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What is a Share Subscription Letter?
A Share Subscription Letter is a simple, direct letter to apply for the issue of new shares.
Contrary to a Seed Investment Agreement, a Share Subscription Letter does not include any warranties or limitation on liabilities, nor any rights for investors or obligations for existing shareholders.
A Share Subscription Letter not only signifies an individual’s or entity’s intention to purchase shares in a company but also serves as a precursor to more detailed agreements that may govern the relationship between the company and its shareholders. One such critical document that often follows the share subscription process is a Shareholder Agreement.
Why is a Share Subscription Letter important?
It is a legally binding letter needed while issuing shares and normally takes a few minutes to do all the formalities. Unlike a Share Subscription Agreement, where there are many legal formalities, a share subscription letter is an easy option for the investor which takes very little time and is easy to onboard new investors.
How to draft a Share Subscription Letter?
It is basically a short form of Share Subscription Agreement and is an easy option for new investors before buying any shares. The important things to include in this letter are:
Subscription price: it is a price on which existing shareholders can buy additional shares of a company before the price enters into the general public market. Normally the subscription price is set below the market price.
Settlement date: The date of settlement is the date on which the shares have been bought and recorded in the letter.
The number of shares: This is the total number of shares that an investor has bought. The price is calculated on the basis of price per share multiplied by the number of shares bought.
What is the difference between the issue and allotment of shares?
Issuance of shares is a process in which companies issue shares to shareholders (these shareholders might be individuals or corporates); whereas allotment of shares is the division of shares between those who have applied for those shares. For instance, if a company issues 1000 shares and 100 people have applied for it, then each applicant is allotted a minimum of 10 shares.
What is the difference between share subscription and share purchase?
A company enters into the Share Subscription Agreement with the investors of the company when they have raised capital by issuing shares. On the other hand, a company enters into a Share Purchase Agreement to sell the stake of the current promoters of the company. This can be to let in new promoters or for current ones to make an exit.
Mainly, the consideration in a Share Purchase Agreement is credited into the account of the seller who wants to sell their stake in the company; while in a Share Subscription Agreement the consideration is cleared by the buyer of the shares and it is credited in the account of the Company.
Further, Share Purchase Agreements are faster in comparison to the Share Subscription Agreement and they also do not lead to the dilution of the stake of the existing shareholders of a company.
Key elements of a Share Subscription Letter
- Subscriber’s Details: The name, address, and contact information of the person or entity subscribing to the shares.
- Company Details: Information about the company issuing the shares, including its name and registered office address.
- Subscription Details: The number of shares being subscribed to, the price per share, and the total investment amount.
- Payment Terms: Details on how and when the payment for the shares will be made.
- Conditions Precedent: Any conditions that must be fulfilled before the subscription can be finalized, such as approval by the company’s board of directors or compliance with regulatory requirements.
- Agreement to Company’s Terms: An acknowledgment that the subscriber agrees to abide by the company’s articles of association and any other relevant terms and conditions.
- Signatures: The document should be signed by the subscriber and, in some cases, by a representative of the company to acknowledge receipt and acceptance of the subscription.
The Share Subscription Letter serves several important functions:
- It legally binds the subscriber to purchase the specified shares at the agreed-upon terms, providing the company with a formal commitment of investment.
- It helps in documenting the transaction for both the company’s and the subscriber’s records, ensuring clarity and transparency.
- It plays a crucial role in the company’s capital raising efforts, serving as evidence of the commitments made by investors.
Once the subscription process is complete, and the conditions in the letter have been met, the company issues the shares to the subscriber, and the subscriber’s details are entered into the company’s register of members, officially recognising them as shareholders.
Create a Share Subscription Letter with Zegal
Creating a Share Subscription Letter can be a meticulous task, requiring a keen understanding of legal and financial details to ensure it accurately reflects the agreement between the subscriber and the company.
To streamline this process and ensure compliance with relevant laws and regulations, utilizing a template from Zegal can be an efficient and reliable solution.
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