If there’s one thing I’ve learned in private equity, it’s that the best way to ensure a smooth investor experience is also the least exciting: mastering the fundamentals, over and over again.

And unfortunately, as effective as it may be, it’s not exactly glamorous… but I’m going to write about it anyway. 

A focus on nailing the basics, every time, is a tried and true formula for success in private equity investment. 

Nowhere is that more glaringly obvious to me than in how people approach their subscription agreements. 

Perhaps reflecting the unglamorous nature of subscription agreements, I searched for an exciting industry leader quote that truly captured their importance but came up empty-handed.

But Practical Law by Thomson Reuters describes the subscription agreement as the “principal contract” between the fund issuer and the investor, underscoring its central role in formalizing investment terms.

Anyway, it’s these often dense, labyrinthine documents that can, at times, inspire eye rolls and sighs of dread. 

But I've seen subscription agreements, crafted with care and attention, transform complex investments into clear, enforceable commitments without any friction, let alone bureaucratic despair. 

When a document precisely outlines your capital commitment, complies with applicable law, and addresses anti‑money laundering checks, it turns a daunting process into a pretty seamless transaction. 

Keep reading, and I’ll do my best to break through the complexity and deliver some key insights for investors, venture capital enthusiasts, and anyone interested in subscription agreements.

What is a Private Equity Fund Subscription Agreement?

In a nutshell, a private equity fund subscription agreement is a legal document that formalizes an investor’s capital commitment to invest in a fund. Straightforward, so far.

This contract spells out things like the purchase price, the number of shares or units to be issued, and any conditions precedent, including detailed covenants, warranties, and investor questionnaires. Basically all the things that must be satisfied before the funds are transferred. 

OK, so now you can see why subscription agreements might have a certain reputation for being a bit dense.

What is a Subscription in Private Equity?

In the private equity context, a subscription is the process by which investors, ranging from accredited investors and hedge funds to those in venture capital, agree to commit a specified amount of capital. 

This capital commitment is a critical component of a fund’s operations. 

The subscription agreement not only details the purchase price and number of shares but also establishes key covenants, warranties, and any side letter clauses that may grant certain investors additional rights or exemptions. 

Due diligence is performed via an investor questionnaire to verify that each investor meets the requisite net worth thresholds and complies with anti-money laundering checks.

Is a Subscription Agreement Necessary in Private Equity?

Absolutely. Subscription agreements are necessary by law in private equity, as they provide essential legal protection and clarity for both General Partners and Limited Partners. 

They ensure that every investor’s capital commitment is clearly documented and that all conditions and compliance with applicable law are met. 

These agreements also lay out covenants and warranties that protect all parties, and they often include power of attorney provisions to confirm that such person authorized to sign is acting with sole discretion. 

In short, they prevent any funny business. They are indispensable, whether you’re investing in a limited liability company or a fund with exposure to real estate and potential resale opportunities.

What Are the Key Requirements for a Subscription Agreement in the Private Equity Sector?

When drafting a subscription agreement in the private equity space, several elements are critical:

• Investor Information: The agreement must verify that each investor is accredited and meets the fund’s net worth requirements.

• Capital Contributions: It should specify the exact capital commitment each investor is making, with detailed payment schedules. This capital commitment is often repeated throughout subscription agreement documents to emphasize its aggregate importance.

• Purchase Price & Number of Shares: Clearly define the purchase price and the number of shares or units to be issued. The agreement must include a signature page confirming that each investor’s completed subscription agreement is in order.

• Conditions Precedent and Covenants: The document will list the conditions precedent that must be satisfied (including anti-money laundering checks and detailed investor questionnaires) and set forth covenants that bind both parties.

• Approvals and Applicable Law: The subscription agreement must be executed in strict accordance with applicable law and the Securities Act, with language such as “by law” and “such documents” ensuring mandatory compliance. It also outlines any required exemptions.

• Indemnification and Confidential Information: Provisions protecting both parties through indemnification clauses, along with measures for safeguarding confidential information, are standard.
  

