# Subscription Agreement: Key Terms, Inclusions, and SEC Regulations

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## What Is a Subscription Agreement?

A subscription agreement is an investor's application to join a [limited partnership (LP)](https://www.investopedia.com/terms/l/limitedpartnership.asp). It outlines the terms for investing in a limited partnership or a private placement.

A subscription agreement serves another role, as a contract between a company and new shareholders (subscribers). The company agrees to sell a certain number of shares at a specific price; in return, the subscriber promises to buy the shares at the predetermined price.

Subscription agreements follow SEC Rules 506(b) and 506(c) of Regulation D. Regulation D allows companies to raise capital in specific private placements without U.S. Securities and Exchange Commission (SEC) registration.

Limited partners' roles and responsibilities include providing capital with no material participation. They are recruited via a subscription agreement by the general partner, who manages the entity. Candidates may join after meeting basic requirements and receiving approval from the general partner.  

### Key Takeaways

*   A subscription agreement is a promise between a company and an investor to transact shares at a predefined price.
*   Limited partners provide capital and are protected from significant risks as they do not participate in business operations.
*   For companies, Regulation D allows raising capital through private placements without SEC registration.
*   Subscription agreements are governed by SEC Rules 506(b) and 506(c) of Regulation D.
*   Investors in private placements must meet specific criteria to be considered accredited.

## Detailed Exploration of Subscription Agreements

Broadly defined, a [partnership](https://www.investopedia.com/terms/p/partnership.asp) is a business agreement between two or more people who all have personal ownership in the business. The partnership entity doesn't pay taxes. Instead, the profits and losses flow through to each partner. Partners will pay taxes on their distributive share of the partnership's taxable income based on a partner agreement. Law firms and accounting firms are often formed as general partnerships.

In a LP, a general partner manages the partnership entity and brings in limited partners using a subscription agreement. Candidates subscribe to become limited partners. After meeting standard requirements, the general partner decides whether to accept the candidate.

Limited partners are silent investors who provide a one-time capital investment and do not participate in operations. Thus, they have little say in daily activities and face less risk than full partners. 

Each limited partner risks only their initial investment. The subscription agreement outlines the prospective partner's experience, sophistication, and net worth.

### Regulatory Framework for Subscription Agreements

Subscription agreements typically follow SEC Rules 506(b) and 506(c) of [Regulation D](https://www.investopedia.com/terms/r/regulationd.asp). These rules govern how offerings are conducted and what information must be disclosed to investors.

As new limited partners are added to an offering, general partners obtain the consent of existing partners before amending the subscription agreement. Reg D investments have fewer requirements than public offerings, saving time and enabling companies to issue securities that might be otherwise restricted.

## Role of Subscription Agreements in Private Placements

When raising capital, a company might issue stock to the public or via [private placement](https://www.investopedia.com/terms/p/privateplacement.asp). Public investors primarily receive a [prospectus](https://www.investopedia.com/terms/p/prospectus.asp), detailing the business and its security.

A private placement is a sale of stock to a limited number of [accredited investors](https://www.investopedia.com/terms/a/accreditedinvestor.asp) who meet specific criteria. The criteria for accredited status include having a particular level of investment experience, assets, and net worth. Investors will receive a private placement [memorandum](https://www.investopedia.com/terms/o/offeringmemorandum.asp) as an alternative to the prospectus. The memorandum provides a less comprehensive description of the investment.

Often, a subscription agreement comes with the memorandum. Some agreements specify a rate of return for the investor, like a percentage of [net income](https://www.investopedia.com/terms/n/netincome.asp) or lump-sum payments.

Also, the agreement will define the payment dates for these returns. This structure gives priority to the investor, as they earn a rate of return on the investment before company founders or other minority owners.

## The Bottom Line

A subscription agreement defines the terms for a party's investment into a limited partnership (LP) or private placement offering.

It is also a two-way guarantee between a company and a new shareholder (subscriber). The company agrees to sell a certain number of shares at a specific price, and the subscriber agrees to buy the shares at the predetermined price in return.

The significance of limited partnerships for investors (the limited partners) is that they provide capital and are protected from significant risks since they don't participate in business operations. The significance of limited partnerships for companies is that they raise capital through private placements without SEC registration. This is done through SEC Regulation D; specifically, subscription agreements are regulated under Reg D's Rules 506(b) and 506(c).

Private placement investors have to meet particular criteria to be considered accredited. Criteria for accredited status include their investment experience level, assets, and net worth.

Limited partners do not participate in operations, have little say in daily activities, and face less risk than full partners. Their investment risk is limited to their one-time initial capital investment.

Some subscription agreements specify a rate of return for the investor and define the payment dates for these returns. These terms prioritize investors over company founders or other minority owners.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Private Placements—Rule 506(b)](https://www.sec.gov/smallbusiness/exemptofferings/rule506b)."
>     
> 2.  U.S. Securities and Exchange Commission. "[General Solicitation—Rule 506(c)](https://www.sec.gov/smallbusiness/exemptofferings/rule506c)."
>     
> 3.  Internal Revenue Service. "[Tax Information for Partnerships](https://www.irs.gov/businesses/partnerships)."
>     
> 4.  U.S. Securities and Exchange Commission. "['Accredited Investor' Net Worth Standard](https://www.sec.gov/info/smallbus/secg/accredited-investor-net-worth-standard-secg.htm)."