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Offering DocumentsNil Masferrer Jiménez

The Subscription Agreement and Investor Questionnaire

The shortest document in the package and the only one you sign as a promise about yourself rather than as acceptance of somebody else's terms.

Of the documents in an offering package, the subscription agreement is the shortest and the most personal. The memorandum tells you about the deal. The operating agreement sets out the terms you are accepting. The subscription agreement is where you make statements, and the issuer relies on them.

What you are signing

The document generally does three things.

It commits you to purchase a stated dollar amount, subject to the issuer's acceptance. The commitment is usually irrevocable once made and once accepted.

It contains your representations, which are the substance. Typically:

  • That you are an accredited investor, under a specified test that you identify.
  • That you have the knowledge and experience to evaluate the investment, or are relying on a purchaser representative.
  • That you can bear the complete loss of the investment.
  • That you have received the memorandum and the governing agreement, and have had the opportunity to ask questions of the issuer.
  • That you are acquiring the interest for your own account and not with a view to distribution — the representation that supports the exemption's restriction on resale.
  • That you understand the interest is unregistered, illiquid, and transferable only with consent.
  • Information about your identity for anti-money-laundering and tax reporting.

It contains an indemnity, under which you agree to indemnify the issuer if a representation you made turns out to be untrue and causes it loss. This is the clause that gives the representations teeth.

Why the representations are in your voice

An issuer relying on Regulation D has to be able to demonstrate that its conditions were met. Your written statement that you are accredited is a large part of that demonstration under Rule 506(b).

Under Rule 506(c), the representation is not enough — the issuer must take reasonable steps to verify — so the subscription package will additionally require tax documents, asset statements, or a letter from a certified public accountant, attorney, broker-dealer or investment adviser.

The practical consequence is worth stating plainly: the accuracy of what you sign is your responsibility, not the sponsor's. A representation about your net worth that is not correct is a problem you have created for yourself, and the indemnity is where it lands.

The questionnaire

Frequently a separate schedule, and it is where the accreditation test is selected and evidenced.

Read the options carefully and choose the one that is actually true of you. Where you qualify under more than one, choosing the one that is easiest to document is sensible. Where you qualify under none, the correct action is to say so; a limited number of non-accredited purchasers may be permitted in a Rule 506(b) offering, and it is the issuer's decision whether to accept one and to provide the additional disclosure that comes with it.

If an entity or a retirement account is subscribing rather than you personally, the questionnaire will ask about the entity. A self-directed IRA subscribes as the account, with the custodian signing, and the accreditation analysis is applied to the account rather than to you.

Signing as an entity rather than as yourself

Where the investor is a trust, an LLC, a partnership or a retirement account, the subscription package changes in ways that are easy to get wrong at the signature page.

The subscriber is the entity, and the representations are made about the entity. Accreditation is tested at the entity level, on the entity tests rather than the individual ones.

Signing authority has to be established. A trustee signs for a trust and a manager for an LLC, and the sponsor will generally ask for the trust agreement or the operating agreement to confirm the authority exists.

A self-directed IRA subscribes as the account, with the custodian signing at your direction. The account is the investor, the funds come from the account, and the K-1 is issued to the account. Getting the registration wrong here is not a formality: an interest titled in your own name rather than the account's creates a problem with the account, not just with the paperwork.

Take a minute over the exact legal name and the tax identification number. An interest issued to the wrong entity is corrected by an assignment, which requires the sponsor's consent and produces its own paperwork.

The clause about receiving future documents

Buried near the end of most subscription agreements is a consent to receive notices, reports, tax documents and consent solicitations electronically, at the address you provide.

It is unobjectionable and it has one practical consequence: that address becomes the channel through which a capital call notice, a consent request or a suspension notice will arrive, often with a short deadline. An address you do not read daily, or one that filters unfamiliar senders, is a genuine risk over a hold measured in years.

Before you sign

The wire verification point is the one worth repeating. It is the only step in this entire process where a mistake costs you everything immediately rather than over years, and it takes one phone call to a number you already had.

Primary sources

Every factual claim above is traceable to a filing, a rule or an agency publication. These are the ones this article relies on.

  1. SEC, Rule 506(c) of Regulation Dsec.gov
  2. eCFR, 17 CFR 230.501 — definitions used throughout Regulation Decfr.gov
  3. SEC, private placements under Rule 506(b)sec.gov
  4. Investor.gov, private placements explainedinvestor.gov

Questions readers ask

What is a subscription agreement?

The contract by which you purchase an interest in the offering. It commits you to a stated amount and contains representations you make about your own status, sophistication, receipt of the documents and understanding of the risks.

Why does it ask me to confirm I have read documents I might not have read?

Because the issuer needs evidence that disclosure was delivered and that its exemption was properly claimed. Signing it is a representation, so the honest course is to have read them first.

What am I actually representing?

Typically that you are accredited under a specified test, that you can bear a total loss, that you have had the opportunity to ask questions, that you are buying for your own account and not for resale, and that you understand the interest is illiquid and unregistered.

Can I change terms in the subscription agreement?

Almost never. The document is standardized for the class and is presented for signature. What you can do is read it, ensure every representation you make is accurate, and decline if any is not.

What happens after I sign?

The issuer accepts or declines your subscription, you fund by wire, and the interest is issued. The issuer will also file a Form D notice with the SEC after the first sale in the offering.

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