Investor Contracts: Everything You Need to Know
Investment contracts are agreements wherein one party invests money with the expectation of receiving a return on investment (ROI). These contracts are used in various industries, including real estate.3 min read
Updated June 30, 2020:
Investment contracts are agreements wherein one party invests money with the expectation of receiving a return on investment (ROI). These contracts are used in various industries, including real estate.
Basic Terms of an Investment Contract
Small business owners may use investment contracts if they have an interest in investing in other businesses or bringing outside investors into their business. When a person invests money as part of the investment contract, he or she expects to receive profits based on the efforts of a third party.
Real estate contracts can fall under the definition of investment contracts. Some specific fields of real estate purchases — namely the hotel condominium, or “condotel” — are fighting to be included in the investment contract definition.
If a transaction qualifies as an investment contract, it's possibly going to be subject to the following:
- Disclosure requirements as laid out by the SEC
In an investment contract, the basics describe the terms of the investment as well as how and when the investor should expect a return on the investment. Basic information that should be included in an investment contract includes the following:
- Names and addresses of participating parties
- Basic structure of the investment
- Purpose of the investment
- Date of agreement
- Signatures of participating parties
If you want your investment to be ownership shares in a company, look into any relevant business documents. This includes the operating agreement or articles of organization. You must make sure you issue shares in a way that adheres to company guidelines. In addition, you may be required to notify your business partners that you plan to issue ownership shares.
A solid investment contract clearly details the following:
- How much the investor provides
- The form of the investment
- When the investment will be transferred
Most investments are provided in check, cash, or wire transfer. Some investments, however, are provided as tangible assets. The contract should state whether this is the case. In the case of tangible asset investments, you'll have to figure out how to continue business operations in the event the investor asks that those assets be returned.
Return on Investment
Your contract must state when an investor can expect an ROI. If he or she doesn't receive a return, the investor can ask that you return the investment.
Think about how the investor will be paid. Will it be a flat interest rate, or do you both agree to a rate of return based on the investment's success? The contract should also take into account what happens if your company is dissolved or enters into bankruptcy. What will happen to the investment in those circumstances?
Any risks associated with the investment need to be disclosed in the contract as well. This makes the investor aware that a return isn't guaranteed.
Reporting and Control
The contract should specify if the investor will have any rights within the company, such as control or management rights. For instance, some investors may receive voting rights in a company that allows them to have a say in the management of the business. Investors may be allowed to vote for executives or directors.
In a smaller company, an investor may be given rights that allow him or her to control day-to-day operations.
The investment contract should specify any types of reports investors may expect to receive in relation to company finances. It should also detail any rights the investor has to audit company books.
Investment contracts are very complex financial instruments. As with any investment, they're not risk-free. They usually contain provisions limiting their ability to provide contract value payouts in certain circumstances. When evaluating investment options, it's very important to fully understand possible risks and circumstances.
Because contract terms are customized, it's helpful for a stable value manager to negotiate with the issuing parties on behalf of sponsors. In stable value investing, some skills are critical for a fixed income manager to have, such as contract negotiation and administrative expertise.
Anyone who's familiar with investing knows that it's not a guaranteed process. Because investment contracts can be so complicated, you may consider consulting with an experienced professional before entering into one.
If you need help with investment contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.