• Side Letter Provisions: Occasionally, a side letter is used to grant certain investors additional rights or flexibility regarding their capital commitment.

Private Placement Memorandum (PPM) vs. Subscription Agreement: What’s the Difference?

While both the Private Placement Memorandum (PPM) and subscription agreements documents are crucial in the private equity investment process, they serve distinct roles. 

The PPM is a comprehensive disclosure document that provides detailed information about the fund such as its strategy, risk factors, and financial projections, enabling thorough due diligence. 

In contrast, the subscription agreement is the legal contract that captures the investor’s capital commitment and the specific terms of their investment. 

Think of the PPM as the instruction manual that provides all the details you need to understand the investment, guiding your due diligence. 

The subscription agreement is more like the signed contract that officially commits you to the deal, locking in your investment under the applicable legal framework, with all warranties clearly outlined.

Key Terms and Clauses in Private Equity Subscription Agreements

Understanding the key terms and clauses is essential:

• Capital Commitment: Repeated throughout these agreements, the capital commitment specifies the aggregate amount each investor is responsible for, ensuring all investors are clear on their financial obligation.

• Voting Rights: These clauses detail how voting rights are allocated, ensuring that investors have a say in management decisions.

• Management Fees: Clearly disclosing the management fees charged by the fund.

• Covenants and Warranties: Covenants lay out ongoing obligations for both parties, while warranties guarantee that the representations made in the agreement are true and accurate.

• Approvals: Outlining the necessary internal and regulatory approvals, often with a power of attorney from such person authorized to act on behalf of the investor.

• Side Letter: In certain cases, a side letter may be used to provide additional rights or clarify specific terms.

• Employee Benefit Plan & ERISA: When investments are made via a retirement account or employee benefit plan, the agreement must address compliance with ERISA and related regulations.

• ILPA and LLP: References to ILPA guidelines and LLP structures ensure that the terms adhere to industry standards.

• Securities Act: Multiple references to the Securities Act are included to emphasize compliance with federal securities laws.

• Limited Liability Company and Real Estate: When applicable, the agreement may involve investments in limited liability companies or funds with exposure to real estate, including potential resale provisions.

• Signature Page and Headings: The completed subscription agreement becomes binding once signed on the signature page, with clearly defined headings to organize such information.

Avoiding Risk By Managing Subscription Agreements

We all know that investing in private equity comes with risks, right? Market fluctuations, liquidity challenges, and regulatory uncertainties.

We’ve all seen our fair share of highs and lows over the years.But a solid subscription agreement helps keep those risks in check.

It lays out every investor’s capital commitment, covenants, warranties, and conditions precedent in black and white. No surprises, no guesswork.

It also builds in strong indemnification clauses and requires thorough due diligence to protect both the fund and its investors.

Additionally, it enforces strict compliance with anti-money laundering measures and relevant laws, like the US Securities Act, the EU Alternative Investment Fund Managers Directive (AIFMD), and Germany’s Kapitalanlagegesetzbuch (KAGB).

These regulations establish clear standards for investor disclosures, risk management, and fund oversight. 

For example, AIFMD places strict reporting obligations on private equity managers, while KAGB governs the structuring and management of investment funds in Germany. 

Additionally, the EU Markets in Financial Instruments Directive II (MiFID II) ensures that financial instruments are marketed transparently, and the German Anti-Money Laundering Act (GwG) enforces KYC and due diligence requirements to prevent financial crimes.

But drafting and managing these agreements can be complex, time-consuming, and prone to errors. That’s where, and here comes the promo, Vestlane comes in. 

Our platform streamlines the entire subscription process: digitizing document creation, automating compliance checks, and ensuring a stress-free investor onboarding. 

So let’s all say goodbye to manual paperwork and siloed processes. With Vestlane, funds can remove risk, ensure regulatory adherence, and provide investors with a first-class experience.

Still have questions about streamlining the subscription agreement process? Let’s discuss.