When a company thoughts regarding the expansion, at the back of mind somewhere there is also a definite desire to grow capital too. Likewise, investors also see the business as a good foundation for growth and capital appreciation. Clearly, in such type of scenario, one party will want to sell the shares, while the other will want to buy that same shares. This is the time when parties use the Share Subscription Agreement (SSA). In such an agreement, the price is fixed and so does the number of shares.
What Is a Share Subscription Agreement?
Share Subscription Agreement is between a company and any private investor for selling a pre-defined number of shares at a decided price. This investor fills out a form documenting his/her suitability for investing in the partnership. This type of agreement may also be utilized to sell any stock in a privately-owned business.
The share subscription agreement is used to keep track of how many shares have been sold and at what price the shares sold at for a privately held company. These agreement details all the information about the transaction, such as the number of shares and price, and confidentiality provisions. Such agreements are most common with start-ups and smaller companies, they’re used when business owners don’t have the resources to work with venture capitalists or to take the company public.
Why Are Share Subscription Agreements Important?
For companies that need more funding, it’s a way to do it without taking a company public or finding venture capitalists to invest. Investors enter into a limited partnership, these investors are only obligated or expected to make a one-time investment. It limits the risk significantly, but it also limits the say investors have in company decisions.
Share Subscription agreements rely on SEC Rule 506(b) and 506(c) of Regulation D. The stipulations within those rules include:
- How companies can or cannot solicit investors;
- What information is shared with investors;
- Who is allowed to invest?
When to Use a Share Subscription Agreement
Basically, private companies try to use such agreements as they want to raise their capital from the investors that are particularly private. This can be achieved by selling either shares or the company’s own without needing to even register with the SEC. Companies that have a particular private placement memorandum may/might also want to include such an agreement to attract any possible investor.
Generally, investors try to protect themselves against companies by amending the terms of the deal numerously. As a company selling stocks or shares, these agreements prevent an investor from changing his/her mind right before the investor gets into the deal. Keeping a share subscription agreement will always help in solidifying any promise into a sure shot fixed transaction.
Common clauses in Share Subscription Agreements
These type of agreements may vary that too greatly, depending on the prime needs of the investing parties and the said types of shares that are being subscribed for, the common clauses include:
- Conditions Precedent: The acts which are required to be committed before the agreement came into force;
- Confidentiality: Both the parties are usually obliged to keep all confidential information confidential;
- No-Shop: Obliging the company to limit its search for further capital in any particular fashion;
- Restraint against Competition: The subscriber must be restrained from engaging in a business or activity that would be in competition with the business of the defined company;
- Tranches: Amount of money to be paid to the company by the subscriber in exchange for an agreed amount of shares at a prescribed time; and
- Warranty and Indemnity: The said subscriber may also warrant that they are able and also willing to meet their obligations under the given agreement, and may also indemnify the company against stated claims and losses.
Advantages and Disadvantages of SSA
If we talk about investing, there will definitely be some good and bad in choosing to do so using the share subscription agreements, which are as follows:
Advantages of the Share Subscription Agreement
- Subscription agreements provide a way to sell stock without registering securities with the Securities and Exchange Commission (SEC). Creating the prospectus needed for registering with the SEC is time-consuming and expensive.
- It’s a one-time investment, unlike venture capitalist investing, which requires much more time and typically multiple investments.
- It’s not such a huge time commitment because you’re a silent partner in the investment.
- It’s a limited partnership, so there’s no worry about being liable.
Disadvantages of SSA
- There are no voting rights and no way to help the business be successful. You have to trust that the leaders of the business know what they’re doing.
- Once you’ve invested your money, there’s no way to get the money back if you change your mind.
These type agreements are not as complex as they are made to sound like. Ultimately it’s about two parties committing to buying and selling, it secures a hopefully good price for the investor. Similarly, the said business also gets an investor to commit to buying their company shares.
Need legal services in Delhi for raising capital or drafting and vetting of documents? LetsComply’s legal experts can help you in drafting an SSA for your business. To know more, call us at +91-9717070500 or send an email at email@example.com