. This could occur during the early stages of a company’s growth, in which angel investors or venture capitalists are targeted, or at later stages when institutional investors are involved. It is also used when a private company raises capital from private investors before going public.

Typical provisions included in a Subscription Agreement often encompass the number of shares or other equity interests to be purchased, the price per share, and the total investment amount. Furthermore, it includes representations and warranties from the investor, which can relate to the investor’s financial condition, sophistication, and acknowledgement of the risks involved in the investment. The company may also provide representations regarding its financial condition, compliance with laws, and other relevant information.

Another common feature is the inclusion of pre-emptive rights, which allow the investor to maintain their proportional ownership in the company by buying additional shares in any future issuance. Confidentiality clauses are also standard, as they restrict the investor from divulging proprietary company information.

Finally, the agreement may contain certain restrictions on the transfer of shares, to ensure the company maintains control over its ownership, and clauses related to dispute resolution and governing law.

Is A Subscription Agreement Binding?

Yes, a Subscription Agreement is typically binding on the investor. Once the investor signs the agreement, they are generally obligated to purchase the shares or other equity interests as specified in the agreement and pay the agreed-upon price. This obligation is subject to the terms and conditions outlined in the agreement, including any contingencies or conditions precedent that may be specified.

For instance, a Subscription Agreement may include conditions that must be satisfied before the investor is obligated to complete the purchase, such as the company achieving certain milestones, obtaining necessary regulatory approvals, or the completion of satisfactory due diligence by the investor.

On the other side, the company is also bound by the agreement to sell the specified amount of equity to the investor at the set price, subject to the terms and conditions in the agreement. Given the binding nature of the agreement, it is crucial for both parties to thoroughly understand the terms and conditions of the Subscription Agreement before entering into it.

Can Corporations, LLC’s, and Partnerships Issue Subscription Agreements?

Yes, it is typical for various types of business entities, including corporations, limited liability companies (LLCs), and partnerships, to issue Subscription Agreements to potential investors. The use of a Subscription Agreement is a common practice when these entities are raising capital through a private placement, which is a sale of securities to a relatively small number of select investors.

For corporations, Subscription Agreements are often used when issuing shares of stock to investors. Similarly, LLCs and partnerships use Subscription Agreements when selling membership interests or partnership interests, respectively. The agreement outlines the terms and conditions of the investment, including the amount of equity to be purchased, the price per share or unit of interest, and the total investment amount. It also includes representations and warranties made by both parties, which can provide essential protection and transparency.

Regardless of the type of entity, a Subscription Agreement is a critical document in a private investment transaction. It formalizes the investor’s commitment to invest a certain amount of money in the company and the company’s commitment to give the investor equity in return. As such, it serves as a crucial tool for companies of all sizes and structures to secure funding from private investors, while providing investors with specific details about their investment.

Contact Our Chicago Business Attorneys

Whether you’re embarking on a new venture or seeking to grow your existing business, the process of attracting investors and formalizing their contributions can sometimes be complex and challenging. At our law firm, we assist with the development and drafting of Subscription Agreements that align with your entity’s business formation or admissions agreements. Our business attorneys has experience working with corporations, limited liability companies, and partnerships across a multitude of industries. We understand that each business is unique and that a one-size-fits-all approach doesn’t serve your best interests. That’s why we tailor our services to your unique circumstances, goals, and challenges. We encourage you to reach out to us to discuss how we can assist you and your business.