In a private placement offering, a company seeks to raise funds in the private capital market. In every private placement offering is the subscription agreement. The subscription agreement describes the type of offering (raising debt or selling equity), how many shares are being offered and the conditions to which the investor must abide by.
The U.S. Securities and Exchange Commission (SEC) does not regulate the content of a subscription agreement. However, a company that is raising capital must provide investors with information that is free from false or misleading statements. A company should not exclude any information if the omission makes what is provided to investors false or misleading.
Subscription agreements describe to the accredited investors the amount of stock being sold or the terms of the loan, the proposed share offering price and the qualifications necessary for investors in the company. Subscription agreements also provide information to the investor about the minimum investment amount and how many shares that minimum investment represents.
The SEC is very specific about the required treatment of an escrow account maintained in an “all or none” or “best efforts” offering. The subscription agreement for an “all or none” or “best efforts” offering indicates that money paid to buy securities must be returned to the investors if the specified number or dollar amount of securities is not sold within a specified time.
A properly drafted subscription agreement will lesson the chance of any future litigation between the investor and the issuing company. It is always advised that all agreements should be reviewed by a qualified securities attorney.