What Is a Subscription Agreement?
Let me explain what a subscription agreement really is. It's essentially your application as an investor to join a limited partnership (LP). Think of it as a two-way guarantee: the company commits to selling you a specific number of shares at a set price, and in return, you promise to buy those shares at that price.
Key Takeaways
- A subscription agreement defines the terms for your investment in a private placement or limited partnership (LP).
- These agreements follow rules outlined in SEC Rule 506(b) and 506(c) of Regulation D.
- Regulation D allows companies to raise capital through certain private placements without registering securities with the SEC.
Understanding Subscription Agreements
To understand this better, consider that a partnership is a business agreement between two or more people who own the business personally. The partnership itself doesn't pay taxes; instead, profits and losses pass through to each partner, and they pay taxes on their share based on the partner agreement. You'll see this in law firms and accounting firms, which are often general partnerships.
In a limited partnership (LP), a general partner runs the show and brings in limited partners via a subscription agreement. If you're a candidate, you subscribe to become a limited partner, and after meeting the requirements, the general partner decides if you're in.
As a limited partner, you're basically a silent partner—you provide capital, often as a one-time investment, without getting involved in daily operations. This means you have little say in how things run and face less risk than full partners.
Your exposure to losses is capped at your original investment. The subscription agreement spells out your investment experience, sophistication, and net worth as a potential limited partner.
How Subscription Agreements Are Regulated
Subscription agreements fall under SEC Rules 506(b) and 506(c) of Regulation D. These rules dictate how offerings are conducted and what material information must be disclosed to investors like you.
When adding new limited partners, general partners need consent from existing ones before updating the agreement. Using Reg D for raising capital is far less burdensome than a public offering, saving time and enabling sales of securities that might otherwise be off-limits.
Subscription Agreements With Private Placements
When a company needs to raise capital, it might issue shares to the public or through a private placement. For public investors, the key document is a prospectus, which details the business and its securities.
A private placement sells stock to a select group of accredited investors who meet criteria like investment experience, assets, and net worth. Instead of a prospectus, you get a private placement memorandum, which offers a less detailed overview.
Often, a subscription agreement comes with the memorandum. Some agreements specify a rate of return, like a percentage of net income or lump sums, and outline payment dates. This setup prioritizes you as the investor, ensuring returns before founders or minority owners get theirs.
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