A subscriber is a private investor in a company. So, the subscription agreement is used as a promise to sell a given number of shares to the investor by the company. On the other hand, the agreement is the investor’s guarantees to pay a certain price for the shares.

If any company wishes to sell certain company’s stock to the investor, it is imperative to nail down the deal in the subscription agreement.

What Is a Subscription Agreement?

A legal agreement between two parties, the service provider and the subscriber, that provides complete details of the subscription, such as cost, length, and the cancellation procedure is a subscription agreement.

This agreement is normally used to receive payment from investors in return for equity shares. It is created before a private offering memorandum to provide information on the quantity of equity and its price tag, business information, and involved lists and disclaimers.

Why Are Subscription Agreements Important?

The subscription agreement is needed to make the company and the investor agree on the buying price of the shares of the business. It describes the warranties and the representations that shall be mutually agreed upon by both parties.

It is imperative to enter into the agreement so that any future misunderstanding and chaos shall be avoided to a great extent. It also saves time and money and fasts forward to the closing of the deal as all the queries of the investors can be resolved from this agreement.

Moreover, the investor can make an informed decision by going through the details of the agreement as they know what they are signing for.

When to Use a Subscription Agreement?

The subscription agreements are useful for the following:

  • A private company needs to raise capital from private investors through their shares or ownership of the company without the need to register with the SEC.
  • A company having a private placement memorandum in place wants to add a subscription agreement for potential investors.

So, whether an individual private investor or a company that is willing to invest in another, a subscription agreement helps to state the details of the transaction like the share price and the quantity of the shares.

Moreover, investors can protect themselves in case the company changes the terms of the deal without confrontation. On the other hand, the company can protect themselves in case the investors change their mind at the last minute.

What Are the Components of a Subscription Agreement?

Here are a few components the parties shall include in their agreement:

  • Parties: Both the parties, the company, and the investors shall provide all their details like name, addresses, contact number, and more.
  • Complete shares details: The agreement shall include everything about the type, amount, and price of shares to be sold to the investors.
  • Consideration: Here, the purchase prices of the shares need to be mentioned. Details of the purchase price, how and when the investors will pay.
  • Covenants and representations: This term binds the parties to refrain from doing certain things. Subscribers need to ensure that they will follow certain restrictions on the transferability of the subscriber’s membership.
  • Completion: The final grant of title and ownership of the shares to the investor is completion. Here, the date and place of completion and the requirement of the parties after completion shall be mentioned.
  • Termination: In case any of the parties decide not to continue with the agreement, termination occurs. However, it is crucial to put the terms of termination so that in case of breach of any of the terms. Some fair penalty could be imposed.
  • Acceptance: Both parties need to duly sign the agreement to acknowledge that they have read and agree to all the above-mentioned terms.
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