The idea of a subscription agreement may not be one you’re familiar with. Simply put, a subscription agreement is an agreement where a business promises to sell a specific number of shares to an investor at a given price, and the investor agrees to pay that price. Many businesses and investors use this sort of arrangement. There are pros and cons to this sort of arrangement. Here are some of the things that you’ll need to weigh when you’re making a decision about entering into a subscription agreement.
Accredited Investor Criteria
There are certain requirements that need to be met to be considered an accredited investor. These criteria can apply to individuals or other types of financial institutions that have a high net worth and a consistent income. The point of creating these criteria is to protect companies that want to complete these sorts of transactions with investors. Only entering into subscription agreements with those that are accredited investors ensures that businesses won’t lose the money if things don’t work out.
Obtain Legal Counsel
There are loopholes and other things that need to be taken into account when businesses are entering into an agreement. Using a securities law attorney will ensure that all of the rules are followed in order to protect your investment. For example, an escrow account should be established if you’re trying to raise funds for your startup business. This step protects the investors who entered into the agreement if you aren’t able to fulfill your end of the bargain.
Limiting Factors
Whether you’re the business or the investor, there are limiting factors that need to be considered as a part of this arrangement. For basic subscription agreements, the investors are silent partners. What this means is that investors have limited say in how the funds are utilized. Unlike traditional investment, investors won’t have any voting rights. On the plus side, this protects them against any personal liability if the financial business matters are being mishandled.
Means to an End
Many companies enter into this type of agreement because they don’t want to take the time to jump through all of the hoops required by the SEC. It also saves businesses money in the long-run because they may be able to get more back on their initial investment if the company does well. Research as much as possible before signing on to this agreement in order to mitigate your chances of losing out. As with any type of investment, funding a new venture comes with inherent risk but can offer great rewards. So consider a subscription agreement as a way to fund your business ventures.
Know the facts before you decide to enter into a subscription agreement. Use these tips to get you started down the path to a successful venture and partnership with investors or businesses. By understanding the pros and cons of subscription agreements, you will be able to take your business investments to the next level.
