The PPM describes the deal and the operating agreement governs it. The subscription agreement is the one that binds you to it. It’s the contract you sign to buy in, and it does a lot more than record how much you’re putting up. When you sign it, you make a series of legal representations and you accept terms that can come back to matter a great deal if the deal later goes sideways.
It’s short next to the other documents, which is precisely why investors skim it and sign. Don’t be one of them.
What You’re Representing
A big chunk of the subscription agreement is statements you’re swearing are true. Usually you represent that:
- You’re an accredited (or sophisticated) investor and meet the offering’s eligibility requirements;
- You’re investing for your own account and not to turn around and resell;
- You’ve received and reviewed the offering documents and had your chance to ask questions;
- You understand the investment is illiquid and that you could lose every dollar of it; and
- You can afford that loss.
None of this is boilerplate you can wave off. These representations build the legal record the sponsor leans on, and they can shape where you stand later. If you’ve acknowledged that you received and understood the risk factors, that acknowledgment can be turned around on you the day you claim nobody warned you. So make sure everything you’re attesting to is actually true before you sign your name to it.
What You May Be Agreeing To
Past the representations, keep an eye out for operative terms folded into the subscription agreement or its accompanying documents:
- Power of attorney. Many subscription packages give the manager a power of attorney to sign the operating agreement and other documents for you. Know how far that authority reaches.
- Indemnification. You may be agreeing to indemnify the sponsor if your representations turn out to be wrong.
- Dispute resolution. Arbitration clauses, venue, and jury-trial waivers show up here as well as in the operating agreement, and they shape how any future fight would actually play out.
- Acceptance and allocation. The sponsor typically keeps the right to accept or reject your subscription, in whole or in part.
How It Ties to the Whole Deal
Read the subscription agreement alongside the PPM and the operating agreement, never on its own. The three are built to work together, and a risk that’s merely acknowledged in one of them may be fully operative in another. It’s also the point of no return. Once you’ve signed and funded, your money is committed under all of these terms at the same moment. That’s the single best reason to do your review before you sign instead of afterward, when there’s nothing left to do but live with it.
A legal review reads the subscription agreement for what you’re representing and what you’re agreeing to, and flags anything that contradicts the other documents or runs unusually one-sided. It’s a small step set against the size of the commitment you’re about to make.
Investor Diligence is a service of Waypoint Law PLLC, a Minnesota-based law firm serving investors nationwide. This article is for informational purposes only and is not legal or financial advice, and reading it does not create an attorney-client relationship. Investment decisions are yours to make.
About to sign a subscription agreement? Get a legal review of your investment or schedule a discovery call.