Subscription agreement

Definition

A subscription agreement is a legal document that outlines the terms under which an investor agrees to purchase shares or interests in a venture capital or private equity fund. This agreement is crucial as it establishes the commitments of both the investor and the fund manager, including the amount of investment, the rights and obligations of each party, and the conditions under which funds will be deployed. It serves as a foundation for the legal relationship between limited partners and general partners.

5 Must Know Facts For Your Next Test

1. Subscription agreements detail important aspects such as capital commitments, management fees, and distribution preferences between investors and fund managers.
2. These agreements are critical for compliance with securities regulations, ensuring that both parties adhere to applicable laws governing investments.
3. Typically, subscription agreements include representations and warranties from investors, confirming their suitability and qualification to invest in private funds.
4. The execution of a subscription agreement is often a precursor to an investor receiving the private placement memorandum, which further details the fund's strategy and risks.
5. In evolving LP-GP relationships, subscription agreements are increasingly tailored to reflect negotiations around fee structures, governance rights, and transparency expectations.

Review Questions

• How does a subscription agreement establish the legal relationship between limited partners and general partners?
  • A subscription agreement sets the terms under which limited partners commit their capital to a fund managed by general partners. It defines the rights and responsibilities of each party, ensuring clarity on how funds will be invested and how returns will be distributed. By detailing these aspects, the agreement creates a formal legal relationship that guides interactions throughout the life of the fund.
• Discuss the role of subscription agreements in ensuring compliance with securities laws in venture capital and private equity investments.
  • Subscription agreements play a pivotal role in compliance with securities laws by requiring disclosures from investors about their financial status and suitability for investing in private funds. This ensures that funds are raising capital from qualified investors while adhering to regulations designed to protect unsophisticated investors from high-risk investments. The details within these agreements also help funds demonstrate adherence to anti-fraud provisions under securities regulations.
• Evaluate how evolving market conditions are influencing the terms and negotiation processes of subscription agreements between LPs and GPs.
  • Evolving market conditions have led to more dynamic negotiations regarding subscription agreements, particularly as competition for capital increases among funds. Limited partners are now more assertive in negotiating terms related to fees, governance rights, and transparency expectations. As institutional investors seek greater control and clarity over their investments, subscription agreements are increasingly customized to reflect these demands, fostering more complex LP-GP relationships that better align interests.

Related terms

limited partner (LP): An investor in a venture capital or private equity fund who provides capital but has limited involvement in the management of the fund.

general partner (GP): The managing partner of a venture capital or private equity fund who is responsible for making investment decisions and managing the fund's operations.

capital commitment:

The total amount of capital that an investor agrees to contribute to a fund over a specified period, often outlined in the subscription agreement.