A subscription agreement is a key legal document used when a company issues securities to an investor. It sets out the terms under which an investor agrees to purchase shares, units, convertible securities, or other equity or debt interests from a corporation or other issuer.
Subscription agreements are commonly used in private placements, startup financings, exempt market offerings, shareholder investments, venture capital transactions, angel investments, family-and-friends rounds, and other private securities transactions.
At Substance Law, we assist companies, founders, investors, and private issuers throughout Canada with drafting, reviewing, negotiating, and completing subscription agreements.
What Is a Subscription Agreement?
A subscription agreement is a contract between an issuer and an investor.
It typically confirms:
- what securities are being purchased;
- the purchase price;
- investor representations;
- issuer representations;
- closing conditions;
- securities law exemptions;
- risk acknowledgements;
- transfer restrictions;
- investor eligibility;
- payment terms; and
- closing deliverables.
A properly drafted subscription agreement helps document the investment and reduce legal risk for both the company and the investor.
When Is a Subscription Agreement Used?
Subscription agreements are commonly used when a business raises capital through the issuance of securities.
Examples include:
- common share issuances;
- preferred share financings;
- convertible note offerings;
- SAFE-style investments;
- unit offerings;
- limited partnership investments;
- private placements;
- startup financing rounds;
- shareholder investments;
- employee or consultant equity issuances; and
- exempt market transactions.
The appropriate structure depends on the issuer, investor, securities, exemption, valuation, and commercial objectives.
Subscription Agreements and Securities Laws
Issuing securities in Canada is regulated by provincial and territorial securities laws.
In many private company transactions, the issuer relies on an exemption from the prospectus requirement.
Common exemptions may include:
- accredited investor exemption;
- private issuer exemption;
- family, friends and business associates exemption;
- minimum amount investment exemption;
- offering memorandum exemption;
- employee, executive officer, director and consultant exemption; and
- existing security holder exemption.
The subscription agreement should identify and support the applicable exemption.
Investor Representations
Subscription agreements frequently require investors to make representations regarding their eligibility to purchase the securities.
These may include confirmations that the investor:
- qualifies under an applicable exemption;
- has reviewed relevant risk factors;
- is purchasing as principal;
- understands the investment is risky;
- understands the securities may be illiquid;
- has not received improper advice from the issuer;
- is not relying on unauthorized representations;
- has authority to enter into the agreement; and
- understands resale restrictions.
Investor representations are especially important in exempt market transactions.
Issuer Representations
The issuer may also provide representations and warranties.
These may address:
- corporate existence;
- corporate authority;
- valid issuance of securities;
- capitalization;
- compliance with law;
- absence of conflicts;
- financial information;
- material contracts;
- intellectual property;
- litigation;
- taxes;
- regulatory matters; and
- use of proceeds.
The scope of issuer representations may vary depending on the size and sophistication of the transaction.
Subscription Price and Securities Issued
The subscription agreement should clearly identify:
- the number of securities being purchased;
- the class or series of securities;
- the purchase price per security;
- the aggregate subscription price;
- payment method;
- closing date;
- currency; and
- any conditions to issuance.
Ambiguity regarding pricing or securities issued can create serious corporate record and shareholder disputes later.
Closing Conditions
Subscription agreements often include closing conditions.
These may require:
- receipt of subscription funds;
- board approval;
- shareholder approval where required;
- completion of securities law forms;
- investor eligibility confirmation;
- delivery of certificates or electronic records;
- execution of ancillary documents;
- corporate filings;
- regulatory approvals; and
- amendment of corporate records.
Conditions should be tailored to the specific transaction.
Risk Acknowledgements
Private company investments are often high-risk and illiquid.
Subscription agreements frequently include acknowledgements that:
- the investment is speculative;
- the securities may not be freely tradable;
- there may be no market for the securities;
- the investor may lose the entire investment;
- financial projections may not be achieved;
- the issuer may require additional financing;
- dilution may occur; and
- resale restrictions apply.
These acknowledgements are important for both investor protection and issuer risk management.
Resale Restrictions
Securities issued under prospectus exemptions are often subject to resale restrictions.
The subscription agreement should address:
- statutory hold periods;
- private issuer restrictions;
- shareholder agreement restrictions;
- rights of first refusal;
- transfer approval rights;
- legend requirements;
- permitted transfers; and
- compliance with securities laws.
