What is a Subscription Agreement?

A subscription agreement is a legally binding contract between a company and an investor, outlining the terms under which the investor agrees to purchase shares or ownership interests in the company. It is commonly used in private equity, venture capital, and limited partnerships, ensuring that investors understand their rights and obligations.

This agreement serves as proof of investment and helps businesses secure funding while protecting both parties legally.

How a Subscription Agreement Works

When a company seeks investment, it provides potential investors with a subscription agreement detailing:

1. Investment Terms – The number of shares or ownership units and the purchase price.
2. Investor Obligations – Payment terms, transfer restrictions, and compliance with company policies.
3. Company Representations – Legal disclosures about the company’s financial condition and risks.
4. Regulatory Compliance – Ensures compliance with securities laws to protect investors.

Once signed, the investor pays the agreed amount and receives ownership rights as specified in the contract.

Key Components of a Subscription Agreement

1. Investment Details

• Number of shares or ownership units purchased.
• Purchase price per share.
• Payment method and timeline.

2. Investor Representations

• Acknowledgement of risks associated with the investment.
• Confirmation that the investor meets accreditation requirements (for private placements).
• Statement that the investment is made for long-term purposes, not immediate resale.

3. Company Representations & Warranties

• Disclosure of financial information.
• Statements about compliance with legal and regulatory requirements.
• Any restrictions on transferring ownership.

4. Rights & Restrictions

• Voting rights and dividend entitlements.
• Lock-up periods preventing early share sales.
• Exit strategies for investors, such as buybacks or future liquidity events.

5. Governing Law & Dispute Resolution

• Specifies the jurisdiction that governs the agreement.
• Outlines how disputes will be resolved (e.g., arbitration or litigation).

Why Companies Use Subscription Agreements

• Legal Protection – Ensures clarity in investor-company relationships.
• Fundraising Tool – Helps private companies raise capital efficiently.
• Regulatory Compliance – Ensures investments follow securities laws.
• Prevents Misunderstandings – Clearly defines rights, restrictions, and obligations.

Subscription Agreement vs. Share Purchase Agreement

Feature	Subscription Agreement	Share Purchase Agreement
Purpose	Used for new share issuance	Used for buying existing shares
Involves Company?	Yes, company issues shares	No, existing shareholders sell shares
Regulatory Compliance	High, subject to securities laws	Lower, depends on private transaction rules

FAQs

What is a subscription agreement?

A subscription agreement is a contract between a company and an investor outlining the terms for purchasing shares or ownership interests.

Who uses subscription agreements?

They are commonly used in private equity, venture capital, real estate partnerships, and private placements.

Are subscription agreements legally binding?

Yes, once signed, both parties are legally obligated to fulfill their commitments.

What is the difference between a subscription agreement and a stock purchase agreement?

A subscription agreement involves purchasing newly issued shares, while a stock purchase agreement involves buying existing shares.

Do subscription agreements apply to public companies?

No, they are primarily used for private companies, startups, and limited partnerships.

Can an investor withdraw from a subscription agreement?

It depends on the terms. Some agreements allow withdrawal under specific conditions, while others are binding upon execution.

What happens if a company breaches the subscription agreement?

The investor may have legal recourse, including refunds, compensation, or enforcing the contract.

Are subscription agreements required for all investments?

No, but they are commonly used for private securities offerings to ensure transparency and legal compliance.

Do subscription agreements need to be notarized?

Not usually, but some jurisdictions or investment structures may require notarization.

How can investors protect themselves in a subscription agreement?

By reviewing disclosures, assessing risks, ensuring legal compliance, and consulting a financial advisor or lawyer before signing.