Subscription Agreement: A Guide for Legal & Compliance

We’re seeing a significant move towards longer-term, performance-based models. Nearly two-thirds of all economic activity is now composed of services, and the use of “As a Service” contracts grew by 7% points between 2021 and 2023. This makes understanding the nuances of subscription agreements more critical than ever.

What is a subscription agreement? 

A subscription agreement is a legally binding contract between a company (the issuer) and an investor or subscriber. It outlines the terms for purchasing securities in a private placement or subscribing to a recurring service.

For your legal and compliance teams, it’s the cornerstone of a defensible transaction. It’s not just a formality; it’s the primary document that:

• For Investments: Evidences an investor’s commitment to buy shares or other securities and captures their representations about their accreditation and sophistication.
• For Services: Governs the recurring provision of software (SaaS) or other services, detailing terms, auto-renewal, and payment schedules.

Key Takeaway: Think of it as a two-way street. It protects the issuer by ensuring only eligible parties participate and defines the obligations, while it protects the subscriber by formally granting them rights and disclosing associated risks.

How does a subscription agreement work

The process might seem bureaucratic, but it’s a carefully choreographed sequence to mitigate risk.

1. Offer: The company issues the subscription agreement to a potential investor or subscriber.
2. Subscription: The party completes the agreement, providing all required information and making necessary representations (e.g., confirming investor accreditation status).
3. Acceptance: The company (often advised by legal counsel) reviews and formally accepts the subscription.
4. Issuance: Upon acceptance and receipt of payment, the company issues the securities or activates the service.

The agreement becomes legally binding upon acceptance by the company, creating enforceable rights and obligations for both sides.

Read also: A Complete Guide to Contract Law Essentials. 

Who are the key parties involved?

• The Issuer/Company: The entity offering the securities or services. Their legal team is responsible for ensuring the agreement is compliant and enforceable.
• The Investor/Subscriber: The individual or entity making the purchase or subscription.
• Other Intermediaries: Brokers, fund administrators, and legal counsel for both sides often facilitate the process and ensure regulatory compliance.

Key components every subscription agreement should include

Missing a key clause isn’t just an oversight; it’s a significant legal and compliance risk. Here’s your checklist.

• Price and Number of Securities/Services: The fundamental “what” and “for how much.”
• Representations and Warranties: The heart of the subscription agreement. These are the legally binding statements where the investor confirms their eligibility, financial status, and understanding of the risk.
• Payment Terms: The specifics of how and when payment is due.
• Investor Eligibility & Accreditation: Critical for compliance requirements under Regulation D. This section is your first line of defense.
• Cancellation Terms: Under what conditions can the agreement be terminated?
• Disclosures & Risk Factors: A detailed catalogue of potential pitfalls. For investors, this includes market risk, illiquidity, etc. For SaaS, it might cover data security and service availability.
• Governing Law & Jurisdiction: Which state’s laws will govern the agreement? This is a non-negotiable for legal teams.

Read also: What are Contract Terms? Types, Examples & Best Practices

Essential clauses of a subscription agreement

• Indemnification Clause: Protects the issuer from losses resulting from a subscriber’s false representations.
• Investor Suitability Requirements: Reinforces that the investor meets specific financial criteria.
• Rights & Obligations: Explicitly states what each party is entitled to and required to do.
• Auto-Renewal or Lock-in Clauses (for SaaS): Clearly defines the terms for automatic renewal, including notice periods. The move towards “servitization” means businesses are frequently dealing with intangibles, which are far more likely to result in disputes over the value received. A clear auto-renewal clause is a primary defense.

Regulatory framework for subscription agreements

For private placements, this is where your compliance team earns its keep. The U.S. Securities and Exchange Commission (SEC) heavily regulates the offer and sale of securities to protect investors.

Rule 506(b) explained simply

This is the “no general solicitation” safe harbor. Companies can raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors. Crucially, you must have a pre-existing, substantive relationship with the investors.

Rule 506(c) and general solicitation

This rule allows for general solicitation (e.g., advertising the offering), but it comes with a catch: every single investor must be verified as accredited, and the issuer must take reasonable steps to verify that status.

When case law comes into play

The landmark case SEC v. Ralston Purina Co. (1953) established that exemptions from registration are intended for those who can “fend for themselves.” This precedent is why investor accreditation and sophistication are central to the representations and warranties in your subscription agreement. 

Subscription agreement vs. purchase agreement: A legal perspective

The subscription agreement is used when you’re selling a piece of the company (a security) or a recurring service. It’s about the relationship. And the purchase agreement is used when you’re buying or selling a discrete asset or an entire business. It’s about the transfer of ownership.

Advantages and disadvantages of the subscription agreement

Benefits for businesses

• Streamlined Fundraising: Provides a standardized framework for a securities offering.
• Risk Mitigation: The representations and warranties shift legal risk to the investor if they misrepresent their status.
• Regulatory Safe Harbor: Properly executed, it ensures compliance with Regulation D, avoiding costly registration.

Benefits for investors

• Formalized Rights: Clearly outlines what they are buying and what rights they have.
• Full Disclosure: The risk factors section provides a (theoretically) complete picture of the investment’s potential downsides.

Common drawbacks or risks

• Complexity: Can be dense and difficult for non-legal parties to understand.
• Enforcement Challenges: If an investor fails to pay, the company must pursue legal action based on the contract.
• Compliance Burden: The need to verify investor accreditation, especially under Rule 506(c), requires rigorous processes.

Read also: Enforceable Contract: Definition, Elements & Examples.

Subscription agreements for products & services 

The principles of a subscription agreement are equally vital for SaaS and other service-based models, though the focus shifts.

How terms differ:

• The “security” is replaced with access to a platform or service.
• Representations and warranties are less about financial status and more about the subscriber’s legal right to use the service and comply with acceptable use policies.
• Auto-renewal clauses and service-level agreements (SLAs) become paramount.

There is a significant overlap with your Terms of Service, and these documents must be harmonized to avoid contractual conflicts.

What businesses should include?

• Clear service description and scope.
• Fee structure, billing cycles, and payment methods.
• Auto-renewal terms with clear opt-out and notice requirements.
• Data privacy and security provisions.
• Termination rights for both parties.

Common legal pitfalls to avoid

• Hidden Auto-Renewals: Not providing clear and conspicuous notice can lead to consumer protection lawsuits and regulatory action.
• Vague Service Definitions: Ambiguity in what the subscription includes is a common source of disputes over the value received.
• Misalignment with ToS: Having conflicting terms between the subscription agreement and your general Terms of Service creates enforcement nightmares.

Tips for drafting or reviewing a subscription agreement

• Red Flags to Look For: Vague risk factors, weak indemnification clauses, non-compliant investor accreditation language, and ambiguous governing law provisions.
• How to Tighten Compliance: Integrate a robust investor questionnaire directly into your process. For SaaS, ensure your auto-renewal practices comply with state laws like California’s Automatic Renewal Law.
• When to Involve Legal Counsel: Always. For the issuer, during the drafting stage. For the investor, before signing. The cost of counsel is trivial compared to the cost of a failed compliance audit or litigation.

• Hidden Auto-Renewals: Not providing clear and conspicuous notice can lead to consumer protection lawsuits and regulatory action.
• Vague Service Definitions: Ambiguity in what the subscription includes is a common source of disputes over the value received.
• Misalignment with ToS: Having conflicting terms between the subscription agreement and your general Terms of Service creates enforcement nightmares.

The bottom line

For legal and compliance teams, its meticulous drafting and rigorous review are non-negotiable. You need one whenever you are conducting a private placement or establishing a recurring service relationship with significant value or risk.