Subscription Agreement

A Subscription Agreement is a contract between an issuer and an investor in a private securities offering. The agreement documents the investor's commitment to purchase securities and provides investor representations regarding accredited status, sophistication, suitability, and other matters relevant to securities exemption compliance. Subscription agreements are foundational to private placement compliance, they document the issuer's basis for relying on Reg D or other exemptions and provide defensive documentation against subsequent investor claims.

Standard subscription agreement components

Comprehensive subscription agreements typically include: (1) recitals, describing the offering and parties; (2) commitment to purchase, investor agrees to purchase specified amount of securities at stated price; (3) investor representations, extensive representations supporting exemption compliance; (4) investor questionnaire, accredited investor verification, sophistication, investment experience; (5) conditions to closing; (6) delivery and payment mechanics; (7) indemnification, investor indemnifies issuer for breach of representations; (8) governing law and dispute resolution; (9) signature pages.

Investor representations

Standard investor representations include: (1) accredited investor status, specific category claimed (income, net worth, professional certification, etc.); (2) investment experience, sophistication and ability to evaluate investment; (3) investment intent, purchase for own account, not for distribution; (4) residence, state of residence (relevant for state-law compliance); (5) access to information, opportunity to ask questions and obtain additional information; (6) review of disclosure, receipt and review of PPM, financial statements, etc.; (7) independent investment decision, relied on own analysis, not issuer representations beyond the disclosure documents; (8) risks understood, investor understands and accepts investment risks; (9) no public solicitation (for Rule 506(b)), investor not solicited through public communications; (10) OFAC compliance, not a sanctioned person.

Investor questionnaire

The investor questionnaire is typically attached to or integrated with the subscription agreement: (1) accredited investor checkbox, investor selects qualifying category; (2) net worth/income certification; (3) investment experience; (4) employment and finance background; (5) investment objectives; (6) tax status; (7) OFAC and AML certifications; (8) other suitability information. The questionnaire creates contemporaneous documentation of investor qualification, useful if the SEC or the TSSB later questions the exemption.

Verification documentation (Rule 506(c))

For Rule 506(c) general solicitation offerings, subscription agreements typically include or reference verification documentation: (1) income verification, tax returns, W-2s, K-1s; (2) net worth verification, bank statements, brokerage statements, real estate appraisals, credit reports; (3) third-party verification, written confirmation from a CPA, licensed attorney, registered broker-dealer or SEC-registered investment adviser. The subscription agreement typically requires investor to deliver verification or authorize third-party verification before closing. Many issuers use third-party verification services to streamline the process.

Indemnification

Subscription agreements typically include investor indemnification of issuer for: (1) breach of investor representations, particularly accredited status and investment intent; (2) misrepresentation in questionnaire; (3) resale violations, investor reselling in violation of securities laws. The indemnification protects issuer if investor's representations turn out to be false (e.g., investor was not accredited despite certification), shifting cost to the investor. The indemnity does not preserve the exemption, which depends on whether the issuer reasonably believed the purchaser was accredited or, in a Rule 506(c) offering, took reasonable steps to verify that status.

Closing mechanics

Subscription agreements typically provide for: (1) conditional acceptance, issuer reserves right to accept or reject subscription; (2) delivery of funds, wire transfer or escrow procedure; (3) delivery of securities, typically electronic delivery or paper certificates; (4) execution of additional documents, joinder to investor agreements, voting agreements, ROFR/co-sale agreements as applicable. Many private offerings have specific closing procedures (rolling closes, milestone closes).

Common drafting issues

Recurring issues: (1) vague accredited investor representations that do not identify a specific category; (2) missing investment intent representations, relevant to the issuer's reasonable care under Rule 502(d) that purchasers are not underwriters; (3) missing residence and OFAC certifications, important for state-law and AML compliance; (4) weak indemnification that does not reach breaches by the investor; (5) governing law issues, typically state of issuer's incorporation or state with broader rights; (6) arbitration provisions, increasingly common; subject to FAA enforcement; (7) integration with side letters, sophisticated investors often negotiate side letters with additional terms.