What is a subscription agreement?

What a subscription agreement does

In a real estate syndication, investors buy membership interests in the LLC (or partnership interests in the limited partnership) that owns the property. The subscription agreement is how that purchase happens. The investor offers to subscribe for a stated amount, and the issuer, acting through the sponsor, may accept or reject the offer in whole or in part.

Acceptance matters for two reasons. It admits the investor as a member under the operating agreement, and it affects the date of sale. For Form D, the date of first sale is when the first investor is irrevocably contractually committed to invest, which, depending on the subscription terms, can come before any money arrives.

What is in it

Packages differ by counsel and by deal. A real estate subscription package commonly contains:

• The subscription amount, the class of interest and the minimum investment.
• Investor information: legal name, the investing entity (individual, joint, trust, LLC or IRA), address, tax ID and bank details for distributions.
• An accredited investor questionnaire: which Rule 501(a) test the investor meets, or for an entity, which entity test.
• Investor representations: buying for investment and not for resale, able to bear the loss of the whole investment, received the PPM and operating agreement, had the chance to ask questions, and understands the interests are illiquid and restricted.
• Anti-money-laundering and sanctions representations about the investor and the source of funds.
• Tax and benefit-plan information: Form W-9 (or W-8 for non-US investors) and whether the investor is a benefit plan investor under ERISA.
• Signature pages: the subscription agreement, a joinder or counterpart signature page to the operating agreement, and the sponsor’s acceptance.
• Funding instructions: wire, ACH or check, and the funding deadline.

How it relates to the PPM and the operating agreement

The three documents do different jobs. The PPM discloses the business plan, terms, fees, conflicts and risks. The operating agreement governs the LLC: the waterfall, voting, capital calls and transfers. The subscription agreement records the purchase: who is buying, how much, and what they represent to the issuer.

The subscription agreement ties the other two together. The investor typically confirms receiving the PPM and operating agreement and agrees to be bound by the operating agreement on acceptance. PPMs commonly say their summary is qualified by the operating agreement, so keep the terms consistent across all three.

From signature to funded

A typical close runs in this order. Your documents and counsel may change it:

• The investor completes the questionnaire and signs the subscription agreement and the operating agreement signature page.
• Under Rule 506(c), the sponsor completes accreditation verification before accepting.
• The sponsor reviews the package for gaps: a wrong entity name, a missing signer for a trust or LLC, an unanswered question.
• The sponsor countersigns to accept, and the investor funds by the deadline.
• The capital account opens at the funded amount, and the Form D deadline runs from the first sale.

Common mistakes

Subscription problems usually surface at funding or at tax time:

• Subscribing in one name and funding from an account in another. The investing entity, signer and bank account should line up, or the difference should be documented.
• Accepting a Rule 506(c) subscription before verification is complete.
• Sending an outdated PPM or operating agreement. The investor confirms receiving the documents you sent, so send the final versions.
• Treating a soft commitment as a subscription. A soft commit is an indication of interest, not a binding purchase.

Primary sources

• 17 CFR 230.501 — Rule 501, accredited investor (Cornell LII)
• SEC — Filing a Form D notice (date of first sale)