What is Subscription Agreement Drafting?
A subscription agreement is a legal contract signed by an investor and a company. An investor purchases shares or securities at an agreed-on price, and details are included in the contract.
The agreement also includes obligations pertaining to the purchase and sale of shares, such as payment terms and what conditions are required for closing.
If you need to draft a subscription agreement, you’ll need to consider what key terms it should include and how to draft it professionally to prevent disputes.
Read the rest of this article to explore these documents and why you should work with a lawyer to help you through the subscription agreement drafting process.
What Key Terms Should Be in a Subscription Agreement?
A subscription agreement usually includes the following essential terms:
- Investment details. This provides the exact number and type of shares being bought as well as the price per share.
- Investor information. This details the investors’ information, such as their names and contact details.
- Representations and warranties. Both the company and investor make statements. The company might state that they are legally allowed to issue shares, while the investor might state that they are accredited.
- Conditions. This specifies the conditions to be met prior to closing the transaction.
- Risk disclosure. All risks involved in the investment must be specified to inform the investor.
- Termination. Should either party want to exit the agreement, the document should specify the process required.
- Disputes. To resolve conflict between the company and investor, the agreement explains effective dispute-resolution methods, such as mediation or arbitration.
What are Tips for Drafting a Subscription Agreement?
When drafting a subscription agreement, there are some important things to bear in mind and include for clarity and transparency between parties.
Understand the Regulations
A subscription agreement is governed by certain rules established by the U.S. Securities and Exchange Commission (SEC). These are Rule 506(b) and 506(c) of Regulation D.
- Rule 506(b). Under this rule, companies can raise an unlimited amount of capital via private placements, without needing to register them with the SEC. They’re not allowed to promote or advertise the offering as it has to be private. Unlimited accredited investors and up to 35 non-accredited investors can take part.
- Rule 506(c). This rule states that companies can publicly promote and advertise their offerings, but all investors must be accredited.
Consider Warranty Provisions
It’s common for warranties made in a subscription agreement to be general in nature. Protect your company by writing a provision that it’s not responsible for a breach of warranty.
Think About Transfer Restrictions
The subscription agreement might restrict the investor’s ability to transfer securities, such as if the company wants to avoid unregistered or unwanted transfers. Restrictions could include right of first refusal or company approval rights.
Include Dispute Resolution
A subscription agreement should include the governing law and jurisdiction so that disputes arising between parties can be handled quickly and effectively.
Dispute-resolution methods, such as mediation or arbitration, should be included so that parties know what to do in the case of conflict. This can serve to keep disputes out of court, reducing legal costs.
Align it with Other Documents
To prevent legal issues, the subscription agreement should be aligned with other company documents, such as operating agreements or shareholder agreements.
What are Benefits of a Subscription Agreement?
A subscription agreement has various advantages, such as the following:
- Reduced liability. Investors are limited partners and not liable for the company’s duties or debts.
- One-time investment. The agreement involves a lump-sum investment.
- Company influence. In some cases, investors might be able to guide the company and influence its management, such as in early-stage companies.
Do You Need to Hire a Lawyer for Subscription Agreement Drafting?
It’s advisable to hire a lawyer for subscription agreement drafting because they will keep you compliant with all securities laws and reduce the risk of lawsuits. Here are some things a lawyer can do during the contract drafting process:
- Tailor the subscription agreement to the specific transaction, such as by considering the type of company, its capital-raising goals, and more.
- Draft a solid representations and warranties clause that protects parties.
- Protect the company from obligations that are unintended, which can occur in poorly-drafted agreements.
- Coordinate the subscription agreement with other company documents for consistency.
- Make provisions enforceable, such as dispute-resolution methods.
- Limit liability by drafting the agreement with precise and simple language. They’ll avoid broad, absolute statements that can be misinterpreted.
- Protect confidential information, such as trade secrets, that can put the company at a disadvantage if exposed.
- Explain all investor rights and restrictions, such as inspection and transfer restrictions.
- Identify any risks to the company early, such as ownership disputes or tax concerns.
Where to Find a Lawyer for Subscription Agreement Drafting
If you need to hire a lawyer to draft your subscription agreement, you can easily locate a qualified lawyer on an online legal platform such as ContractsCounsel.
ContractsCounsel is one of the largest online legal marketplaces that gives you access to a curated network of vetted lawyers. All lawyers on the platform have the experience to draft balanced and legal contracts to protect your interests.
To request that a qualified lawyer on the ContractsCounsel platform drafts your agreement, follow these easy steps.
1. Go to the ContractsCounsel marketplace and post your project for free. You can include some details of what you require, or your reason for requesting the drafting, so that you’re matched with the most suitable lawyers.
2. Wait for lawyer bids. You’ll receive multiple bids from lawyers directly on the platform.
3. Review the lawyers' profiles. The platform provides extensive lawyer data, such as location, client ratings, years of experience, field of expertise, and previous projects completed on the platform.
4. Connect with a lawyer who matches your legal requirements and hire them to draft your subscription agreement.
