Table of Contents
What Securities Services Can Easler Law Provide?
Easler Law can assist in drafting the necessary documents, managing subscribers, and complying with reporting obligations.
Here are a few of the types of services we can offer in securities and finance:
- Rule 144 Legend Removals
- General Opinion Letters
- Developing a Capital Investment Plan
- Selecting Financial Instruments
- Drafting Offering Memorandums and Prospectuses
- Drafting Subscription Agreements
- Establishing Real Estate Investment Trusts (REITs)
- Maintaining Shareholder/Subscriber Registries
- Holding Annual Meetings
- Transfer Agency Services
- EDGAR Filing and Reporting Services
- Applying for Government Funding
- Compliance with State and Federal Regulations
What Is a Subscription Agreement?
A subscription agreement is often used by startups and early-stage companies looking to raise capital through private investors instead of going public and registering with the SEC. The subscription agreement is a formal and legal contract between the company and a private investor, allowing the investor to purchase shares at a specified price to become a ‘subscriber’ – or shareholder – with private placement rights or a limited partnership (LP).
The subscription agreement serves to track the number of outstanding shares that have been sold and to whom, and the price of the shares, along with any other vital provisions. These may include confidentiality clauses, current disbursements, a guaranteed rate of return on investment, and more.
Because younger companies typically use subscription agreements, they are most commonly presented to angel investors, startup investors, and family and friends who wish to invest (as long as they are qualified buyers) because they have a personal relationship with the business owner.
How Are Subscription Agreements Regulated?
Subscription agreements are covered under SEC Regulation D, Rule 506. This is a safe harbor that makes it possible for companies in need of capital to raise funds without relying on venture capitalists or needing to take the company public. Some stipulations dictate how these securities can (and cannot) be marketed to potential investors and what information must be shared with investors. In addition, these SEC regulations state that only an accredited business or individual can purchase stock from a privately-held company. More on that below.
What Is Included in a Subscription Agreement?
The information included in a subscription agreement will vary from one contract to the next, which is one reason it’s crucial to engage an experienced business attorney when drafting one. A lawyer with extensive knowledge in securities aw will ensure your document is designed to protect your rights and interests while appealing to potential investors through clear and concise contractual language.
There are certainly commonalities between subscription agreements, and they will typically include certain critical pieces of information. These include:
- The number of outstanding shares
- The price of each share
- Specific payout terms
- The structure of share ownership
- Resolution (both shareholders and director’s)
- Minute books
- Indemnity and warranty
- Non-compete agreements
- Conditions precedent
- Confidentiality clause
This is by no means an exhaustive list. The subscription agreement may also contain provisions specific to the company that is selling shares.
What Is an Accredited Investor?
Under the Securities and Exchange Commission (SEC) Regulation D, an accredited investor is an investor who is financially sophisticated and has a lower threshold of the need of the protection provided by regulatory disclosure filings. Subscription agreements and other unregistered securities are deemed riskier than registered securities because they don’t come with all of the disclosures required for SEC registration. Purchasers must be able to tolerate the added fiscal risk.
To qualify as an accredited investor, an individual or business entity must satisfy at least one requirement as set forth by the SEC “based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth.” Accredited investors typically include individuals with a high net worth, banks and insurance companies, trusts, and brokers.
Because the SEC does not perform a formal assessment to determine eligibility for an accredited investor, it becomes the responsibility of the seller of the securities. They may determine their process to verify the qualifications of the individual or business entity that wishes to enter into the subscription agreement. The seller may use a questionnaire and require documentation, like tax returns, bank statements and/or credit reports.
What Are the Pros and Cons of a Subscription Agreement?
The pros of a subscription agreement include an attractive investment opportunity for investors with flexibility for the company to set their preferred terms and conditions. There is also a significant amount of transparency between the buyer and seller and the purchaser may secure some influence within the company without establishing a limited liability partnership.
The drawbacks primarily surround the potential risk of the investment. An investor could lose funds if things don’t go as planned. Investors do not receive liquidity or voting rights, so they have less control than they might in registered security. Another con is the lack of security oversight and the lack of firm deadlines that is built into regular securities and preferred shares.
Overall, subscription agreements can be an attractive offer for investors who seek short-term or one-time commitments that can offer long-term gain as long as they have the financial sophistication to whether the potential risk.
Do I Need a Lawyer to Draft a Subscription Agreement?
A subscription agreement is a legally-binding contract that should not be drafted without consulting an attorney experienced in business law and securities. The agreement should be written in a way that protects your company’s legal rights and holds up to any legal disputes that may arise in the future.
The Easler Law team has the expertise to ensure that the terms of your subscription agreement are clear, concise, and easily understood by potential investors. We’ll take the time to walk you through every option and make sure you know the meaning behind every clause and caveat. We’ll also make sure that you avoid any errors, legal or otherwise, that could prove costly down the line.
Are you interested in raising capital by selling unregistered shares to qualified and accredited investors through a subscription agreement? Schedule a consultation today, and let Easler Law help you understand all of your options. When you’re ready to move forward, we’ll cross every T and dot every I, so you can trust that your company’s contracts are structured in your own best interests while remaining attractive to potential investors
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