Subscription Agreement

What Is a Subscription Agreement?

A subscription agreement is a contract between an investor and an issuer, the company or fund selling securities. In it, the investor agrees to purchase a stated amount of equity or other securities at a set price or on specified terms. It is most common in private placements, where shares or fund interests are sold without a public offering, but it also appears in some public offerings and in new company formations.

How It Works

Before an investment closes, the issuer typically sends the investor a subscription agreement along with offering documents such as a private placement memorandum. The investor fills in details like the number of units or the dollar amount they wish to buy, then signs the document. The issuer reviews it and decides whether to accept. Acceptance is often the step that makes the purchase binding.

The document usually contains representations and warranties from the investor. Common ones state that the investor has read the offering materials, understands the risks, can afford a possible total loss, and meets the eligibility rules for the offering. Investors may also confirm that they are buying for their own account and not with the intent to resell right away, since privately sold securities often carry restricted securities status.

Why It Matters to Investors

For an individual investor, a subscription agreement is the binding document that defines what they are actually buying and what they promise about themselves. Reading it carefully matters because it can include terms on transfer restrictions, indemnification for false statements, governing law, and how and when funds must be paid. Investors may also negotiate a side letter with the issuer that modifies certain terms for them alone.

Because private offerings often have limited liquidity and fewer disclosure requirements than public markets, the subscription agreement is one of the main places where the terms are spelled out. Investors who do not read it closely may be surprised by obligations they accepted when signing.