Drafting and negotiation of subscription agreements for direct equity investments.
The instrument for a direct equity purchase
A subscription agreement documents an investor's direct purchase of shares or membership interests at an agreed price, as opposed to the deferred-equity mechanics of a SAFE or convertible note. It is typically used for priced rounds, real estate syndications and fund investments.
Investor representations
Subscription agreements require the investor to make specific representations, most importantly confirming accredited investor status where the offering relies on an exemption that depends on it, along with representations about investment intent and sophistication.
Closing mechanics for multiple investors
- Initial and subsequent closings: allowing a company to admit investors in stages as funds are committed.
- Minimum and maximum offering amounts: thresholds that may need to be met before any closing occurs.
- Escrow arrangements: holding subscriber funds until closing conditions are satisfied.
- Company acceptance: the company's right to accept or reject a subscription in its discretion.
Coordinating with securities compliance
The subscription agreement works together with the offering's overall securities-compliance framework: the applicable exemption, any offering memorandum or disclosure document and required federal and state notice filings. These pieces should be prepared as a coordinated set, not independently.
Process
- 1
Prepare offering documents
Draft the subscription agreement alongside any offering memorandum and disclosure materials.
- 2
Confirm exemption
Verify the applicable securities exemption and investor eligibility requirements.
- 3
Close
Execute subscription agreements, collect funds and complete any required notice filings.
- 4
Update records
Reflect the new investor in the company's capitalization table and governing documents.
Answers
Frequently asked questions
- What is the difference between a subscription agreement and a SAFE?
- A subscription agreement documents an immediate purchase of actual shares or membership interests at an agreed price, while a SAFE grants a right to future equity that converts later, typically without an immediate valuation being fixed.
- What representations do I make as an investor signing a subscription agreement?
- Common representations include confirming accredited investor status if relevant to the offering's exemption, confirming the investment is for the investor's own account and acknowledging the risks and illiquidity of the investment.
- Can a company reject my subscription?
- Typically yes, if the subscription agreement reserves that right, which is standard in most private offerings. The company is generally not obligated to accept every subscriber who submits funds.
- What happens if the offering doesn't reach its minimum funding target?
- If the offering has a stated minimum, funds are typically held in escrow and returned to investors if the minimum is not reached by the offering's deadline, as specified in the subscription agreement and escrow arrangement.
- Does signing a subscription agreement complete my investment?
- Generally, the investment is complete once the agreement is executed, funds are received and the company formally accepts the subscription: all of which should be clearly documented for the company's records and the investor's protection.
Official sources
Consult the official sources above for current rules and procedures.