Investors should understand that private company securities are often not freely transferable.
Subscription Agreements and Shareholder Agreements
A subscription agreement may operate alongside a shareholder agreement.
The subscription agreement governs the investment and issuance of securities.
The shareholder agreement may govern the ongoing relationship between shareholders, including:
- voting rights;
- transfer restrictions;
- drag-along rights;
- tag-along rights;
- information rights;
- pre-emptive rights;
- board rights;
- exit rights; and
- dispute resolution.
In many financings, investors are required to become parties to an existing shareholder agreement at closing.
Board Approval and Corporate Records
Issuing shares or other securities generally requires proper corporate authorization.
This may include:
- director resolutions;
- shareholder approvals where required;
- amendments to articles where necessary;
- updates to securities registers;
- issuance records;
- share certificates or electronic records;
- subscription receipts;
- minute book updates; and
- filings where applicable.
Failing to properly document the issuance can create capitalization table problems later.
Regulatory and Industry-Specific Issues
Some investments raise regulatory concerns beyond corporate and securities law.
Additional analysis may be required for businesses operating in industries such as:
- cannabis;
- alcohol;
- food and drugs;
- financial services;
- payments;
- crypto;
- healthcare;
- telecommunications;
- transportation; and
- controlled goods.
Changes in ownership or control may trigger licensing, notification, or approval requirements.
Investor Due Diligence
Investors often conduct due diligence before signing a subscription agreement.
This may include reviewing:
- corporate records;
- capitalization table;
- financial statements;
- business plans;
- material contracts;
- intellectual property;
- employment matters;
- regulatory licences;
- litigation;
- tax matters; and
- existing shareholder rights.
Legal review can help identify risks before funds are advanced.
Common Subscription Agreement Issues
Common issues include:
- unclear securities being issued;
- incorrect exemption reliance;
- missing investor certificates;
- inadequate risk disclosure;
- improper board approvals;
- incomplete corporate records;
- valuation disputes;
- inconsistent shareholder agreement terms;
- failure to address resale restrictions;
- missing closing deliverables; and
- regulatory ownership concerns.
These issues can create problems during future financings, audits, due diligence, or exits.
Our Subscription Agreement Services
Substance Law assists clients with:
- drafting subscription agreements;
- reviewing subscription agreements;
- securities exemption analysis;
- investor certificates;
- private placement documentation;
- board and shareholder approvals;
- share issuance documentation;
- capitalization table review;
- shareholder agreement coordination;
- closing documents;
- investor-side review;
- issuer-side representation;
- regulated industry ownership analysis; and
- transaction closing support.
Work With a Subscription Agreement Lawyer in Canada
Whether you are raising capital, investing in a private company, issuing shares to a new shareholder, or documenting a private placement, a properly drafted subscription agreement is essential.
Substance Law assists issuers and investors throughout Canada with subscription agreements, securities law compliance, corporate approvals, and closing documentation.
Frequently Asked Questions About Subscription Agreements in Canada
What is a subscription agreement?
A subscription agreement is a contract between an issuer and an investor that sets out the terms under which the investor purchases securities from the issuer.
When do I need a subscription agreement?
A subscription agreement is commonly used when a company issues shares, units, convertible notes, preferred shares, or other securities to an investor.
Is a subscription agreement the same as a shareholder agreement?
No. A subscription agreement governs the purchase and issuance of securities, while a shareholder agreement governs the ongoing relationship between shareholders.
Do subscription agreements need to comply with securities laws?
Yes. Issuing securities in Canada generally requires compliance with securities laws, including reliance on an exemption from the prospectus requirement unless a prospectus is filed.
What is an accredited investor certificate?
An accredited investor certificate is a document used to confirm that an investor qualifies under the accredited investor exemption.
Can a startup use a subscription agreement?
Yes. Startups frequently use subscription agreements when raising capital from founders, angel investors, strategic investors, or other private investors.
What should be included in a subscription agreement?
A subscription agreement should usually address the securities issued, purchase price, investor representations, issuer representations, securities law exemptions, closing conditions, risk acknowledgements, and resale restrictions.
Does issuing shares require board approval?
In most cases, yes. Share issuances generally require proper director authorization and updates to the company's corporate records.
Can Substance Law draft or review a subscription agreement?
Yes. Substance Law assists clients throughout Canada with drafting, reviewing, negotiating, and closing subscription agreements and related private securities transactions.
