Subscription Agreement for a Private Fund: What It Is and What to Know

A subscription agreement is a contract between a prospective investor and a private fund (or its issuer). By signing, the investor offers to purchase an interest in the fund, and the fund may accept or decline that offer. It is usually delivered alongside other offering documents, such as a private placement memorandum and the fund's governing agreement.

Most subscription agreements include an investor questionnaire and a series of representations and warranties. These commonly cover your identity, your investment experience, whether you are an accredited investor under SEC Rule 501(a), and that you understand the risks. Accredited-investor categories under Rule 501(a) include certain income or net worth tests, holders in good standing of Series 7, 65 or 82 licenses, knowledgeable employees of the fund, spousal equivalents, entities and family offices with over $5 million in investments or assets, and registered investment advisers or exempt reporting advisers.

The document also tends to reflect how the offering is conducted. Under Rule 506(b), the issuer may not use general solicitation. Under Rule 506(c), general solicitation is allowed, but all purchasers must be accredited and the issuer must take reasonable steps to verify that status. Your agreement may therefore ask for different information or verification depending on the exemption relied upon.

Traditionally, investors have received the subscription agreement near the end of a fund's onboarding process, after they have reviewed the offering documents. Many people read it with their own attorney, accountant or financial adviser, since the document creates legal obligations and may include acknowledgments about risk, transfer limits and the fund's discretion.

Common sections include the amount of the commitment, the investor's eligibility representations, tax and withholding forms, anti-money-laundering and identity checks, and wiring or funding instructions. Some agreements also include provisions on dispute resolution, indemnification, confidentiality and the investor's agreement to be bound by the fund's governing documents.

Reviewers often compare the subscription agreement against the other offering documents to check that they are consistent. Some investors also confirm the details of how tax reporting works, such as whether the fund issues a Schedule K-1, and, if relevant, whether the fund describes anything related to Section 1202 (QSBS). Tax treatment depends on individual circumstances, so these questions are usually directed to a licensed tax professional.

The right fund due diligence provider may help you understand what you are being asked to sign and how it fits with the rest of the offering. A first conversation is generally a chance to explain your situation, share the documents you have received, and learn how the provider approaches their review. It is a possibility, not a promise, that a provider will spot issues or add clarity.

Questions you might ask include: What does this provider actually review, and what falls outside their scope? Do they work alongside legal and tax professionals? How do they approach conflicts of interest and independence? How will they communicate findings, and what do they need from you? You may also ask how they think about the representations you are making, including accredited-investor status and verification.

A good provider can help you build a list of questions for the fund manager and your own licensed advisers, such as liquidity terms, fees described in the documents, and how the fund handles reporting. They do not replace your attorney or tax adviser, and The Hastings Fund does not recommend, endorse or rank any provider or investment. Past performance does not guarantee future results.