What is a subscription agreement?
A subscription agreement is a contract by which an investor agrees to buy securities (often shares or a partnership interest) from an issuer at a specified price. In the context of limited partnerships (LPs) and private placements, it serves as the investor’s application and the issuer’s offer, documenting the terms of the investment and representations about the investor’s qualifications.
How it’s used in limited partnerships
- General partner (GP): manages the partnership and selects investors.
- Limited partner (LP): contributes capital, typically as a one‑time investment, and does not participate in daily operations.
- Liability: limited partners generally risk only their invested capital; they are not personally liable for partnership obligations beyond their contribution.
- Admission: candidates subscribe to become LPs; the GP evaluates eligibility and approves admissions. Adding new LPs or changing terms often requires consent from existing partners per the partnership agreement.
Role in private placements and Regulation D
- Private placements: securities are sold to a restricted group of investors rather than the public. Offerings commonly rely on Regulation D exemptions to avoid SEC registration.
- Common Reg D rules for subscription agreements:
- Rule 506(b): allows private offerings without general solicitation if investors are accredited (and a limited number of sophisticated non‑accredited investors).
- Rule 506(c): permits general solicitation if all purchasers are accredited and issuer takes reasonable steps to verify accredited status.
- Private placement memorandum (PPM): accompanies the subscription agreement, providing disclosure about the business, risks, and terms—less formal than a public prospectus but essential for investor decision‑making.
Typical terms and provisions
Subscription agreements commonly include:
– Purchase details: number and price of shares or partnership units.
– Investor representations and warranties: statements about experience, sophistication, net worth, and agreement to receive restricted securities.
– Accredited investor verification: documentation or procedures used to confirm accredited status (as required under 506(c)).
– Payment and closing terms: timing and method of capital contributions.
– Allocation of returns: priority, distributions, preferred returns or specified payouts, and payment dates.
– Transfer restrictions and resale limitations.
– Conditions to closing: required consents, regulatory compliance, and absence of material adverse changes.
– Indemnities, governing law, and dispute resolution provisions.
Explore More Resources
Investor eligibility and accredited status
Accredited investor criteria are intended to ensure participants can bear the risks of private investments. Common metrics include:
– Net worth thresholds (excluding primary residence) and/or income levels.
– Professional investment experience or licenses in some cases.
– Entity status (certain institutions, trusts, or accredited entities).
Issuers must follow the applicable Rule 506 verification standards when relying on Reg D exemptions.
Tax and regulatory considerations
- Tax treatment: Partnerships are generally flow‑through entities—profits and losses pass through to partners, who report them on individual returns. Consult tax counsel for specific consequences.
- Securities law: Use of Reg D exemptions reduces registration burdens but does not eliminate disclosure obligations or antifraud rules. Proper documentation and verification are essential to maintain the exemption.
Key takeaways
- A subscription agreement formalizes an investor’s purchase of securities in a private offering or admission to an LP.
- It includes investor warranties, purchase and payment terms, transfer restrictions, and conditions to closing.
- Many private placements rely on Regulation D (Rules 506(b) and 506(c)); 506(c) imposes verification requirements for accredited investors.
- Limited partners typically have limited liability, limited governance rights, and risk limited to their capital contribution.
- Legal and tax advice is important before subscribing to a private offering.
Sources
- U.S. Securities and Exchange Commission — Rule 506(b): Private Placements
- U.S. Securities and Exchange Commission — Rule 506(c): General Solicitation
- U.S. Securities and Exchange Commission — Accredited Investor standards
- Internal Revenue Service — Tax Information for Partnerships