Stock Subscription Agreement: Definition & Investor Protection

Subscription agreements set terms for the sale of stock in privately held firms.

When a privately held corporation sells shares to an investor, the transaction is carried out under the terms and conditions of a written contract known as a stock subscription agreement. A subscription agreement protects the investor, because it requires the company to sell the shares at an agreed-upon price, although companies typically retain the right to withdraw from the sale for certain reasons. Investors are protected by getting the price and other terms in writing.

Features of Stock Subscription Agreements

Both individuals and businesses can buy shares in a non-public firm under a stock subscription agreement. The company issuing the stock agrees to the sale of a specified number of shares at a stated price. The investor agrees to the terms and to buy the shares at the stated price by signing the agreement. Subscription agreements include provisions that comply with laws governing privately held companies rather than Securities and Exchange rules regulating publicly traded corporations. Stock subscription agreements usually prohibit the sale of the stock away from the issuing company and require investors to keep company records confidential. Typically, investors may not compete with the company or try to lure customers away.