Subscription Agreements in Canadian Private Placements

Nick Wright, BA JD MBA LLM (Tax)
Wright Business Law

A subscription agreement is one of the most important documents in a Canadian private placement. Although it is often viewed as a standard closing document, the subscription agreement performs several critical legal and regulatory functions. It records the terms of the investment, documents the investor’s representations, supports reliance on applicable prospectus exemptions, and provides an important evidentiary record of the issuer’s compliance with Canadian securities laws.

Whether an issuer is raising capital for a private corporation, investment fund, mortgage investment corporation (MIC), real estate investment trust (REIT), or limited partnership, the subscription agreement typically forms the contractual foundation of the investment. It also serves as one of the principal documents reviewed during due diligence, regulatory compliance reviews, and subsequent financing transactions.

Poorly drafted subscription agreements can expose issuers to unnecessary legal and regulatory risk. Outdated accredited investor certificates, inconsistent representations, incomplete execution provisions, or references to obsolete securities legislation may undermine an issuer’s ability to demonstrate compliance with National Instrument 45-106 Prospectus Exemptions (“NI 45-106”) and other applicable securities law requirements.

This article explains the purpose of subscription agreements used in Canadian private placements, examines their principal provisions, and discusses practical considerations for issuers conducting exempt market financings.

What Is a Subscription Agreement?

A subscription agreement is a legally binding contract between an issuer and an investor under which the investor agrees to purchase securities and the issuer agrees to issue them, subject to the terms and conditions set out in the agreement.

The agreement typically identifies the securities being purchased, the subscription amount, the purchase price, and the closing mechanics governing the transaction. It also contains representations and warranties from both the investor and the issuer, together with various acknowledgements, covenants and contractual provisions that allocate risk between the parties.

Although subscription agreements vary depending on the type of issuer and the nature of the financing, they generally serve four principal purposes.

First, they document the commercial terms of the investment. The agreement records the securities being purchased, the amount invested, the purchase price, and the conditions that must be satisfied before the issuer accepts the subscription.

Second, they establish the legal relationship between the issuer and the investor. Once accepted by the issuer, the subscription agreement becomes the contractual basis upon which the securities are issued and the subscription proceeds are received.

Third, they support compliance with applicable securities legislation. Investor representations regarding accredited investor status or other prospectus exemptions help demonstrate the basis upon which the issuer completed the exempt distribution.

Finally, subscription agreements create an important compliance record. Together with investor questionnaires, exempt distribution reports, corporate resolutions and securities registers, they form part of the issuer’s books and records relating to the financing.

For these reasons, subscription agreements should not be viewed as standard forms that can simply be reused from one transaction to another. They should instead be tailored to reflect the issuer’s capital structure, the applicable prospectus exemption, the securities being offered, and the commercial terms of the financing.

Why Subscription Agreements Matter

Although investors often focus on the commercial aspects of a private placement, subscription agreements perform several important legal and regulatory functions that extend well beyond documenting the purchase of securities.

Documenting the Investment

The subscription agreement records the essential terms of the transaction. It identifies the investor, the issuer, the securities being acquired, the subscription amount, the purchase price, and the conditions governing the issuance of the securities.

Having a comprehensive written agreement reduces the potential for disputes regarding the terms of the investment and provides an objective record of the parties’ intentions.

Supporting Prospectus Exemption Compliance

In most Canadian private placements, issuers rely upon one or more prospectus exemptions under NI 45-106.

The subscription agreement is one of the principal documents through which investors represent that they satisfy the requirements of the applicable exemption. For example, where an issuer relies upon the accredited investor exemption, the agreement will typically include detailed accredited investor representations together with a separate accredited investor certificate identifying the specific category under which the investor qualifies.

Similarly, offerings conducted under the offering memorandum exemption, the family, friends and business associates exemption, or other prospectus exemptions frequently include representations tailored to the requirements of those exemptions.

Although investor representations alone may not establish compliance with securities legislation, they remain an important component of an issuer’s overall compliance framework.

Allocating Legal Risk

Subscription agreements also allocate legal risk between the parties.

Investors typically represent that they have reviewed the offering materials, made their own investment decision, understood the risks associated with the investment, and possessed the legal authority to enter into the agreement.

Issuers, in turn, establish the contractual basis upon which they accept subscriptions and issue securities.

While these provisions cannot eliminate statutory rights or liability arising under applicable securities legislation, they provide an important contractual framework governing the relationship between the parties.

