Subscription Agreements for Investment - YouTube

Hello and welcome to TDW Tech  Byte. My name is Tara Chan,  

and I am an associate in the  Corporate and Commercial department.  

Today, I will be talking about subscription  agreements for investment rounds.

A subscription agreement sets out the terms  of an equity investment into the company.  

It will set out the commercial  terms of the investment,  

such as the subscription price for shares and  the class number of shares to be purchased.

It will bind the parties to the deal.

The two main sections of a subscription agreement  are, one; the mechanics of purchasing shares in  

the company, and two; the representations  and warranties made to the investor.

Typically we recommend for  the subscription agreement  

to be separate from the shareholder agreement.

The reason for this is that in the future  if there are additional shareholders  

that signed up to the shareholder  agreement, you do not have to show  

the terms of the original subscription  agreement to these new shareholders.

Since the mechanics of a subscription  agreement are relatively straightforward,  

I will discuss the representations and  warranties section made to the investor.

An investor will ask for the company--and  sometimes also the founders--to  

give representations and warranties.

A representation is a statement as to a fact that  you are saying it's true on a specified date.  

The representation is given to induce the  investor to enter into the subscription agreement.

A warranty is a promise that a statement as  to a fact is true as at a specified date.

The key difference between a representation and  a warranty is the remedy available for each.  

If there is a breach of representation, the  innocent party can bring legal proceedings for  

misrepresentation and seek  to rescind the contract.

This means that the contract could be set  aside and the company would be required  

to return the parties to the position  before the contract was entered into.

If there is a breach of warranty, the innocent  party will only be entitled to damages.

Although there is a difference between the  two, it will often be seen that the company  

is giving both representations and warranties  as to a list of the same statements of facts.

Examples of representations  and warranties that are given  

are in respect of the constitution of the  company and the shares of the company,  

director and the employees, intellectual  property, the accounts and tax, and litigation.

I will now discuss some top tips for founders  when giving representations and warranties.

The first is for only the company to give  representations and warranties, not the founders.

If the founders also give  representations and warranties,  

then--if there is a breach--the  founders would be personally liable.

Next would be setting a liability  limitation on the representations and  

warranties--so including limitations  on liabilities in respect of the  

cap liability amounts and limiting the  period of time a claim may be brought.

Third is the disclosure letter. If you see that a  representation or warranty may not be true because  

of a specific reason, you can disclose these  specific circumstances in a disclosure letter.

If it is disclosed in a disclosure  letter, the investor cannot claim  

a breach of representation or warranty  for that specific reason later on.

Next is to carefully review to ensure  the representations and warranties are  

only in respect of matters of fact--current  or historic--known by the company.

You do not want to make statements  that the company cannot confirm is  

a hundred per cent true or accurate or any  statements or forecasts about the future.

Be careful of very general representations and  warranties, such as compliance with all laws.  

There are many laws that a company must obey,  

and it is difficult to ensure  compliance with every single one.

Last would be for the company, you want to give  as few representations and warranties as possible  

as you are limiting your  exposure for potentially being  

sued in the future for a breach  of a representation or warranty.

This is a quick overview of  subscription agreements for investment.

My name is Tara Chan and if you  have any questions or concerns,  

please feel free to reach out to Tanner De Witt.