Subscription Agreement

What Is a Subscription Agreement?

A subscription agreement is an investor's application to join a limited partnership (LP). It is likewise a two-way guarantee between a company and another shareholder (subscriber). The company consents to sell a certain number of shares at a specific price and, in return, the subscriber vows to buy the shares at the foreordained price.

Figuring out Subscription Agreements

Extensively defined, a partnership is a business agreement between at least two individuals who all have personal ownership in the business. The partnership substance doesn't pay taxes. All things considered, the profits and losses flow through to each partner. Partners will pay taxes on their distributive share of the partnership's taxable income in view of a partner agreement. Law firms and accounting firms are many times formed as broad partnerships.

In a LP, a general partner deals with the partnership substance and gets limited partners utilizing a subscription agreement. Candidates buy into become limited partners. Subsequent to meeting standard requirements, the general partner chooses whether to acknowledge the candidate.

Limited partners act as silent partners by giving capital, typically a one-time investment, and have no material participation in the business' operations. Accordingly, partners ordinarily have almost no voice in the everyday operations of the partnership and are presented to less risk than full partners.

Each limited partner's exposure to business losses is limited to that partner's original investment. The subscription agreement for joining the LP depicts the investment experience, complexity, and net worth of the expected limited partner.

How Subscription Agreements Are Regulated

Subscription agreements are generally covered by SEC Rules 506(b) and 506(c) of Regulation D. These limitations characterize the method of directing an offering and the amount of material information that companies are required to uncover to investors.

As new limited partners are added to an offering, general partners get the consent of existing partners before revising the subscription agreement. Raising capital through a Reg D investment includes meeting essentially less onerous requirements than a public offering. This permits companies to save time and sell securities that they could not in any case have the option to issue now and again.

Subscription Agreements With Private Placements

At the point when a company wishes to raise capital, it will frequently issue shares of stock for purchase by either the overall population or through a private placement. The primary disclosure form for potential overall population investors is a prospectus. The prospectus is a disclosure document listing information about the business and its underlying security.

A private placement is a sale of stock to a limited number of accredited investors who meet specific criteria. The criteria for accredited status incorporate having a specific level of investment experience, assets, and net worth. Investors will receive a private placement memorandum as an alternative to the prospectus. The memorandum gives a less exhaustive description of the investment.

By and large, a subscription agreement accompanies the memorandum. A few agreements frame a specific rate of return that will be paid to the investor, for example, a specific percentage of company net income or lump sum payments.

Likewise, the agreement will characterize the payment dates for these returns. This structure gives priority to the investor, as they earn a rate of return on the investment before company founders or other minority owners.

Features

• Regulation D lets companies doing specific types of private placements raise capital without expecting to register the securities with the SEC.
• A subscription agreement is an agreement that characterizes the terms for a party's investment into a private placement offering or a limited partnership (LP).
• Rules for subscription agreements are generally defined in SEC Rule 506(b) and 506(c) of Regulation D.