Creating an Important Compliance Record

Subscription agreements also play a significant role in an issuer’s books and records.

If an exempt market financing is later reviewed by securities regulators, auditors, potential acquirers, lenders or future investors, the subscription agreement will often form part of the documentation demonstrating how the financing was conducted.

For this reason, issuers should maintain complete executed copies of subscription agreements together with related investor certificates, correspondence and supporting compliance documentation.

Key Terms Found in Most Subscription Agreements

Although no two subscription agreements are identical, most Canadian private placements contain a common set of provisions designed to document the investment and facilitate compliance with applicable securities legislation.

Description of the Securities

Every subscription agreement should clearly identify the securities being offered.

Depending upon the issuer, these may include common shares, preferred shares, limited partnership interests, trust units, debt securities, convertible securities or other investment instruments.

The agreement should accurately describe the securities, the purchase price, and the number of securities to be issued upon acceptance of the subscription. Where securities are issued under an offering memorandum, limited partnership agreement or declaration of trust, the subscription agreement should clearly identify those governing documents and ensure that the defined terms remain consistent throughout.

Subscription Amount and Payment

The agreement should specify the amount being invested, the purchase price of the securities, and the method by which subscription funds are to be delivered.

Many agreements also address matters such as wire transfer instructions, trust conditions, escrow arrangements, and the treatment of subscription funds if the issuer rejects the subscription or the financing does not close.

These provisions help establish certainty regarding the parties’ financial obligations and reduce the potential for disputes regarding payment or closing mechanics.

Investor Representations and Warranties

Investor representations are among the most significant provisions in any subscription agreement.

Depending upon the transaction, investors may represent that they have the legal capacity to enter into the agreement, are purchasing as principal, have reviewed the available disclosure, possess authority to make the investment, and understand the risks associated with acquiring securities that may be subject to resale restrictions.

Where the purchaser is a corporation, partnership or trust, additional representations often confirm the entity’s legal existence, authority to invest, and the authority of the individual executing the agreement on its behalf.

These representations provide the issuer with important contractual assurances while also documenting information relevant to the issuer’s securities law compliance obligations.

Prospectus Exemption Representations

One of the principal functions of a subscription agreement is to document the basis upon which the issuer is relying on an exemption from the prospectus requirement.

Accordingly, subscription agreements typically contain representations confirming that the investor qualifies under one or more prospectus exemptions available under NI 45-106. The nature of these representations depends upon the exemption being relied upon.

For example, where the issuer is relying on the accredited investor exemption, the subscription agreement will ordinarily include an accredited investor certificate requiring the investor to identify the specific category under which they qualify. Similarly, offerings conducted under the offering memorandum exemption or the family, friends and business associates exemption frequently include representations tailored to the requirements of those exemptions.

Where an offering relies upon multiple prospectus exemptions, the subscription agreement should clearly identify the exemption applicable to each investor.

Issuers should remember, however, that investor representations are only one aspect of the compliance process. Depending on the circumstances, securities regulators may expect issuers to take reasonable steps to verify that the applicable exemption is in fact available rather than relying solely upon the investor’s representations.

Risk Acknowledgements

Subscription agreements also contain various acknowledgements relating to the risks associated with the investment.

These provisions commonly confirm that the investor understands the speculative nature of the investment, accepts the possibility of losing their entire investment, appreciates that the securities may be illiquid, and understands that resale restrictions may apply under Canadian securities legislation.

Where a private placement memorandum has been provided, investors frequently acknowledge that they have received and reviewed the document before making their investment decision.

Although these acknowledgements do not eliminate statutory rights or liability arising under securities legislation, they help establish that investors understood the nature of the investment at the time the subscription was made.

Anti-Money Laundering Provisions

Modern subscription agreements routinely include provisions addressing anti-money laundering and anti-terrorist financing compliance.

These provisions may require investors to provide information regarding their identity, tax residency, beneficial ownership, source of funds, or other information reasonably requested by the issuer or its advisers in order to comply with applicable legislation.

For issuers using exempt market dealers or third-party administrators, these provisions frequently complement broader know-your-client and anti-money laundering procedures implemented as part of the subscription process.

Closing Mechanics

Every subscription agreement should clearly describe how and when the investment becomes legally effective.

