Subscription Agreement

A Subscription Agreement is essentially a formal promise between an investor and a company. Think of it as a detailed pre-order form for new, unissued company shares. When a company wants to raise capital without going through a full-blown public offering—a process known as a Private Placement—it turns to a select group of investors. This agreement is the legally binding contract that seals the deal. The investor agrees to buy a specific number of shares at a predetermined price, and the company agrees to sell them. It's not just a simple handshake; this document lays out all the nitty-gritty details and conditions of the investment. It’s the company's application for an investor's capital and the investor's commitment to subscribe to the offering. For many private investments, especially in startups, venture capital, and private equity funds, the Subscription Agreement is the central document governing the transaction.

This agreement isn't just a single page. It's a comprehensive document designed to protect both parties. While they can vary, most will contain a standard set of ingredients.

• The Offer: Clearly states the number of shares (or partnership units) the investor is subscribing to and the price per share.
• Investor's Promises (Representations and Warranties): This is where the investor certifies certain facts about themselves. Most importantly, they often need to confirm they are an Accredited Investor or a Qualified Institutional Buyer (QIB), meaning they meet specific income or net worth thresholds set by regulators like the Securities and Exchange Commission (SEC). This proves they are sophisticated enough to understand the risks of a private investment, which isn't subject to the same disclosure rules as public stocks.
• Company's Promises (Representations and Warranties): The company also makes its own set of promises, confirming that it is legally established, has the authority to issue the new shares, and that the information it has provided to the investor is accurate.
• Terms and Conditions: This section covers the “how” and “when,” including payment instructions, the closing date of the transaction, and any conditions that must be met before the deal is finalized.

For a value investor, any investment is a business transaction, and the Subscription Agreement is the rulebook for that transaction. It’s not just legal boilerplate; it’s a treasure trove of information that goes straight to the heart of your Due Diligence.

Reading a stock's annual report is one thing; getting to see the raw terms of a capital raise is another. The Subscription Agreement gives you a direct look at the price insiders or sophisticated investors are paying. If a company is raising money at $5 per share while its publicly traded stock is at $10, you need to ask why. The agreement can also reveal the company's immediate capital needs and its own assessment of its valuation, providing crucial context that you won't find in a press release. It forces you to evaluate the investment on the same terms as the professionals involved.

The devil is always in the details, and a Subscription Agreement is full of them. A careful read can uncover terms that dramatically affect the value and risk of your investment. Pay close attention to:

• Lock-up Period: This clause prevents you from selling your shares for a specified period, often ranging from six months to several years. This is a critical liquidity constraint. You might have found a fantastic bargain, but if you're locked up, you can't cash out, even if the public market price soars.
• Registration Rights: These are incredibly important. They give an investor the right to require the company to register their private shares with the SEC, making them publicly tradable. Without these rights, you could be stuck holding illiquid shares indefinitely.
• Special Terms: Look for any unique or unusual clauses. Are there anti-dilution provisions? What are the voting rights associated with these new shares? Are there any specific covenants that restrict the company's future actions? These terms can either protect your investment or put it at greater risk.

Imagine a private tech startup, “Innovate Inc.,” needs $2 million to develop a new product. Instead of a costly IPO, they decide on a private placement. They approach Jane, a value investor who qualifies as an accredited investor. Innovate Inc. offers to sell her 200,000 shares at $10 per share. To finalize this, they both sign a Subscription Agreement.

1. Jane's Role: She fills out a questionnaire in the agreement, confirming her accredited status. She wires the $2 million as instructed. She acknowledges that the shares are restricted and subject to a one-year lock-up period.
2. Innovate Inc.'s Role: The agreement warrants that the company is in good legal standing and has authorized the issuance of these new shares. It also grants Jane registration rights after the lock-up period expires.

Once signed and the money is transferred, the agreement becomes binding. Jane is now a shareholder in Innovate Inc., and her investment is governed by the terms she carefully reviewed in the Subscription Agreement.