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Subscription Agreement Review

September 21, 2023
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A subscription agreement is a legally binding contract between a company and an investor, sometimes called a subscriber. This legal document outlines the terms and conditions that govern the purchase of company shares and ownership interests or securities in the company.

Subscription agreements are commonly used in private placements, venture capital, and startup funding rounds to formalize investment transactions. This contract helps ensure that all parties are following securities laws and regulations.

How Do I Review a Subscription Agreement?

It is crucial to carefully review a subscription agreement before agreeing to the terms of the transaction. A comprehensive contract review will involve the following steps:

  1. Read the agreement. Start by reading the entire subscription agreement from beginning to end. Pay attention to every clause, definition, and provision and make notes of any terms that may need to be clarified or renegotiated.
  2. Review the specifics. Focus on the specifics of the contract which can include the number and type of shares or ownership interests you are purchasing, transfer restrictions, and representations and warranties.
  3. Double check the financial terms. Examine the payment terms and be sure you understand how and when you are required to make payments. Review the purchase price, total investment amount, payment schedules and deadlines.
  4. Be prepared to negotiate. If you are unhappy or uneasy with any terms or conditions on the subscription agreement, be prepared to renegotiate more favorable terms.
  5. Consult a lawyer for contract review. It is highly recommended to hire a lawyer to review your subscription agreement.

While it is possible to review your own subscription agreement, many investors and companies choose to hire lawyers to assist in the transaction. A lawyer can check the contract for mistakes and ensure that it follows all applicable securities laws in your jurisdiction.

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What Should I Look for in a Subscription Agreement?

When reviewing a subscription agreement, you should look for the following key components:

  • Subscription terms. Subscription terms will include the number of shares or ownership interests, purchase price, and payment schedule.
  • Payment and funding. How and when the investor is required to make payments and what payment method must be used.
  • Ownership rights. The investor’s ownership rights and privileges associated with the subscribed shares or interests like voting rights, dividends, and participation in company decisions.
  • Transfer restrictions. Any restrictions on transferring or selling shares or interests.
  • Use of funds. An outline of how the company plans to use the funds raised through the subscription.
  • Governing law. The jurisdiction and governing law that will control the agreement.
  • Confidentiality clauses. Provisions to ensure that sensitive information, like company financial statements, is adequately protected.
  • Amendment and waiver procedures. A detailed outline of the process to amend the agreement or waive terms, like transfer restrictions.
  • Risks and disclosures. The section that outlines potential risks associated with the investment. All material risks that may affect the value of your investment should be disclosed.
  • Termination and default. The conditions under which the agreement can be terminated or considered in default. This section should also detail any potential consequences of early termination or default for both parties.

Subscription agreements can be complicated and depending on the needs of the parties, the agreement may require additional clauses. It is always a good idea to speak with a lawyer familiar with securities law when determining what terms and conditions need to be included in your subscription agreement.

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Is a Subscription Agreement Legally Binding?

Yes, a subscription agreement is legally binding. Once all parties sign the contract, they agree to be held to the terms within the agreement. This means that each party will be responsible for upholding their end of the deal which can include payment obligations, ownership rights, and obeying any agreed upon restrictions laid out in the contract.

When a contract is legally binding, that means that if either party breaches the contract, the nonbreaching party can be held legally responsible for any damage sustained because of the breach. For this reason, it is important that each party fully understands their rights and obligations prior to executing the agreement.

How Do I Get Out of a Subscription Agreement?

Whether or not you can get out of a subscription agreement depends on the terms and conditions outlined in the agreement. Some common ways that parties can terminate a subscription agreement include:

  1. Mutual agreement. The parties can agree to terminate the contract through an amendment or termination agreement.
  2. Termination clause. Some subscription agreements may include termination clauses that allow parties to get out of the agreement under certain conditions. This section should include notice periods and possible consequences for early termination.
  3. Breach of contract. If either party breaches the contract, the nonbreaching party may have grounds for termination or legal action.
  4. Regulatory changes: Securities law is often changing and evolving. If a change in laws or regulations affects the validity or legality of the subscription agreement, the contract can usually be terminated.

Terminating a subscription agreement without cause and without proper procedure can have legal consequences and could result in penalties or even a lawsuit. Always consult with a knowledgeable attorney before taking any action to terminate a subscription agreement.

Who Signs a Subscription Agreement?

A subscription agreement is typically signed by the two parties entering the agreement: the “issuer” and the “subscriber”.

The issuer is the entity, often a company, offering the securities for sale. When the issuer signs the subscription agreement, it confirms its willingness to issue and sell the securities to the subscriber.

The subscriber is an investor who is purchasing the securities. By signing the contract, the investor agrees to buy the specified number of shares or ownership interests outlined in the agreement.

Should I Hire an Attorney to Review My Subscription Agreement?

Yes. It is always advisable to hire an attorney to review your subscription agreement. Subscription agreements often facilitate complex financial transactions, so it is important that the contract is well drafted and free from mistakes.

Hiring a lawyer to conduct contract review provides the following benefits:

  1. Lawyers who specialize in securities laws and contract law will ensure that your subscription agreement complies with all relevant laws and regulations in your jurisdiction.
  2. Your attorney will review the terms and conditions with your best interests in mind to ensure that the terms align with your investment goals and protect your rights.
  3. Your lawyer can identify unfair terms and advocate on your behalf for a fair and mutually beneficial contract.
  4. Attorneys can identify and help mitigate potential risks associated with the investment to help prevent future disputes or losses.
  5. If a disputes or breaches of contract arises, having an attorney familiar with the subscription agreement can be invaluable for pursuing legal remedies.

While hiring an attorney for subscription agreement review may incur costs upfront, it is a valuable investment. When a lawyer reviews your subscription agreement, it can provide peace of mind, legal protection, and a clearer understanding of the investment's terms and conditions.

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