Typically, the agreement provides that the issuer has discretion to accept or reject subscriptions, in whole or in part. Once accepted, the issuer issues the securities, updates its securities registers, and delivers any confirmations or certificates required by the transaction.

The agreement may also address conditions precedent to closing, payment procedures, electronic execution, and the timing of the issuance of securities.

Clear closing provisions reduce uncertainty and assist both issuers and investors in understanding when contractual obligations become binding.

Common Drafting Mistakes

Although many subscription agreements are based upon precedent documents, they should not be treated as static forms that can be reused indefinitely.

One common mistake is relying upon outdated accredited investor certificates that no longer reflect current securities legislation or regulatory guidance. As prospectus exemptions evolve, related schedules and investor certificates should be reviewed and updated accordingly.

Another frequent issue arises where the subscription agreement is inconsistent with the issuer’s other offering documents. Definitions, investment terms, redemption provisions, distribution policies, and closing mechanics should be consistent across the subscription agreement, offering memorandum, limited partnership agreement, declaration of trust, or shareholders’ agreement.

Issuers should also ensure that subscription agreements are appropriately tailored to the purchaser. Individual investors, corporations, trusts, partnerships and managed accounts frequently require different representations concerning authority, capacity and beneficial ownership.

Finally, issuers should periodically review their precedent documents. Subscription agreements prepared for one transaction or one type of issuer may not be appropriate for another. Regular updates help ensure that precedents remain consistent with current legislation, regulatory guidance and market practice.

Practical Considerations for Issuers

Preparing an effective subscription agreement involves considerably more than updating the name of the issuer and the purchase price.

Issuers should begin by confirming which prospectus exemption or exemptions will be relied upon for the offering. The investor representations, certificates and acknowledgements should then be tailored to reflect those exemptions and the nature of the securities being offered.

Subscription agreements should also be reviewed alongside the issuer’s other transaction documents. Where an offering memorandum, limited partnership agreement, declaration of trust or shareholders’ agreement forms part of the financing, the documents should operate together as a consistent set of transaction documents.

Before accepting subscriptions, issuers should also confirm that supporting compliance procedures have been completed. Depending upon the transaction, this may include reviewing accredited investor certificates, obtaining required know-your-client or anti-money laundering information, verifying investor eligibility, and ensuring that executed copies of all relevant documents are retained in the issuer’s records.

Careful preparation at the outset of a financing is generally more efficient than attempting to correct deficiencies after subscriptions have been accepted or regulatory questions arise.

Frequently Asked Questions

Can every private placement use the same subscription agreement?

Generally, no. Although many subscription agreements share similar provisions, they should be tailored to reflect the issuer, the securities being offered, the applicable prospectus exemption, and the structure of the financing.

Can one subscription agreement rely on more than one prospectus exemption?

Yes. Issuers frequently rely on multiple prospectus exemptions during the same financing. The subscription agreement should clearly identify the exemption applicable to each investor and include the representations necessary to support reliance on that exemption.

Can subscription agreements be signed electronically?

In most cases, yes. Electronic execution is common in Canadian private placements. Issuers should nevertheless ensure that their transaction documents expressly permit electronic signatures and that appropriate records of execution are retained.

Does a subscription agreement replace an offering memorandum?

No. The documents serve different purposes. A subscription agreement records the contractual terms of the investment, while an offering memorandum is primarily a disclosure document describing the issuer, the investment opportunity and the associated risks.

Is a subscription agreement sufficient to establish compliance with NI 45-106?

No. A properly drafted subscription agreement forms an important part of the issuer’s compliance framework, but it is only one component of a compliant exempt market financing. Issuers should also ensure that they have satisfied the requirements of the applicable prospectus exemption, completed any required regulatory filings, and maintained appropriate supporting records.

Conclusion

Subscription agreements are among the most important documents used in Canadian private placements. They record the commercial terms of the investment, establish the contractual relationship between the issuer and the investor, document representations supporting prospectus exemption compliance, and form an essential part of the issuer’s books and records.

Although many subscription agreements share common features, they should be carefully tailored to the particular financing rather than treated as standardized forms. Well-prepared subscription agreements reduce legal uncertainty, support compliance with NI 45-106 and related securities legislation, and provide issuers with an important evidentiary record of the financing.

Book a Consultation

If you are preparing subscription documents for a Canadian private placement or require advice regarding prospectus exemptions, offering documentation, or exempt market compliance, contact us to schedule an initial consultation with Nick Wright.