Updated October 28, 2020:

If you're wondering, what is the difference between share subscription agreement and share purchase agreement, you might own a business or be thinking about starting a business that would require one of these agreements. Understanding the differences between these two types of agreements can help ensure that you use the correct version for your company's needs.

What Is a Subscription Agreement?

A subscription agreement is a form completed by an investor as a step to becoming a partner in a limited partnership. This agreement is also known as a two-way guarantee between a subscriber and a company. The subscriber agrees to purchase shares of a company at a set price, while the company agrees to sell those shares.

A general partner in a limited partnership is responsible for managing the business entity and bringing on limited partners. These partners often start as subscribers and later become partners after the terms of the agreement have taken place. The general partner can determine whether the candidate will be accepted into the partnership.

A limited partner in a partnership will typically provide capital, often as a single investment, but not participate in the company's daily operations. This role is also called a silent partner. Since these partners aren't involved in the operations of the business, they have little to no influence over how the company is run overall. These partners are also less exposed to risk than a full partner. A limited partner is only exposed to as much risk as they originally invested in the business.

Within the subscription agreement, terms for partnership should describe some key aspects for the limited partner:

  • Investment experience
  • Net worth
  • Sophistication (ability to manage the risk of investing)

A partnership is formed when two or more individuals form a business. Each individual must have some type of personal ownership in the company to be considered a partner. A partnership is a pass-through business entity, which means it doesn't have to pay separate taxes. Instead, all business profits and losses pass through the company to the partners, who must report the information on their personal tax returns.

When partners file their own tax returns each year, they will pay taxes on the business income that is considered taxable. All terms for paying taxes on business income should be included in the partnership agreement. Business types that are commonly formed as general partnerships include accounting and law firms.

Subscription Agreements with Private Placements

If a company needs to raise capital, one way to do so is to issue stock shares that can be purchased through private placement or by members of the public. A prospectus is a document used when a company is selling shares of its stock to the general public. This document will include information about the company's security, history, and other details that a potential investor would need to know.

If the company wishes to only sell its stock shares to accredited investors who meet certain requirements, this process is called a private placement. Some of the most common criteria for an accredited investor include:

  • Assets
  • Net worth
  • Level of experience with investment

Instead of receiving a prospectus, an investor involved in a private placement would receive a memorandum of private placement. This document has some of the same information, although the investment description is usually less comprehensive than what would be provided to a member of the public. A subscription agreement is often provided to accredited investors with the memorandum of private placement. This agreement could outline the return rate for the investor, such as whether returns would be paid in lump sums or as a percentage of the net income of the business.

This agreement should also outline the dates on which these payments will be made to the investor. By having all of this information in writing, the investor understands the business and payment structure. The agreement should outline the priority structure of the order in which returns will be paid out to owners and founders.

Investment Agreements (Share Holder Agreement and Share Purchase Agreement) – Understanding the Meaning

A transaction document outlines the details of a transaction that has been proposed. In the case of investing, the transaction document would discuss the preference shares, purchase of equity in a company, or subscribing to debentures, both convertible and non-convertible.

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